NEW ORLEANS -- Just how big is the municipal swaps market? It seems no one really knows.
But several professionals gave their own estimates at last weekend's meeting in New Orleans of the State Debt Management Network, an association of public officials at the state level involved in debt issuance.
BT Securities Corp. vice president Beth A. deHamel said the total notional value of municipal swaps outstanding is about $40 billion. That's just a tiny portion of the $14 trillion of total notional swaps outstanding recently reported by the International Swaps and Derivatives Association.
Andrew Readinger, an associate at J.P. Morgan, said his firm estimates that the total notional value of municipal swaps is closer to $100 billion.
Notional value, while an important gauge to measure the volume of activity, does not reveal much about the amount of money at risk in swap deals. Notional value is the base amount used to calculate the interest payments exchanged, but the notional amount is not usually exchanged.
Also on hand at the meeting were rating agency officials, who discussed their concerns about issuers dabbling in derivatives.
Regis Shields, an assistant vice president at Moody's Investors Service, said her firm has never had to change a rating because of a swap.
But Parry Young, a director at Standard & Poor's Corp., said that his firm had seen credit quality "adversely affected" by swaps.
Issuers related several experiences with derivatives.
Kansas Treasurer Sally Thompson said her office prepared for months to use a simple derivatives product, a floater and corresponding inverse floater, on a $50 million piece of a state transportation issue last year. But when the deal was priced, the market wasn't there. Senior manager Smith Barney Inc. sold just $9 million of the deal as derivatives.
"It was actually nice to have done our homework but then not go through with it -- a good dry run," Thompson said.
The number of states granting explicit authorization for swaps activity is growing, according to David Taub, partner at Rogers & Wells.
"In 1985 when the first municipal swaps were done, there were no statutes," Taub said. "Today, more than 30 states have some form of derivatives legislation."
The states have very different rules, he said, ranging from the broad authority granted in California to more limited authority available in New York.
On Sunday, R. Fenn Putman, managing director at Lehman Brothers and chairman of the Public Securities Association, discussed derivatives and possible new regulations.
Congress is holding hearings on derivatives this month, and some proposed legislation would subject swaps and swap dealers to considerably more government oversight.
But, Putman pointed out, the derivatives business is global and the U.S. regulations could be circumvented.
"The market can move offshore," he said. "We'll put more money in our Bermuda subsidiary and do the business from there."
John Vogt of the PSA briefed the conference on a number of legislative developments in Washington. He said that derivatives legislation may attempt to define swaps and similar contract-based products as "securities" subject to all existing laws of and oversight by the Securities and Exchange Commission.
Another panel discussed the challenges to issuers posed by this year's volatile market. While interest rates have risen considerably so far this year, they could go much higher over the next year, according to John O'Brien, president of O'Brien Partners Inc.
"In 1995, we could see 9%," O'Brien said. "I think we'll get well up into the 8's, and we could see 9% bonds again."
He suggested that issuers take advantage of historically low rates and issue soon. He also said issuers should consider selling long-term, fixed-rate bonds and entering a two-year swap to convert the liability to a floating rate.
"That way you take advantage of the steep yield curve," O'Brien said. "After two years, you look again and maybe you renew the swap or maybe you stay fixed."
Marvin Marcus, managing director at Kidder Peabody & Co., also recommended derivatives for issuers, given the volatile rate environment.
But, he said, "Derivatives are not right for every issuer and every issue."
