Massachusetts' Treasury Department is looking for a swap monitor to evaluate the state's $3.48 billion portfolio of derivative agreements and any future swap transactions or settlement agreements it may enter into.

Along with the Treasury Department's search, the Massachusetts Development Finance Agency Monday will release a request for proposals for underwriting services on its new $250 million, tax-exempt Infrastructure Investment Incentive program, or I-Cubed.

State Treasury officials anticipate selecting a swap monitor on April 10. Proposals are due March 30 at 3 p.m. Eastern Time. The commonwealth will choose one firm for a one-year contract with an option to renew for two additional terms of one year each.

The swap monitor position will require the firm to examine the state's current derivative portfolio, calculate mark-to-market valuations independent from swap counterparties' estimates, submit monthly reports, and potentially track and analyze possible swap settlements.

"The firm selected as swap monitor may be required to maintain a database to track, calculate, verify, and report all fixed and floating swap settlements, including reset rates and day counts according to the terms of the commonwealth's swap confirmations," according to the RFP.

The swap monitor will also alert Treasury officials on counterparty credit rating changes, along with bankruptcy and merger and acquisition announcements, and advise the state on any future derivative transactions.

The minimum requirements for applicants include experience monitoring at least 10 swap transactions in the last three years for state-level issuers or other large entities, and with derivative portfolios similar to Massachusetts' collection of swaps. The firm will also need to provide mark-to-market valuations through a web-based platform.

Massachusetts has 19 floating-to-fixed rate swaps totalling $3.48 billion attached to various general obligation and special obligation bonds. Those transactions had a fair market value of negative $360 million, as of January 30, according to a Moody's Investors Service report.

Of the 19 swaps, seven are based on the consumer price index and also calculated on a cost-of-funds basis, five are derived from solely on a cost-of-funds basis, three swaps are based on the London Interbank Offered Rate, and another three are SIFMA swaps. One swap listed in the RFP does not identify the fixed rate that the state pays or the type of floating rate Massachusetts receives in the agreement. That derivative is linked to $294 million of Route 3 North Series 2002B bonds.

Standard & Poor's assigns the state a debt derivative profile of 1.5 based on a scale of 1 to 4, with 4 representing the highest risk. That 1.5 rating reflects the highly-rated and diversified counterparties in the state's swap portfolio and the favorable match between variable interest rates it pays on its floating-rate bonds and the variable rate it receives in the swap agreements.

Massachusetts has "strong economic viability of its swap structures over stressful economic cycles, in which the swap floating rate received by the commonwealth from its counterparties approximates the actual floating rates on the bonds, providing a favorable hedge that reduces basis risk," according to a Standard & Poor's report.

The Bay State may also take on five floating-to-fixed-rate Massachusetts Turnpike Authority swaps that total $800 million and have a termination cost of roughly $350 million, if lawmakers approve a plan to extend the state's GO pledge to the derivatives. UBS Securities LLC is counterparty on the five swaps and Ambac Assurance Corp. insures the derivatives. If Standard & Poor's drops the monoline's credit rating by one notch, that would prompt a termination event unless the swaps carry the state's double-A GO credit rating.

Separately, MassDevelopment Monday will begin a search for bankers to price debt in its new $250 million I-Cubed program, said Adam Bickelman, spokesman for the authority. Responses will be due April 10.

MassDevelopment, as conduit issuer, will sell I-Cubed deals on behalf of municipalities in sales ranging from $10 million to $50 million, with the authority allowed to issue up to $250 million of I-Cubed debt in total. The revenue bonds will have the state's GO pledge but will be paid off from new or additional revenue streams the developments generate for the state.

Qualifying projects include relocation of out-of-state companies or major in-state expansion plans that would spark new or surplus employment-tax revenue, sales tax receipts, and hotel and motel tax revenue, according to MassDevelopment.

Developers pay debt service costs until the new projects are completed . Once the residential or commercial buildings are occupied, the state will then pay principal and interest payments on the bonds from the new revenue. If the developer defaults on the debt or the project fails to garner sufficient revenue to pay debt service, the municipality where the project is located pays the shortfall, according to MassDevelopment.

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