Slide 1 - Oakland University by xiuliliaofz

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									          Oakland University



Interest Rate Swap Restructuring Opportunity –
         Constant Maturity Swap (CMS)

           CDR Financial Products, Inc.
                  April 4, 2007
         Constant Maturity Swap (CMS) - Overview


                  Take advantage of the current interest rate environment
                  and historically flat yield curve by converting the variable
Description:      rate index received on the swap from the short-term index
                  to the longer tenor 10-year BMA swap rate index.




                  Experience significant cost savings in the event the BMA
Objective:        swap curve reverts to its historical average, and the spread
                  between BMA and the 10-year BMA swap rate widens.




                  Convert at a minimal cost while the BMA swap curve
Execution:        remains relatively flat. An overlay basis swap to the
                  existing deal will complete the transaction with minimal
                  documentation.


                                                                                 2
                                        Background

   Based on historical averages, the BMA swap curve typically displays a steep and
    positive slope, whereby longer-term yields are higher than short-term yields.

   Current market conditions have resulted in a significant “flattening” of the BMA
    swap curve such that the current spread (differential) between the weekly BMA
    index and the 10-year BMA swap rate is narrow:

                                                                          Today
                        BMA Swap Curve
                                                                          2 Years Ago

                4.50%



                4.00%



                3.50%



                3.00%



                2.50%
                          1 yr   2 yr    3 yr   5 yr   7 yr   10 yr   20 yr    30 yr



                                                                                        3
                                                                  Structure
     The CMS structure/basis swap replaces the floating leg of the swap with a lower % of 10-year
      BMA.
     As the existing swap is based on the actual bond rate with alternative index conditions, CDR
      recommends an overlay basis swap instead of an amendment to the existing confirmation.
      This simplifies the process and provides transparency to the new transaction.
     The proposed structure is a basis swap whereby the University pays the BMA Index and
      receives a lower % of 10-year BMA.


                                                  BMA Index                                     Actual Bond
                                                                                                   Rate1
                                     Swap                                 Oakland                                       Swap
                                  Counterparty                           University                                  Counterparty

                                                  % 10 yr BMA                                   Fixed Rate


                                                                                   Actual
                                                                                   Bond Rate

        CMS Basis Swap
                                                                            Bond
                                                                           Holders


    ________________________________


    (1) Index converts to the BMA Index upon certain conditions including a rating downgrade of the bonds or default. Furthermore, the index converts to 65% of 1-
    Month LIBOR upon certain conditions including an event of taxability as described in the confirmation, including if the actual bond rate average exceeds 77% of the
    1-Month LIBOR average for a period of more than 180 days                                                                                                              4
                                                     Economic Summary

   Potential cost savings exist for the University if the curve returns to its
    normal positive sloping shape and steepness.

                                                                                                             Weekly                   Net Annual
                                                               89.36%1 of 10-Year BMA
                                                                                                              BMA                    Benefit of CMS

           10-Year Historical Average                                    3.74%                               2.67%                          1.07%

            5-Year Historical Average                                    3.34%                               2.00%                          1.34%

            3-Year Historical Average                                    3.37%                               2.55%                          0.82%



                                       Index (as of 3/14/07)                 Reset                    10-Year BMA vs. BMA

                                               BMA                          3.60%                                   N/A

                                           10-Year BMA                      3.59%                                (0.01)%



    ________________________________


    (1) Assumes a forward-start date of 03/01/08 and a dealer spread of 2 ratios. Indicative pricing is as of 03/16/07 and is not a guarantee of future pricing.



                                                                                                                                                                   5
Economic Summary (cont.) - Potential benefit/(loss) based on yield curve spreads
                                                              -70 bp         -27 bp          25 bp        50 bp       107 bp       285 bp
                     Date              Remaining Notional     spread         spread         spread       spread       spread       spread
                   03/01/08             $34,370,000.00
                   03/01/09             $34,370,000.00      ($240,590)      ($92,799)      $85,925     $171,850     $367,759      $979,545
                   03/01/10             $34,370,000.00      ($240,590)      ($92,799)      $85,925     $171,850     $367,759      $979,545
                   03/01/11             $34,370,000.00      ($240,590)      ($92,799)      $85,925     $171,850     $367,759      $979,545
                   03/01/12             $33,765,000.00      ($240,590)      ($92,799)      $85,925     $171,850     $367,759      $979,545
                   03/01/13             $33,130,000.00      ($236,355)      ($91,166)      $84,413     $168,825     $361,286      $962,303
                   03/01/14             $32,465,000.00      ($231,910)      ($89,451)      $82,825     $165,650     $354,491      $944,205
                   03/01/15             $31,765,000.00      ($227,255)      ($87,656)      $81,163     $162,325     $347,376      $925,253
                   03/01/16             $31,035,000.00      ($222,355)      ($85,766)      $79,413     $158,825     $339,886      $905,303
                   03/01/17             $30,270,000.00      ($217,245)      ($83,795)      $77,588     $155,175     $332,075      $884,498
                   03/01/18             $29,465,000.00      ($211,890)      ($81,729)      $75,675     $151,350     $323,889      $862,695
                   03/01/19             $28,625,000.00      ($206,255)      ($79,556)      $73,663     $147,325     $315,276      $839,753
                   03/01/20             $27,745,000.00      ($200,375)      ($77,288)      $71,563     $143,125     $306,288      $815,813
                   03/01/21             $26,820,000.00      ($194,215)      ($74,912)      $69,363     $138,725     $296,872      $790,733
                   03/01/22             $25,850,000.00      ($187,740)      ($72,414)      $67,050     $134,100     $286,974      $764,370
                   03/01/23             $24,835,000.00      ($180,950)      ($69,795)      $64,625     $129,250     $276,595      $736,725
                   03/01/24             $23,770,000.00      ($173,845)      ($67,055)      $62,088     $124,175     $265,735      $707,798
                   03/01/25             $22,650,000.00      ($166,390)      ($64,179)      $59,425     $118,850     $254,339      $677,445
                   03/01/26             $21,480,000.00      ($158,550)      ($61,155)      $56,625     $113,250     $242,355      $645,525
                   03/01/27             $17,580,000.00      ($150,360)      ($57,996)      $53,700     $107,400     $229,836      $612,180
                   03/01/28             $13,490,000.00      ($123,060)      ($47,466)      $43,950      $87,900     $188,106      $501,030
                   03/01/29              $9,205,000.00       ($94,430)      ($36,423)      $33,725      $67,450     $144,343      $384,465
                   03/01/30              $4,710,000.00       ($64,435)      ($24,854)      $23,013      $46,025      $98,494      $262,343
                   03/01/31                  $0.00           ($32,970)      ($12,717)      $11,775      $23,550      $50,397      $134,235
                                                   Total:   ($4,242,945)   ($1,636,565)   $1,515,338   $3,030,675   $6,485,645   $17,274,848

        ________________________________


        (1)       Based on an analysis of data over the past 10 years, the spread between 89.36% of 10 yr-BMA swap rates and the weekly BMA index
                  has averaged 107 basis points, with a low of (108) bps and a high of 294 bps
        (2)       Based on 2 standard deviations (a 95% confidence interval), the worst/best case spread income falls within a range of (70) bps and 285
                  bps. These ranges serve as the endpoints to the scenarios shown above. Current spread is (27) bps                                        6
                            Executed Transactions

   Many issuers throughout the country have similarly taken advantage of this market
    opportunity and have entered into CMS transactions -

           Large Municipalities
           Specialized Authorities (e.g., water & sewer, transportation issuers)
           School Districts
           Hospitals and Healthcare Facilities
           Universities


   CMS Transactions executed by Universities include the following:

    University                        Approx. Notional Amount
    University of Texas               $500,000,000
    Louisiana State University        $22,940,000
    University of New Mexico          $125,000,000
    American University               $21,000,000
    Boston University (in process)    $29,000,000 - $56,000,000
                                                                                        7
                                 Benefits

Potential Cost Savings
   Borrowing costs can be reduced significantly if the yield curve returns to
    its historically positive sloping shape in the long term.

        For example, from a cash flow perspective, the potential exists to
         capture significant value and unwind the CMS at a future date in
         the event the swap curve steepens to a normal level.


Flexibility
   Relatively easy to implement and the structure is flexible, allowing the
    swap to be executed in a number of different ways depending on the
    needs of the University. If executed with the existing swap counterparty, a
    new trade confirmation would be governed by the ISDA Master currently
    in place.




                                                                                  8
                                                                     Risks: Mark-to-Market Risk
                                                          The Primary Risk is Curve Flatness/Inversion

    The market value will move against the University if long-term BMA swap rates fall below short-
     term BMA resets.
    Historically, the longest periods of inversion occurred over 20 years ago before the Fed applied
     rigorous monitoring and management of interest rates.

    20.000%
                                                                                                                                                                                                                         5Y Treasury
                                                                                                                                                                                                                         3M T-Bill
                                                                                                                                                                                                                         Spread

    15.000%




    10.000%




     5.000%




     0.000%

                                                                                                                              inverted from :
                                                    inverted from :                                                           12/29/78 - 8/16/80
                                                6/8/73 - 6/28/74 and                                                          11/14/80 - 3/27/81
                                                    8/16/74 - 9/20/74                                                         5/15/81 - 6/26/81
    -5.000%
              1/5/1962


                         1/5/1964


                                    1/5/1966


                                               1/5/1968


                                                          1/5/1970


                                                                      1/5/1972


                                                                                 1/5/1974


                                                                                            1/5/1976


                                                                                                       1/5/1978


                                                                                                                  1/5/1980


                                                                                                                             1/5/1982


                                                                                                                                        1/5/1984


                                                                                                                                                   1/5/1986


                                                                                                                                                              1/5/1988


                                                                                                                                                                         1/5/1990


                                                                                                                                                                                    1/5/1992


                                                                                                                                                                                               1/5/1994


                                                                                                                                                                                                          1/5/1996


                                                                                                                                                                                                                     1/5/1998


                                                                                                                                                                                                                                1/5/2000


                                                                                                                                                                                                                                           1/5/2002


                                                                                                                                                                                                                                                      1/5/2004


                                                                                                                                                                                                                                                                 1/5/2006
                                                                                                                                                                                                                                                                            9
                           Additional Risks

Higher Execution/Termination Costs
   Using a 10-year BMA swap rate provides for a less efficient market than
    executing a traditional fixed payer swap based on the short-term BMA
    index; higher counterparty hedging costs may result in increased
    termination costs for the University.

Higher Risk/Reward for CMS
   Historically, the current index shows a higher correlation to the underlying
    bonds versus an equivalent % of the 10-year BMA swap rate. Converting
    the variable rate swap index to a % of the 10-year BMA swap rate results
    in increased volatility versus the underlying bonds, reducing cash flows in
    some periods.

       However, historical averages show a significantly higher spread
        over BMA (greater upside) for 10-Year BMA swaps, thereby
        mitigating this risk in the long run.



                                                                                   10
Standard & Poor’s Credit FAQ




                               11
Standard & Poor’s Credit FAQ (cont.)




                                       12

								
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