Municipal Refinance

QVM acts as Bond Bid Manager for municipal bond refinancings. We work with all major domestic financial institutions and many international financial institutions that provide flexible municipal refinance.

Adam Cloud directs our activities in this specialized area.

Adam Cloud is a 1996 graduate of Howard University Law School with an extensive municipal bond experience through prior work with Advest (Hartford) and Loop Capital (Chicago). Adam specializes in risk and cash management consulting, as well as advisory work related to municipal bond and infrastructure finance transactions.

 

 

 

FLEXIBLE REPURCHASE AGREEMENTS FOR TAX-EXEMPT MUNICIPAL ENTITIES
Summary Information

The Problem: When a governmental entity issues debt for the building of new facilities or renovation of existing buildings, there is often an uncertain construction draw schedule requiring a high degree of flexibility. That creates an investment problem – how to maximize return while providing liquidity for uncertain drawdown.

The Solution: Flexible repurchase agreements permit a governmental entity to withdraw funds as capital expenditure needs arise, with a guaranteed interest rate, and a final maturity date on which any remaining funds are returned. This high liquidity feature is what differentiates the flex repo from an ordinary repurchase agreement.

Suitability: A Flexible Repurchase Agreement (“flex repo”) is a short-term investment vehicle designed to meet the special needs of tax-exempt debt issuers such as cities, counties and school districts. It has a fixed rate of interest allowing the entity to lock in a positive arbitrage spread during the construction period of bond funded projects, and provides a fixed maturity with flexible withdrawal.

Summary of Benefits: Flexible repurchase agreements provide several benefits for the investment of tax-exempt bond proceeds.

• Simplicity: All-in one investment product


• Safety: Fully collateralized investment (minimum 102%) with high quality credit counter-party


• Custodian: collateral held by acceptable third party custodian


• Yield: Competitive yield up to maximum allowable arbitrage *


• Fixed Return: Guaranteed rate locks in positive arbitrage for life of flex


• Liquidity: Withdraw funds when needed to pay project expenses


• No Reinvestment Risk: all reinvestment during flex at locked in rate


• Control: entity reviews all bids and approves repo Provider selection, and all confirmation of transactions sent directly to entity


• Cost: There is no direct cost to the entity. Positive spread is locked in for the life of the flex, net of fees. Fee is paid to QVM by the winning bidder.

* Note on Yield Arbitrage: Flexible repos are structured to maximize yield arbitrage within the limits imposed by the Internal Revenue Service. The arbitrage rebate rules introduced by the Tax Reform Act of 1986 require issuers of tax-exempt bonds to rebate to the Internal Revenue Service 100% of earnings that are greater than the yield on the bonds unless one of the few rebate exceptions are met, which repos are structured to satisfy.

The tax on “excess” arbitrage removes incentive to take risks to generate more than allowable arbitrage levels. A more practical investment strategy for bond proceeds subject to the rebate requirement is to seek a guaranteed interest rate within the allowable limits with reinvestment rate guarantees and withdrawal flexibility from a creditworthy Provider backed by redundant collateral.

Provider/Custodian Reports: The governmental entity purchasing a flexible repurchase agreement will receive monthly statements from the Provider showing the current balance, activity, and accrued interest on the outstanding balance. In addition, the custodian performs a daily market valuation of the collateral and provides a monthly report to the governmental entity detailing the collateral and its current market value.

Repo Agreement Form: The TBMA (The Bond Market Association) Master Repurchase Agreement governs the general terms of the repurchase agreement, including collateral requirements and downgrade protection provisions for the governmental entity in the event the Provider is downgraded

Credit Quality of Repo Provider: To protect the governmental entity’s funds, QVM usually requires a Provider to have a public debt rating of at least “A”.

Collateralization: Third party custodian holds collateral. Entity transfers funds to custodian, and repo Provider transfers collateral to custodian. Collateral is delivered to the custodian in an amount equal to at 102% or more of the value of the funds delivered. Depending on the terms allowed in the bid specifications, the collateral may range from U.S. Treasury securities to U.S. Agency obligations, or eligible mortgage backed securities (note: in the current environment, QVM does not work with mortgage backed repo agreements.)

Exchange Timing: Most repurchase agreements, as well as flexible repurchase agreements, are normally executed on a “delivery versus payment” basis. As such, the repo Provider must deliver the collateral securities to the third party custodian before the custodian will release the entity’s cash to the Provider.

The QVM Role:

QVM typically acts as an independent advisor serving as the bidding agent for the flexible repurchase agreement and assuring that the complex bidding requirements of the Internal Revenue Service are followed. QVM would provide the following services:

• Draft the Request for bids


• Assist in selecting qualified providers


• Oversee the bidding process


• Review all legal documents from the winning bidder


• Coordinate delivery of the funds


• Assist in monitoring collateral requirements after delivery of the agreement


• After settlement, QVM will track the investment, review collateral levels and interface with the counter-party on the client’s behalf when needed.

To learn more about how we can help you, contact us now.