New York City's $2.2 billion note sale last Wednesday included $500 million of floating-rate revenue anticipation notes backed by interest rate swaps.
Merrill Lynch & Co. won $100 million of the notes, due in June 1995, with a fixed-rate bid of 3.8913%, and won another $150 million with a bid of 3.9156%. The fixed-rate bids reflect the effective interest cost to the city of selling floating-rate notes and entering swaps with Merrill to lock in a synthetic fixed rate.
Note holders will receive a floating rate of interest based on the London Interbank Offered Rate. The Merrill notes will pay 69% of one-month Libor, reset monthly. The index was at 4.75% yesterday, up from 4.5625% last Wednesday.
The notes, which are rated SP-1 by Standard & Poor's Corp. and MIG-1 by Moody's Investors Service, are money market eligible and are considered tier-one securities under Rule 2a7 of the Investment Company Act of 1940.
Lehman Brothers was the only other firm with winning swapbacked bids. The firm won $100 million of notes with a fixed-rate bid of 3.8817% and another $150 million at a bid of 3.9115%.
Lehman's notes will pay 65% of three-month Libor reset weekly but paid monthly. The index was at 5% yesterday, up from 4.875% last week.
Fixed-rate bids for the other $300 million of June notes ranged from 3.78% to 3.91%.
An official on the deal said the city saved $440,000 by using the index notes with swaps instead of selling only fixed-rate notes.
Derivatives professionals said that other issuers are inquiring about the swap-backed note structure. But two big upcoming sales will not use the index notes with swaps. Illinois plans to sell $687 million of notes today and Texas plans to sell $1.7 billion of notes Aug. 24. Bidders at the competitive sales can only bid on fixedrate notes.
In other news, Moody's reported that at least $95 million of last month's $4 billion California revenue anticipation warrant issue has been converted into secondary market derivatives.
But the derivatives, on Series C warrants due in April 1996, are probably just synthetic short-term securities.
Money market funds are prohibited from buying the unadulterated Series C warrants because the funds cannot own securities with a maturity of more than 13 months.
So Bankers Trust Co. placed $95 million of the warrants in a trust. The trust issues receipts with shorter effective maturities and credit enhancement from the bank. The resulting securities are money market eligible.
Moody's rated the Class A certificate receipts MIG 1/VMIG 1, the highest short-term rating. Analysis Tools Sought
As derivatives become a more integral part of the tax-exempt market, portfolio managers are seeking more sophisticated tools to analyze their investments.
So Capital Management Sciences, which sells quantitative analysis software, is adding more municipal functions to the upcoming release of its popular BondEdge program.
Laurie Adami, executive vice president with the firm, said the new version to be released in October will include a data base of municipal bonds, customizable tax code tables, calculation of tax equivalent yields, and comparison to the Bond Buyer 40-bond index.
Adami said the requests for the municipal analytics came not just from the usual tax-exempt fund managers, but also from institutional investors that are increasingly including some municipal bonds in their portfolios.
The firm also plans to add interest rate swaps to the program next year, following the increased use of such products outside of the banking world.
"Swaps aren't just being used by a few financial institutions and the big banks," Adami said. "They are also being used by investment managers now."