New York City may follow California's lead by issuing floating-rate notes and locking a synthetic fixed rate with a swap.
California sold $700 million of floating-rate notes in its titanic $3 billion revenue anticipation note offering last Wednesday.
New York City plans to bring a competitive $2.2 billion notes issue next Wednesday in three maturities. Bidders on the $800 million June 30, 1995, maturity will be able to bid on notes tied to the Public Securities Association's municipal swap index, the constant maturity Treasury rate, or the London interbank offered rate.
Last October, New York City sold $250 million of a $650 million note offering as floating-rate securities backed by a swap.
Last week, California saved $330,000 by using the swaps, an official working on the deal said. After converting the state's synthetic fixed rate to a bond equivalent true interest cost, the winning bids ranged from 4.15% to 4.22%, while the true interest cost of the fixed-rate notes was about 4.26%, the official said.
The savings came as icing on the cake for California, the official said. The state offered floating-rate notes primarily to attract a broader array of potential investors, he said.
"They were not doing it for the savings," the official said. Instead, "the floating-rate notes helped ensure the success of the fixed-rate portion." Market participants said it's too soon to know if the swap-based notes will create savings for New York City.
"It depends on the note market, and that's been very volatile," one derivatives professional said yesterday.
New York will pre-approve swap counterparties this week. The city will require that potential swap mates have a minimum A-rating from at least two rating agencies, a city official said.
A $140.9 million issue by the Sacramento Municipal Utility District, Calif., priced yesterday by Goldman, Sachs & Co. did not include any derivatives. The issuer considered selling embedded derivatives and floaters with corresponding inverse floaters.
With linked floater/inverse floaters selling for less than similar fixed-rate bonds, investors are less and less willing to pay a premium for the structure, an official on the deal said. But issuers still typically demand a premium of five to 10 basis points for selling floater/inverse floaters.
The volume of secondary market derivatives transactions rated by Standard & Poor's fell 43% in the second quarter from the first quarter of this year. But volume was up 14% compared with the second quarter of 1993.
The rating agency said it rated 50 secondary market transactions totaling $842.7 million in the second quarter of 1994, compared with 60 issues totaling $1.48 billion in the first quarter of this year and 29 issues totaling $740 million in the second quarter of 1993.
Most of the second quarter issues -- 80% -- were structured as put-table floating-rate receipts, the rating agency said. Tender options bonds made up 16% of the issues and 4% were floater/inverse floaters.
The rating agency's numbers do not include derivatives sold in the primary market. Also, not all secondary market transactions carry a rating from Standard & Poor's.
In the personnel area, Frederick R. Medero resigned as executive director of the International Swaps and Derivatives Association last week.
The association named Robert J. Schwartz, a member of the board of directors, as interim chief operating officer until a new executive officer is appointed.
Medero said in a statement that he was resigning to pursue other interests. Medero took the post in July 1993.
Schwartz is also chairman of the International Association of Financial Engineers.
