Case Study

Owen J. Roberts School District, PA

PFM assisted Owen J. Roberts School District with a $60 million forward starting interest rate swap agreement in November of 2003 with settlement in May, 2005. The School District's main objective was to lock in a fixed rate in the market at the time of the borrowing, although the projects weren't to begin for 18-24 months and were to be completed some time in 2008. Creating a synthetic fixed rate through the use of the swap allowed the School District to:

• efficiently lock in a fixed rate (on all $60 million) and not be subject to future market conditions
  
• eliminate negative arbitrage in the construction fund for at least 18 months
  
• eliminate the need for potential future referendum due to the increase in debt service in its budget based on the prospects of future legislation
  
• no payments on the debt until FY 2005/2006

The synthetic fixed "all-in" rate locked in for 30 years was 4.43%. This "all-in" rate includes all the fees and costs associated with the transaction. At the time of the transaction, a traditional fixed rate bond issue rate would have been 4.89%, but the School District would have had to wait until May, 2005 to issue such bonds and, thus, would have been subject to the market at that time. If a traditional forward settling fixed rate bond issue was done in November, 2003 for settlement in May, 2005, the Underwriter estimated that the fixed rate would have been 5.80%. The index used on the swap was 67% of LIBOR, which reduced the fixed coupon by several basis points relative to a comparable BMA indexed interest rate swap.

PFM provided the following services to the District:

• Provide extensive education to both Staff and board members regarding the benefits, risk and mechanics of the interest rate swap.
• Provide an options analysis on alternate financing strategies
• Negotiate the ISDA documents with the Counterparty
• Develop an interest rate management plan to help mitigate the risks of a swap
• Negotiate fair terms, conditions, and rate with the swap counterparty (RBC)
• Provide a "Fair Market Opinion" with respect to the pricing of the swap.