Pennsylvania's Washington County entered into a swaption last week with JPMorgan on a USD15 million outstanding bond issue to generate upfront premium of about USD860,000. Through the swaption, JPMorgan has the option to swap those fixed-rate bonds, which feature a 5.125% coupon, at maturity in 2012 for floating-rate debt, said Thomas Trimm, a partner with law firm Pepper Hamilton in Pittsburgh, Penn., and counsel to Washington County. In return, JPMorgan will pay the county about USD860,000 at the deal's close, which is the saving the county would realize if the bonds were called backed today.
The county could not simply call back the 2002 bond issue because they were sold with a 10-year call, meaning the county can't redeem the bonds from investors until 2012, explained Martin Stallone, a managing director with Pottstown, Pa.-based Investment Management Advisory Group, which is serving as a third-party advisor on the deal. He said JPMorgan came to Washington County with the swaption idea, adding the county has a long-standing relationship with the firm. Trimm added, "JPMorgan takes the approach that it can hedge its bet against market fluctuation by doing a variety of these deals in different market conditions."
