Rate Lock Strategies for
City of Stamford, Connecticut
March 5, 2007
UBS Securities LLC
The City currently has the opportunity to realize $625,000 of present
value savings (or 3.4% of refunded bonds) by refunding its
outstanding 1998 Issue, General Obligation Bonds
Sum m ary of Ref unding Candidat es
1998 Series Bonds
1998 Series Bonds
1998 Series Bonds
1998 Series Bonds
1998 Series Bonds
1998 Series Bonds
M aturity
Coupon
Par Amount
Call Date
Call Price
7/15/09
7/15/10
7/15/11
7/15/12
7/15/13
7/15/14
5.00%
5.25
5.25
5.25
5.25
5.25
$ 3,900,000
3,885,000
3,870,000
3,850,000
570,000
2,355,000
7/15/08
7/15/08
7/15/08
7/15/08
7/15/08
7/15/08
100
100
100
100
100
100
 Because of tax regulations, the City cannot realize these savings through a
traditional fixed rate refunding
 The City must wait until within 90 days of the call date (4/16/08) to issue the
refunding bonds
 By 4/16/08, the interest rate market may be higher than today, thus the City would
lose out on these savings
 The City can utilize either a Forward Refunding or a Rate Lock to take advantage of
current low rates and lock into these savings today
UBS Securities LLC
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With a forward refunding, the City can price the transaction today and
deliver the bonds 12-months from now to achieve a refunding within
90 days of the call date
 The City would pay a relatively low forward premium today (10-12 basis points) to attract
investors to purchase the bonds today to be delivered a year from now (Investors would bear the
interest rate risk)
Forward Refunding Mechanism
Today
**PRICING**
Paper
Closing
Opening of Current
Refunding Window
Interest Payment Date
&
**DELIVERY**
**First Optional Call Date**
12 month forward
03/15/07
04/17/07
05/01/07
90 days
04/16/08
07/15/08
 The City would engage in a transaction process similar to a traditional refunding
 The City would prepare an offering document to the investors, price the transaction, perform a
paper closing and deliver the bonds
 The only difference is that the actual delivery of the bonds and transfer of the proceeds would
occur on 4/16/08 instead of within 3 weeks of pricing
 At that time, the City would purchase an escrow to call the bonds on the 7/15/08 call date
 There are some administrative, legal and time considerations with this strategy
—
—
—
It will take the City some time to prepare the offering document
There are also risks during such a long time period prior to closing which may cause the transaction not to
close (ie. Circular 230, world catastrophe, city’s credit downgrade etc…)
Overall, it may take at least 3 weeks to complete the process to price a deal
UBS Securities LLC
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The City can also utilize a Rate Lock strategy to lock in savings today

There are three types of Rate Locks to consider
—
—
—
AAA MMD Rate Lock
BMA Rate Lock
67% LIBOR Rate Lock
The mechanisms of the Rate Locks are very similar
**Rate Lock Pricing**
Today
**Rate Lock Termination**
12 month forward
03/15/07







90 days
04/16/08
07/15/08
The Rate Locks preserve the City’s savings by locking in rates using today’s AAA MMD or BMA or 67% LIBOR Indices
The City would pay a rate lock premium (between 2-13 basis points depending on the type of Lock) to lock in rates today
A year from now, the City would compare that future index rate against the locked in interest rate (plus rate lock premium)
to determine settlement cost (If rates are higher, UBS makes a payment to the City, if rates are lower, the City makes a
payment to UBS)
Whether interest rates have increased or decreased, the City would be indifferent since it has locked into its savings
already
In the case of a AAA MMD Rate Lock, the City would simply negotiate a document with UBS to identify the terms of the
Rate Lock
With a BMA or 67% of LIBOR Rate Lock, the City would need to negotiate an ISDA Agreement and Credit Support Annex
with UBS which also identifies the terms of the Lock
There are fewer administrative, legal and time considerations with this strategy
—
—
—

04/17/07
**First Optional Call Date**
The City would not need to prepare an offering document, no rating agency involvement, no marketing of bonds
No time period risk since the lock does not involve any investors, but is a simple rate to rate comparison
Locks can be executed within two to three weeks depending on document negotiation
There are however, some considerations – City’s credit risk, basis risk, cash settlement, etc.
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Examples of Payments to or From Stamford to UBS (AAA MMD Rate
Lock)
Assum pt ions
Ref erence index:
M M D AAA Scale
Par am ount :
$18.67 million
Average lif e:
3.18 years
 MMD rate locks generally do not
extend past one year forward
Indicat ive Pricing
Durat ion
12-mont hs
Ef f ect ive
April 22, 2008
Rat e lock cost
13 basis point s
Paym ent at Set t lem ent Dat e
Change in M M D
f rom Today
Change in M M D
f rom Locked Rat e
+30 bps
+20 bps
+13 bps
Today’s M M D
-10 bps
+17 bps
+7 bps
Hedged M M D (1)
-13 bps
-23 bps
Paym ent t o/
(f rom ) St am f ord (2)
$
85,000
35,000
–
(65,000)
(115,000)
Ef f ect ive
“ Locked-in” M M D
(3)
3.67%
3.67
3.67
3.67
3.67
(1) Equals current M M D plus rate lock cost .
(2) Approximate present value of a basis point of $5,000 on a 12-mont h f orw ard. This w ill vary based on t he amort izat ion and market condit ions.
(3) Corresponds t o M M D AAA scale year 2010 w it h a rat e of 3.54% .
Not e: M arket rat es as of February 27, 2007. For illust rat ion purposes only; act ual rat es w ill depend on f ut ure market condit ions, w hich may vary.
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Examples of Payments to or From Stamford to UBS (BMA or 67%
LIBOR Rate Lock)
67% LIBOR M arket Today
Current f ixed 67% LIBOR rat e
Rat e lock cost s
“ Locked-in” 67% LIBOR rat e
=
=
=
Not ional amount
=
$ 18,670,000
Assumed f orw ard period
=
12 mont hs
Present value of a basis point change (1 bp = 0.01% )
=
3.34%
0.02
3.36%
$
5,000
Change in 67% LIBOR
Rat e f rom Today
Change in 67% LIBOR Rat e
f rom Rat e Lock Level
M ark-t o-M arket
Value of Rat e Lock
Ef f ect ive
“ Locked-in” Rat e
+20 bps
+18 bps
$ 90,000
+10 bps
+8 bps
40,000
3.36
+2 bps
Locked Rat e
–
3.36
Today’s 67% LIBOR Rat e
-2 bps
(10,000)
3.36
-10 bps
-12 bps
(60,000)
3.36
3.36%
_______________
Note: Based on market conditions as of February 27, 2007. Current lock rate and related lock cost shown are for a 3.18-year average
life 67% of LIBOR-based rate lock and a 12-month forward period. For illustration purposes only; actual rates will depend on
future market conditions, which may vary.
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Summary of Rate Lock Alternatives
M M D Rate Lock
67% of LIBOR Forw ard Rate Lock
12-month rate lock costs: 13 basis points
12-month rate lock costs: 2 basis points
Mechanics
Mechanics

Stamford locks in current MMD scale + rate lock costs


On settlement date, Stamford unwinds the rate lock and
issues fixed rate bonds
Stamford executes a forward-starting 67% of LIBOR rate
lock today + rate lock costs

If rates rise above the rate lock level, Stamford receives a
cash payment on settlement of the lock which offsets
higher expected cost of debt
On the forward date, Stamford unwinds the rate lock and
issues fixed rate bonds
Advantages


If rates fall or rise less than the rate lock level, Stamford
makes a cash payment on settlement of the lock which
offsets lower expected cost of debt
Advantages

Stamford locks in today’s market environment against
general interest rate movements
Disadvantages

Rate Lock does not protect Stamford against adverse
movements in credit spreads

Rate Lock is cash settled regardless of whether or not the
bonds are issued, potentially exposing Stamford to
payment making a cash from its own funds without
repayment from bond proceeds

Stamford locks-in today’s market environment against
movements in the market

67% LIBOR market reflects general interest rate
movements in the tax-exempt market

Lower rate lock costs than MMD Rate Lock
Disadvantages

Same as MMD Rate Lock

Stamford is exposed to basis risk between tax-exempt
bond and LIBOR markets
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Financing Working Group recommends that if Stamford proceeds with
a strategy to preserve savings today, it should use a 67% LIBOR Rate
Lock
 Lowest cost strategy
 Easy documentation
 Can be executed within 2-3 weeks
 Very transparent and easy to monitor in the market
 Relatively low risk
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