Even the preliminary official statement is changing as the municipal derivatives market tries to meet investor demands.
Because issuers and underwriters cannot always forecast exactly which derivative products will be most popular on the day a deal is priced, some preliminary statements now include brief menus describing all the possible derivatives that may be issued.
For example, the preliminary statement for a recent Puerto Rico Housing Bank and Finance Agency issue, managed by Kidder, Peabody & Co., listed eight possible derivative candidates.
The items included variable-rate bonds, inverse floating-rate notes, and strippable bond components similar to Lehman Brothers' bond payment obligations.
And the menu further said that each product could be issued with a variety of different twists. Variable rates could be leveraged to exaggerate changes in interest rate indexes. Inverse floating-rate notes could be hedged by the issuer with a swap or with a mirrored variable-rate security.
When the Puerto Rico deal was finally priced last month, the authority issued inverse floating-rate notes with an auction counterpart, but none of the other structures.
"From our perspective, if we're sure a product has wide appeal and we're probably going to use it, we will include a full summary," said Gregory Kaufman, the authority's financial adviser and executive vice president at the Government Development Bank of Puerto Rico. "But I prefer the menu if the product is dependent on marketing conditions and structural concerns."
The final official statement will contain details of the derivatives issued, but the menu will be gone.
During the summer, the California Health Facilities Financing Authority sent out a preliminary official statement for an upcoming issue managed by Lehman Brothers with a five-option menu.
The menu included possible derivative structures but also said that the derivatives could be based on a variety of unusual indexes.
The lion's share of derivatives pay investors a floating rate of interest that varies either up or down based on basic, tax-exempt market indexes.
But the Lehman deal included language allowing derivatives based on more esoteric indexes as well, like the constant maturity Treasury rate, a taxable market index. The menu also offered the possibility of a play on the difference between any two floating rates.