A swap that the San Diego Regional Transportation Commission signed this month is considered so airtight even the rating agencies view the underlying variable-rate bonds as a fixed-rate obligation.

In a rare move, Moody's Investors Service and Standard & Poor's Corp. decided the commission had built enough protections against a swap collapse into its $142 million deal that the issuer could consider the bonds fixed for purposes of funding its debt service reserve and meeting its additional bonds test.

Rating agency officials said only a handful of issuers have so far qualified for that special treatment, and all of them have the ability to raise rates or fees to cover added swap costs if necessary. The San Diego commission, in contrast, is believed to be the first issuer to qualify that sells bonds backed by a sales tax it is powerless to control.

Typically, when issuers sell variable-rate debt and swap to fixed-rate, the rating agencies still see the obligation as a floating risk. That is because most deals include several termination clauses that allow the swap to be canceled, leaving the issuer exposed to the vagaries of the variable-rate market.

So, even with a swap, variable-rate issuers must build a bigger debt service reserve fund than their fixed-rate counterparts in order to meet the agencies' more stringent safety requirements for variable-rate debt.

For purposes of the additional bonds test - a formula that determines how much new debt the issuer can sell in the future without jeopardizing its credit - variable-rate bonds typically must be counted at their maximum possible interest rate, in this case 12%. But the commission's exemption means it can instead count the $142 million deal at the fixed-swap rate, which sources involved in the transaction said was less than 5%.

Officials at Lehman Brothers, which handled the swap for the San Diego Commission, said the key to convincing the rating agencies to agree to the arrangement was to develop a swap contract that leaves very few outs for either side.

To start, that meant making sure the swap lasts the full 16-year maturity of the underlying bonds, an unusually long life for a swap.

An important component to ensure the swap actually survives that long came in the form of a longterm liquidity facility from Financial Guaranty Insurance Co.

In addition to insuring the underlying bonds, FGIC also agreed to provide a five-year liquidity facility with terms that market sources said virtually guarantee it will renew for another five years at the expiration date. That still leaves six years at the end of the swap in which the price and availability of the liquidity facility is in question, but 10 years of coverage was deemed secure enough for San Diego to proceed.

Steven N. Klein, vice president of business and product development at FGIC, said the lack of long-term liquidity facilities in the market has hindered issuers from trying variable-rate debt and swaps similar to the San Diego transaction.

He said the arrangement, which is provided through a subsidiary known as FGIC Securities Purchase Inc., might help swap providers overcome their reluctance to execute longer-term swaps.

"We know there are other swap providers who would bid for long-dated swaps, they just don't have the liquidity facility to bring to the table," Klein said.

In addition to matching the maturity of the bonds and carrying a liquidity facility longer than most, the San Diego swap also included several safety features Lehman engineered to provide additional comfort for the rating agencies.

In a normal swap. counterparties to the contract typically demand termination clauses allowing them to unwind the deal if the other side suffers severe credit deterioration.

But those clauses are the very reason rating agencies are reluctant to consider a swap contract a guarantee against variable-rate exposure. Because the San Diego deal is insured by FGIC, however, Lehman agreed to limit its ability to terminate the swap, according to Andrew Garvey, a senior vice president in Lehman's municipal derivatives area.

In addition, Lehman agreed to provide credit enhancement in the event the firm begins to suffer its own credit problems, Garvey said.

Ernesto R. Perez, a vice president at Standard & Poor's, said about a half-dozen deals have been structured like the San Diego swap, but he expects it to become more common.

"From our standpoint, we'll view [the bonds] as fixed as long as the swap is for the duration of the bonds and we had the opportunity to go over the swap to make sure the events of termination are tight," Perez said.

Richard P. Larkin, a managing director at Standard & Poor's, agreed swaps should be recognized if they are strong enough to stand up to the agency's scrutiny. But he stressed that the credit evaluation of every issuer must still include a component that assesses what would happen if the swap disintegrated.

Gina France, a vice president of public finance at Lehman, said the swap saved the issuer between 50 and 55 basts points over the insured market at the time of the pricing. or about $5.5 million on a present-value basis.

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