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Floating Rate Note Pricing Gains Efficiency

Growth in the floating rate notes market has allowed issuers to gain cost-effective variable rate exposure and investors a way to manage interest rate risk, according to speakers at the first ever municipal conference focused on the securities.

"FRNs have been a common form of financing in the corporate and asset-backed debt markets to gain access to variable interest costs of funds without risks to the short-term bank market, and now the municipal industry is following suit by adopting the product within our own market," said Mark Maroney, head of U.S. rates, municipals, and securitized products at RBC Capital Markets.

RBC's municipal markets group hosted the event on Friday at the Conrad Hotel in New York City, bringing together over 180 investors and issuers to discuss the emergence of FRNs following the recent period of market challenges.

FRNs are municipal obligations with interest rates resetting regularly, often monthly or quarterly. The rates are derived from a benchmark rate — typically either the Securities Industry and Financial Markets Association seven-day swap rate or the one- or three-month London Interbank Offered Rate — plus a fixed spread negotiated at issuance. The debt provides issuers with a variable rate cost of fund without many of the risks present in traditional variable rate demand bond financings.

RBC has underwritten more than $4 billion in FRNs since 2012, and was the top issuer of the debt for 2012, according to data from Thomson Reuters.

"Within our client base, we have seen a significant uptake in interest in FRNs over the last few years, as evidenced by the 89 industry-wide FRN transactions totaling $16 billion since 2009," said Chris Hamel, head of the municipal finance group at RBC. "[Friday's] event convenes some of the biggest players in the space to further examine the opportunities and challenges in our market and we are thrilled to host this opportunity."

Mark Muller, senior portfolio manager at Loews Corporation, gave the keynote address, discussing the changes in the municipal market landscape over the last five years. He noted the increase in interest with the decline of credit enhancements, including letter-of-credits and standby purchase agreement support, and the low supply of FRNs, which has driven the market's rebound.

Other investor panelists included Lyle Fitterer, managing director at Wells Capital Management, Justin Schwartz, portfolio manager at Vanguard, and James Pruskowski, managing director and portfolio manager at BlackRock.

The panelists said FRNs are an attractive asset because they provide protection against interest rate risk, particularly in the current environment.

In a second panel, issuers discussed the maturity of the municipal market, which now has a much larger investor base. As a result, they said the pricing in the market has become more efficient, allowing issuers to gain floating rate exposure at a cost-effective price.

Issuer panelists included Nikolaus Grieshaber, chief financial officer at the Pennsylvania Turnpike, Carol Kostik, deputy comptroller for public finance in the New York City comptroller's office, Katherine McManus, deputy general counsel finance at the New York Metropolitan Transportation Authority, and Donna Manuelli, chief financial officer at the New Jersey Turnpike Authority.

RBC was ranked fifth among underwriters in 2012, working on 632 issues totaling $21 billion, according to Thomson Reuters. The firm's municipal markets group employs more than 345 people in 26 cities.

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