Variable Rate Debt Options: Auction Rate Securities Auction Rate - - PowerPoint PPT Presentation

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Variable Rate Debt Options: Auction Rate Securities Auction Rate - - PowerPoint PPT Presentation

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Variable Rate Debt Options: Auction Rate Securities Auction Rate Securities What are Auction Rate Securities? Long-term securities sold to short-term investors Variable rate, priced competitively relative to other forms of short-term

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Variable Rate Debt Options: Auction Rate Securities

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Auction Rate Securities

What are Auction Rate Securities?

Long-term securities sold to short-term investors Variable rate, priced competitively relative to other forms of short-term debt, most notably VRDB’s Re-priced periodically, most common reset periods are weekly (7 day) or monthly (28/35 day) Multi-modal with conversion features at issuer option Does not require liquidity facility as the auction process provides liquidity; investors have no “put” option Usually insured, most often by a AAA monoline bond insurer

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Auction Rate Securities

What is a Dutch Auction?

Competitive Bidding Process - among Investors who submit bids/orders to buy, sell or hold securities at desired rates Reverse Price Concept - orders are filled beginning with the lowest bid submitted until all available securities are allocated Clearing Bid - order at which the last available security is allocated; clearing bid becomes the reset rate for all investors for the upcoming period Auction Rate Mechanism - can be viewed as an alternative to the Remarketing Agent function in VRDO programs

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Auction Rate Securities

Market Size – Approximately $250 Billion Overall Issuers

  • Closed-End Municipal Bond / Equity Funds
  • Student Loan Entities
  • Municipalities

Investors

  • Corporate Cash Managers
  • Institutional Investors
  • High Net Worth Individuals

Holding Periods - Daily, Weekly, Monthly, Flex Dealers

  • Sole Managed Programs
  • Multiple Dealer Participation
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Auction Rate Securities

Product Introduction - 1984 Closed End Bond Funds - 1988 Private Placements & Secondary Market Programs - 1990 Student Loan Industry - 1993 Municipal Notes - 1997

  • Health Care Issuers
  • Utility and Power Companies
  • Educational Issuers
  • Other Municipal Bond Sectors

Asset Backed Programs - 2000 Closed End Equity Funds - 2002

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Auction Rate Securities

5 1 0 1 5 2 0 2 5 3 0 '9 5 '9 6 '97 '9 8 '9 9 '0 0 '0 1 '0 2 '03 '0 4 '0 5 '0 6 LOC

A Decade of Municipal Bond Finance (Source: Thomson Financial 2/ 6/ 2007) LOC Municipal Bond Issuance

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Auction Rate Securities

5 1 0 1 5 2 0 2 5 3 0 3 5 4 0 4 5 '9 5 '9 6 '9 7 '9 8 '9 9 '0 0 '0 1 '0 2 '0 3 '0 4 '0 5 '0 6 ARS

A Decade of Municipal Bond Finance (Source: Thomson Financial 2/ 6/ 2007) Auction Rate Municipal Bond Issuance

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Auction Rate Securities

5 1 0 1 5 2 0 2 5 3 0 3 5 4 0 4 5 '9 5 '9 6 '9 7 '9 8 '9 9 '0 0 '0 1 '0 2 '0 3 '0 4 '0 5 '0 6 ARS LOC

A Decade of Municipal Bond Finance (Source: Thomson Financial 2/ 6/ 2007) Auction Rate and LOC Municipal Bond Issuance

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What was Behind the Surge in ARS?

Lower Cost of ARS vs. LOC-backed VRDB’s

  • Increased cost of L/C’s
  • Fewer providers of L/C’s; German bank liquidity rule changes in 2005

Legislative changes at state and local levels have greatly increased the pool of potential issuers of ARS

  • Issuers ability to float ARS debt
  • Issuers ability to enter into swaps and other derivative transactions

Demand from investors as they redirect capital from money market funds and other ST investments to ARS

  • Increase in retail investors
  • Increased usage of weekly reset vs. monthly reset
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BNY as Your Auction Agent

250 + Auctions per day 800 Issues / 1,814 Series (CUSIPS) $100.9 Billion Principal Administered

  • Municipal T/E Debt:

$ 52.32 Billion

  • Student Loan Debt:

$ 13.59 Billion

  • Closed End Funds - Taxable

$ 15.4 Billion

  • Closed End Funds - Tax-Ex

$ 9.73 Billion

  • Taxable Pfd (Corp / DRD)

$ 2.98 Billion

  • Other Debt:

$ 6.88 Billion Total $ 100.9 Billion

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Auction Mechanics

Step 1: Preparing for the Auction

  • Confirm “Bidding Rights” with each Participating Broker-Dealer
  • Establish the Band

Input Transaction Reference Rate

  • BMA Municipal Swap Index
  • CP Rate
  • LIBOR Rate
  • Net Loan Rate

Calculate Minimum and Maximum Rates

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Auction Mechanics

Step 2: Receipt and Compilation of Orders

  • Order Types:

Hold Order Sell Order Bid to Hold Order Potential Bid Order

  • Determine if Sufficient Clearing Bids Exist

If Demand > Supply = Successful Auction If Demand < Supply = Failed Auction If No Supply = All Hold Auction

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Auction Mechanics

Step 3: Running the Auction

  • Calculate Winning Rate
  • Allocate units among Broker-Dealers
  • Calculate Interest/Dividend Amounts to Investors and Commission

Amounts to Broker-Dealers

  • Distribute funds as necessary
  • Notify Parties-in-Interest including Issuer, Borrower, Trustee,

Broker-Dealers, DTCC, etc.

Note: Settlement occurs B/ D following the auction through DTCC

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Auction Mechanics - Example

1 0 0 Bonds Multi-Broker I ndex = 7 day CP I ssue Rating AAA $ 1 0 0 ,0 0 0 / Bond W eekly Reset I nsured I ssuer Rating AA

Step 1: Set Param eters I ssue Sum m ary

Ref Rate Multiplier Band 125% = 2.50% Maximum 7 Day CP 2.00% 70% = 1.40% Minimum

Confirm ation of Bidding Rights & Auction Param eters to Broker / Dealers

Note: Certain programs have no minimum rate

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Auction Mechanics - Example

Step 2: Bid Subm ission Step 3: Calculate Available Units

Total Units

100

Hold Orders 50 Available 50

Step 4: Do Sufficient Clearing Bids Exist?

Dem and 7 0 Supply 5 0

> =

Successful Auction

Brok er Units Exist ing Pot ent ial B1 5 0 Hold B2 2 0 Sell 2 5 @ 2 .1 0 % B3 2 0 Bid @ 2 .0 0 % 1 5 @ 2 .2 0 % B4 1 0 Bid @ 2 .2 5 % 1 0 0

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Auction Mechanics - Example

Bid Subm issions

Beginning Net Ending Broker Balance Change Balance B1 5 0 5 0 B2 2 0 5 2 5 B3 2 0 5 2 5 B4 1 0

  • 1 0

100 100

Step 5: Determ ine W inning Rate

Available Bids Rate Type Result 50 2 0 2.00% Existing Filled 30 2 5 2.10% Potential Filled 5 1 5 2.20% Potential Partial

  • 1 0

1 0 2.25% Existing Reject 7 0

Clearing Bid

Step 6: Allocation of Units

Broker Units Exist ing Pot ent ial B1 5 0 Hold B2 2 0 Sell 2 5 @ 2 .1 0 % B3 2 0 Bid @ 2 .0 0 % 1 5 @ 2 .2 0 % B4 1 0 Bid @ 2 .2 5 % 1 0 0

Note: The Clearing Bid rate becom es the reset rate for the entire issue for the current interest rate period

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Auction Mechanics

I nvestors I nvestors I nvestors I nvestors I nvestors I nvestors Broker - Dealer A Broker - Dealer B Broker - Dealer C AUCTI ON AGENT TRUSTEE I SSUER D TC

1 Bid Parameters 2 Relays Parameters 4 3 Relays Bids Submits Bids 7 6 5 Assem bles Bids Resets Rate Reports Results 7 7 8 Relays Results 9 Requests $$$ 10 Funds Bond Int & Fees 11 Interest Payment 11 Interest Payments to Investors 12 Fees 12 BD Fees Reports

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The Trustee’s Role Differs Across Rate Structures

Fixed Rate Securities

  • The rate is established at the time of the original issuance
  • After Capitalized Interest Period is over, the Trustee receives monthly

deposits into the Bond Fund (1/6th of Interest) and (1/12th of Principal)

  • f the annual amount due
  • For each debt service payment the Trustee calculates and confirms Debt

Service amount

  • Payment amount for each CUSIP does not change unless there is a partial

call or redemption

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Variable Rate Demand Bonds

Remarketing agent is responsible for ensuring Trustee receives rates that may be set daily, weekly, monthly, or semi-annually Trustee required to calculate blended rate (daily, weekly, or monthly reset) calculate amount required and confirm Debt Service with borrower Conforms to computation and Holiday rules Trustee draws on the Letter of Credit for Payment of Interest and/or Principal and pays holders The Borrower reimburses the Trustee or will make payment to LOC Bank directly in accordance with the Reimbursement Agreement

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Auction Rate Securities

Broker Dealer receives bids from existing holders or potential holders Auction Agent receives bids from Broker Dealer or Dealers Auction Agent calculates the bids to determine clearing rate (rate at which all bonds are sold) Trustee is informed of rate established and pays servicing fees for Broker Dealer and/or Auction Agent Trustee makes payment on the established date (weekly, 28 days, 35 days, etc.) Issuer establishes a depositary account with the trustee to hold and invest funds for future payments. It is necessitated because

  • f the frequent debt service payments
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Contact Information

For Further Information Please Contact: Tom Bogert, Vice President 101 Barclay Street – 8E New York, NY 10286 212-815-8229 Email: TBogert@bankofny.com Jennifer Valenti, Vice President 101 Barclay Street – 7W New York, NY 10286 212-815-3415 Email: jvalenti@bankofny.com

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