9- Lessons of '08, Opportunities of '10- Peter Shapiro

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An overview of bond,s Swaps and the new environment by Peter Shapiro, Swap Financial Group.

Published in: Economy & Finance, Business
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9- Lessons of '08, Opportunities of '10- Peter Shapiro

  1. 1. Lessons of ’08, Opportunities of ’10:Lessons of ’08, Opportunities of ’10: Bonds, Swaps and the New EnvironmentBonds, Swaps and the New Environment MassDevelopment Current Topics in Tax-Exempt Finance Conference October 29, 2010 Swap Financial Group Peter Shapiro 76 South Orange Avenue, Suite 6 South Orange, New Jersey 07079 973-378-5500
  2. 2. Swap Financial Group 2Swap Financial Group 2 Typical swap – ‘synthetic fixed’Typical swap – ‘synthetic fixed’ Swap Dealer Fixed Rate Bond Holder Issuer pays Swap Fixed Rate minus the difference between the two Floating Rates Floating Index Bond Rate (Floating) Issuer
  3. 3. Swap Financial Group 3Swap Financial Group 3 Realized risk #1: CounterpartyRealized risk #1: Counterparty Swap Dealer Fixed Rate Bond Holder Lehman bankruptcy, downgrades of AIG, Ambac, Depfa, others Floating Index Bond Rate (Floating) Issuer
  4. 4. Swap Financial Group 4Swap Financial Group 4 Realized risk #2: Basis riskRealized risk #2: Basis risk Swap Dealer Fixed Rate Bond Holder Bonds rates sharply higher due to bank, insurer problems Floating Index Bond Rate (Floating) Issuer
  5. 5. Swap Financial Group 5Swap Financial Group 5 Realized risk #3: Rollover riskRealized risk #3: Rollover risk Swap Dealer Fixed Rate Bond Holder Bank crisis eliminates many SBPA and LOC providers, increases costs sharply for new facilities. Floating Index Bond Rate (Floating) Issuer
  6. 6. Swap Financial Group 6Swap Financial Group 6 Common thread on risksCommon thread on risks All three risks – counterparty, basis and rollover risk – were created by the meltdown of financial institutions By contrast, muni credits have remained very strong
  7. 7. Swap Financial Group 7 Realized risk #4: Collateral postingRealized risk #4: Collateral posting  ‘Don’t worry – you’ll never have to post’ because: – Your swap is insured – Rates would have to move beyond any historical experience Swap Financial Group 7
  8. 8. 8 8 30-Year U.S. Treasury Yield30-Year U.S. Treasury Yield 2.00 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 8/3/06 12/1/06 3/31/07 7/29/07 11/26/07 3/25/08 7/23/08 11/20/08 Swap Financial Group Yield(%)
  9. 9. 9 9 30-Year LIBOR Swap Spread30-Year LIBOR Swap Spread -70.00 -50.00 -30.00 -10.00 10.00 30.00 50.00 70.00 90.00 8/11/06 12/9/06 4/8/07 8/6/07 12/4/07 4/2/08 7/31/08 11/28/08 Swap Financial Group Spread(bps)
  10. 10. 10 10 The killer: Terminate swap, fix bondsThe killer: Terminate swap, fix bonds 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8/9/07 12/7/07 4/5/08 8/3/08 12/1/08 Swap Financial Group Yield(%) 30-Year Bloomberg Fair Value Municipal Yield 30-Year 67% of LIBOR Swap Rate Spread = 75 bps Spread = 339 bps
  11. 11. Swap Financial Group 11Swap Financial Group 11 Floating rate without bank supportFloating rate without bank support Swap Dealer Fixed Rate Bond Holder Floating Index (SIFMA) Bond Rate (Fixed) Issuer • Issue fixed rate bonds • Swap to floating (pay SIFMA , receive fixed) • No bank LOC/liquidity cost • No bank covenants • No remarketing cost or risk • No basis risk • Key risk: counterparty risk Pricing sweet spots: 5 year tax-exempt: SIFMA – 20 to + 50

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