The Shield - Final LIBOR Transition Update
Minneapolis, MN | August 30, 2023 | Brandon Lippold, Vice President
LIBOR cessation occurred as scheduled on June 30th of this year and most variable instruments that historically referenced LIBOR should now reference a different index. Depending on your last reset period, your debt instruments could still be utilizing a LIBOR rate for your current interest accrual period, however, with interest accrual periods thereafter referencing a different rate, likely some form of SOFR.
The next and final priority for institutions managing their variable rate exposure through this transition will be to monitor and verify that the transition occurred as expected. The initial place to determine your transition occurred correctly will be the first interest payment that occurs prior to June 30th. Depending on your new variable rate, there are different methods to determine what the correct payment should have been. If you have questions about how your specific interest calculation is determined, please reach out to Blue Rose and we can help with that process. After the initial interest accrual period, it would still be a good idea to continue to monitor variable rate payments as banks become more accustomed to new resetting mechanisms, especially when variable rate exposures are hedged with interest rate swaps.
Comparable Issues Commentary
Two of our higher education clients brought transactions to market on back-to-back days this month, making for an exciting week at Blue Rose. The results for these pricings are shown in the table below. On August 15, Carleton College (“Carleton”) priced its tax-exempt Series 2023 Revenue Bonds. The following day, Wayne State University (“WSU”) priced its tax-exempt Series 2023A General Revenue Refunding Bonds. Carleton’s transaction was purely a new money issuance, with the proceeds financing new student townhomes along with a multipurpose student health and counseling center on the college’s campus. In contrast, WSU’s transaction was a standalone refunding of the majority of its Series 2013A Bonds. Given the current elevated interest rate environment, existing maturities of the 2013A bonds with lower coupons in 2027, 2028, and 2040 were partially or fully excluded from the refunding.
Both schools’ bonds carried ratings in the “Aa” category from Moody’s, with Carleton’s bonds rated Aa2 while Wayne State’s were rated Aa3. WSU’s issuance also featured a AA insured rating from S&P from Build America Mutual, with bond insurance used to enhance the University’s underlying A+ rating. Carleton’s pricing also benefited from the Minnesota state tax-exempt status of the bonds, which proves valuable to Minnesota borrowers given the higher state taxes in Minnesota relative to many other states. Its issuance was the larger of the two deals, totaling roughly $60.5 million in total par amount while Wayne State’s issuance was approximately $42.5 million in size. Both deals were sold with a standard 10-year par call option in 2033. Carleton’s bonds were issued with an 8-year interest-only period to reduce the new issue’s impact on MADS. The College utilized serialized maturities from 2031 through the 20-year point in 2043, before also featuring three term bonds in 2045, 2048, and 2053. WSU’s bonds were fully serialized with maturities ranging from 2024-2026 and 2029-2040, and were structured to accelerate interest rate savings into the first three fiscal years (FY 2024-2026) without generating dissavings in later years. The two deals were similar in coupon structure as well, both using exclusively 5% coupons with the exception of WSU’s final two maturities in 2039 and 2040, which were sold with 4% coupons.
In the two weeks leading up to Carleton’s pricing on the 15th, MMD rose between 7-18 bps across the curve, with double-digit increases at every tenor beyond the 3-year point. On pricing day, most of the curve increased by an additional 2-5 bps (with the exception of the first five maturities, which were primarily unchanged except for a 2 bp decrease for the 1-year tenor). Carleton was ultimately able to achieve spreads of 15-34 bps on its serial maturities and 34-35 bps on the three term bonds.
Following the generally negative MMD movements on the 15th, WSU priced into a still-choppy market environment the following day. MMD continued to tick upwards on the 16th, with 2 bp increases to the curve beyond the 12-year tenor. Despite these headwinds, WSU was able to achieve spreads of 13-49 bps on its 5% serial bonds and a spread of 77 bps on both 4% serial bonds.
Meet the Author:
Brandon Lippold | email@example.com | 952-746-6054
Brandon Lippold joined Blue Rose in 2018 as a Quantitative Analyst, now in his role of Vice President, he is focused on growing client management responsibilities, in particular ensuring that our clients’ transactions run smoothly through closing. He has significant expertise in direct purchase bonds, and derivative products and is experienced with the pricing and execution of fixed rate bond transactions, and reinvestment products. Mr. Lippold is closely involved in every step of the financing process for clients, from initial capital planning stages all the way through closing.
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