New York City said last week that it would like to hear about new variable-rate debt products.
The city informed respondents to its outstanding request for proposals for underwriting services that it was particularly interested in products that function as alternatives to variable-rate demand bonds and self-liquidity products that don’t require support or liquidity from commercial banks. The call for new products does not extend to derivatives such as synthetic floating-rate debt.
“We would be interested in hearing about products that would be of low cost to us as an issuer,” said the city’s director of investor relations, Ray Orlando. “We know there are products out there that are looking to avoid liquidity issues that exist.”
Like many issuers dealing with the collapse of the auction-rate market and turbulence in the variable-rate market, the city has reduced its variable-rate exposure. In May, the city reported it had 17.3% of its debt in variable-rate form — $9.63 billion out of $55.52 billion. That was down from 19.6% a year earlier.
Short-term interest rates are low, but the high cost of liquidity makes it difficult for issuers to take advantage of those rates. The Securities Industry and Financial Markets Association municipal swap index, which market participants use a benchmark for variable rates, is at historic lows. On June 3 it was 0.34%, a rate only matched once since 1989, and that was earlier this year.
Market participants said they have heard discussions of new variable-rate products that would be pegged to indexes and function in ways similar to bond anticipation notes. Citi has introduced a new variable-rate product known as windows variable-rate demand bonds that would allow highly rated issuers to sell variable-rate debt without credit enhancement and which could be purchased by money market funds.