John Hewlett, of Susquehanna Group Advisors, presents information on a what he defines as a Fixed Receiver Swaption Opportunity.

The proposed swaption would be related to the counties LCSWMA Guaranteed Authority Bonds, Series B of 2013, the principle amount of the bonds are $24 million with an obligation of the county to pay a fixed rate of 4.00%

The terms call for an Upfront Payment to the county of $1,750,000 depending on final structure and market conditions on execution date.

Video. Current Market Opportunity.

PDF. Fixed Receiver Swaption Opportunity.

ARCHIVE VIDEO from Senate Local Government Committee discussing several bills to ban or restrict the use of Swaps published September 9, 2012.

Several testifiers agreed upon the elimination of up-front payments for entering into interest rate swap transactions. Lucien Calhoun, President of Calhoun Baker, Inc. utilized the term “train-wrecks” to describe swap arrangements where the initiating party receives up-front payments for entering into swap agreements. “If you wanted to eliminate 95% of the problems, deny the ability to take money up-front, they’re abusive and they should be stopped,” said Calhoun.

Video Lucien Calhoun. Delaware Valley Regional Finance Authority currently has 1.7 billion dollars notional amount of SWAP transactions outstanding.

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The following information was provided to the commissioners by Susquehanna Group Advisors.

The County’s total non‐electoral debt outstanding is currently $108,552,723, all of which is currently outstanding at a fixed interest rate.

• The County currently has two outstanding swap agreements:

1.) 2015 Swap: $20,330,000 Notional / Effective May 15, 2015 / County Pays 2.252% / Receives 70% 3mo LIBOR;

2.) 2016 Swap: $14,405,000 Notional / Effective May 15, 2016 / County Pays 2.403% / Receives 70% 3mo LIBOR.

• The County’s total lease rental debt outstanding is currently $233,823,283, of which $165,625,503 is deemed self‐ liquidating.

• One of the lease rental debt issues that is not self‐liquidating is the LCSWMA Guaranteed Authority Bonds, Series B of 2013 (the “2013B Bonds”) in the principal amount of $24,000,000.

‐ The fixed rate on the 2013B Bonds is 5.00%. The County is obligated to pay 4.00%.

‐ The maturity date of the 2013B Bonds is December 15, 2033, at which time the entire principal amount is due.

• In connection with the 2013B Bonds, the County has the opportunity to execute a fixed receiver swaption in order to:

1.) Potentially convert its fixed rate obligation to a floating rate; and

2.) Receive an upfront cash payment.

By executing a fixed receiver swaption, the County would potentially convert its fixed rate obligation under the 2013B Bonds to a floating rate (on a future date) by selling an option to a swap counterparty (for the right to commence swap payments) in exchange for a cash payment today.

• Terms:

‐ Exercise (Effective) Date: April 15, [2017] or [2018] (European‐style option)

‐ County Receives: Fixed (Strike) Rate of [4.00%] (only if exercised, commencing on the exercise date)

‐ County Pays: Floating Rate [3‐month LIBOR] (only if exercised, commencing on the exercise date)

‐ Upfront Payment: [>$1,750,000] depending on final structure and market conditions on execution date.

* If exercised by the counterparty on the exercise date, the exchange of swap payments commences. If not exercised, the County keeps the upfront payment and no additional payments are exchanged.

• The proposed floating swap rate [3‐Month LIBOR] is currently 0.236%.

‐ 10‐year average = 2.042% ‐ 10‐year maximum = 5.725%

‐ 20‐year average = 3.301% ‐ 20‐year maximum = 6.851%

• Key risks include:

1.) Interest Rate Risk

2.) Termination Risk

3.) Counterparty Risk

4.) Event Risk

• The County previously executed three (3) fixed receiver swaptions in 2007 with a combined notional amount of $40,055,000 and a combined upfront payment to the County of $1,001,000. The swaptions expired in 2012 without being exercised, at which point the County was released from all future obligations. 

 

FIXED RECEIVER SWAPTION (if exercised)*

Upfront Payment = >$1,750,000**

* The Counterparty would have the right to exercise the swaption (commencing swap payments) only on April 15, [2017] or [2018]. **

Estimated. The County keeps the upfront payment regardless of whether or not the swaption is exercised.

NET INTEREST RATE ON 2013B BONDS:

Before Exercise Date = 4.00%

After Exercise Date (if exercised) = [3‐Month LIBOR]

After Exercise Date (if not exercised) = 4.00%

Photo/Natalie Cake

Updated to include archive video and additional text.