The New Jersey Turnpike Authority's $1.6 billion refunding last week featured a $372 million interest rate swap, believed to be the largest of its kind in the industry's history.
The deal is the third in a string of unusuall large swaps handled by Smith Barney, Harris Upham & Co. and AIG Financial Products Corp., a team that in the past seven months has engineered almost $1 billion of interest rate swaps on behalf of municipal clients.
Like last week's turnpike deal, the other two -- a $293 million swap for the Southern California Public Power Authority in April and a $318 million deal for Las Vegas's McCarran International Airport in September -- featured extremely long maturities, another rarity for municipal swaps.
The turnpike swap includes a 27-year maturity, matching the terms of the underlying bond issue and protecting the authority against the risks associated with securing a new swap halfway through the life of the bonds.
The swap is expected to generate about $12.5 million in present value savings before taking into account the transferred proceeds adjustment, according to Alan D. Marks, an executive vice president and managing director at Smith Barney.
The savings result from about 30 basis points shaved from the yield that the authority estimated it would have had to pay if it had issued the bonds at fixed rates maturing in 2018. Mr. Marks said. Instead, the bonds are issued at variable rates and swapped to fixed.
Richard P. Poirier, a general partner at Lazard Freres & Co., the authority's financial adviser, said about eight firms submitted swap proposals, but only one or two others were willing to include maturities that matched the underlying bond issue.
That, combined with AIG's triple-A credit rating, were key reasons the authority selected the Smith Barney/AIG proposal, Mr. Poirier said.
In addition, the two firms committed themselves to providing a liquidity facility for the bonds for the entire 27 years at a capped fee, which Mr. Poirier described as "extremely unusual" and another deciding factor in approving the proposal.