Citi yesterday said it will lend up to $5 billion through three-year, direct loans to highly rated municipal issuers, supported by capital the bank received from the Treasury Department's Troubled Asset Relief Program.

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Citi said it will lend the money at variable rates to state and local governments, municipal agencies, and nonprofit hospitals rated double-A or better. The money can be used for capital investment projects or to refinance existing variable-rate debt, the bank said.

Citi will loan the money to municipal issuers at SIFMA municipal swap rate plus a spread depending on whether the credit is a general obligation, revenue, or higher-education/health care bond. A double-A rated GO credit would pay SIFMA plus 100 basis points, for instance, regardless of the name of the issuer.

The SIFMA municipal swap index stood at 0.47% on as of May 6. Only once - on Jan. 14, when it stood at 0.46% - has the index been lower since 1989, according to Municipal Market Data.

The difficulty issuers have had accessing the variable-rate market have helped contribute to the record low rates. Letters of credit are more difficult to find than in the past, and those that are available typically have higher prices and stricter covenants.

In addition, some issuers have seen their rates spike in the variable-rate markets after their liquidity providers have been downgraded.

A total of 216 short-term variable-rate obligations with a par value of $10.7 billion have come to market so far in 2009, compared to 674 issuers with a par value of $42.2 billion during the same period in 2008, according to Thomson Reuters. Last year's numbers, though, were boosted by issuers rushing to variable-rate issuance following the collapse of the auction-rate securties market.

"A major objective of this program was to provide an access point for municipal and not-for-profits near-term to resolve the challenges of the variable-rate demand market," said Citi managing director and co-head of public finance David Brownstein.

Citi says it has already put out proposals to lend more than half the $5 billion, but has yet to actually enter into any loans.

The municipal lending program is part of a broader plan Citi's TARP committee has approved to use $44.75 billion in TARP capital. The bank had put $8.2 billion of these initiatives to work as of March 31, with most being used to purchase mortgage securities in the secondary market.

"Citi's municipal lending program is designed to help communities around the country pursue infrastructure development and other projects at a time when the difficult credit environment has limited access to other funding sources," Citi chief executive officer Vikram Pandit said in a statement. "Investments in projects like schools and hospitals help create jobs and will be an integral part of our country's economic recovery."

The program only applies to double-A or higher rated issuers, which have typically had an easier time accessing the fixed-rate market than lower rated issuers. A three-year, double-A rated bond yielded 111 basis points less than single-A rated paper, compared to 42 a year ago, according to Municipal Market Data.

However, higher rated issuers may need to access the variable-rate market for different reasons, such as if they have a floating-to-fixed rate swap.

James Colby, municipal strategist at Van Eck Global, said the program would be most valuable to municipalities "looking to offload burdensome" variable-rate demand notes.

"Some may question as to whether the recipients are as much in need as those who are having more difficulties accessing the capital markets," Colby said. "Without more detail it is difficult to make this observation. But shouldn't TARP money, a product of taxpayer support, be available to support a broader spectrum of the communities in need?"

Other major TARP recipients have not released quarterly reports on their TARP funding. They are required to file monthly reports with the Treasury, but they do not have to be made public.

Patrick Temple-West contributed to this story.

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