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Derivatives

Pa. County Pockets Bifurcated Swap Premium

Montgomery County, Pa., has entered into a bifurcated swap with Bear Stearns to generate upfront cash in excess of USD2 million, which it sought to secure in anticipation of state funding cuts.

Montgomery County, Pa., has entered into a bifurcated swap with Bear Stearns to generate upfront cash in excess of USD2 million, which it sought to secure in anticipation of state funding cuts. L. Gordon Walker, an advisor with Public Financial Management, the county's financial counsel in Malvern, Pa., said it heard proposals from numerous banks and chose Bear Stearns because its bifurcated swap generated the greatest premium. The deal, which comprised of a swaption and a basis swap, was written on a 2001 USD37.2 million bond issue with a 5% coupon. The bond issue can be called in 2011, and it expires in 2022.

The swaption gives Bear Stearns the option to require the county to issue floating-rate debt to refund the bond issue in 2011. Ruth Damsker, a Montgomery County commissioner in Norristown, said the swaption premium was USD2.372 million. The county also entered into a basis rate swap which, between now and the 2011 bond issue call date, is expected to generate another USD580,000 on a net present value basis, meaning this amount takes into account the value of today's dollar versus that same dollar in the future, said Walker. In the basis swap, the county pays Bear Stearns a rate linked to the Bond Market Association swap index, and receives 67% of one-month LIBOR in U.S. dollars, plus 25 basis points.

If the swaption is exercised, the bifurcated deal collapses into one--a LIBOR swap under which the county pays BMA plus 25bps for liquidity and remarketing, plus 5%, which is the 2011 bond issue's fixed-rate. The county will receive from Bear Stearns 67% of LIBOR plus 25bps.

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