HomeMy WebLinkAboutExhibitThe City of Miami, Florida
MASTER SWAP POLICY
1. The City
By recommendation of the City's Finance Committee, approval to execute an interest rate
swap on behalf of The City of Miami, Florida (the "City") will be authorized by a
resolution passed by the City Commission (the "Commission") on a case -by -case basis.
Each swap resolution must authorize the swap agreement and its major provisions,
including notional amount, security, and payment, in regard to a swap agreement between
the City and qualified swap Counterparties. Each swap resolution must specify the
appropriate City officials authorized to make modifications to the swaps contemplated,
within certain parameters. In the event of a conflict between a swap resolution and the
Master Swap Policy, the terms and conditions of the swap resolution will control.
2. Purpose
Interest rate swap transactions can be an integral part of the City's asset/liability and debt
management strategy. By utilizing interest rate swaps, the City can expeditiously take
advantage of market opportunities to reduce costs. Interest rate swaps allow the City to
actively manage asset and liability interest rate risk, balance financial risk, and achieve
debt management goals and objectives through synthetic fixed rate and variable rate
financing structures. Among the strategies which the City will consider in entering
Swaps are:
(i) Managing the City's exposure to floating and fixed interest rates, through
interest rate swaps, caps, floors, collars, and other option products;
(ii) Hedging floating rate risk with caps, collars, and other instruments;
(iii) Locking in fixed rates in current markets for use at a later date, through
the use of forward swaps, swaptions, rate locks, options, and forward
delivery products;
(iv) Reducing the cost of fixed or floating rate debt, through swaps and related
products to create "synthetic" fixed or floating rate debt;
(v) More rapidly accessing the capital markets than may be possible with
conventional debt instruments;
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(vi) Managing the City's credit exposure to financial institutions and other
entities through the use of offsetting swaps and other credit management
products; and,
(vii) Other applications to enable the City to increase income, lower costs, or
strengthen the City's balance sheet.
When a Swap is being used in preference to conventional bonds in order to produce
savings, as a general rule, the level of savings should exceed the City's traditional fixed
rate refunding savings target of 5%. In general, savings should equal or exceed 8% to
account for normal Swap risks (as detailed below in Section 5), but may be as low as 5%
if risks have been eliminated or significantly mitigated, A particular transaction may be
employed at a lower level of savings if warranted by specific circumstances.
While the City may use Swaps to increase or decrease the amount of floating-rate
exposure on the City's balance sheet, the City will not enter into Swaps solely for
speculative purposes.
3. General Guidelines for Interest Rate Swap Agreements
The following non-exclusive list provides certain guidelines the City will follow in the
evaluation and recommendation of interest rate swap transactions:
3.1. Legality
Any proposed contract must fit within the legal constraints imposed by state laws,
City resolutions, and existing covenants, indentures and other contracts.
3.2. Goals
The authorizing resolution should clearly state the goals to be achieved through the
swap contract and the execution parameters should be consistent with the goals.
3,3. Rating Agencies
The swap agreement being entered into must not have an adverse impact on any
existing City credit rating without express consent of the Commission. In addition to
the legal constraints as noted above, the swap agreement must conform to any and all
outstanding commitments with bond insurers, credit enhancers, surety providers, and
the City's liquidity requirements related to outstanding debt.
3.4. Term
The City will determine the appropriate term for an interest rate swap agreement on a
case -by -case basis. However, the term of a swap agreement entered into for liability
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management purposes may not extend beyond the final maturity date of the
underlying debt.
3.5. Impact on Variable Rate Capacity
The impact of any swap agreement on the City's variable rate debt exposure and the
impact on its ability to continue the issuance of traditional variable rate products
should be assessed in advance of execution of the agreement.
3.6. Enhancements
The City may utilize other swap enhancement products such as forward starting
swaps, swap options, caps, floors, collars, cancellation options, etc. provided their use
is approved in accordance with Section 7 — Form of Swap Agreements and Other
Documentation. The costs, benefits, and other matters regarding the enhancement
should be considered during the approval process.
3.7. Accounting Compliance
The impact of compliance with FASB 133, or prevailing accounting principles, will
be disclosed in the City's annual financial reports.
3.8. Exit Strategy
The mechanics for determining termination values at various times and upon various
occurrences must be explicit in the swap agreement. The potential termination costs
should be considered during the approval process.
4. Method of Procurement
The City will choose counterparties for entering into Swap contracts on either a
negotiated or competitive basis. As a general rule, a competitive selection process will be
used whenever reasonable, if the product is relatively standard, if it can be broken down
into standard components, if two or more providers have proposed a similar product to
the City, or if competition will not create market pricing effects that would be detrimental
to the City's interests.
Negotiated procurement may be used for original or proprietary products, for original
ideas of applying a specified product to a City need, to avoid market pricing effects that
would be detrimental to the City's interests, or on a discretionary basis in conjunction
with other business purposes. Consideration may be given in negotiated transactions to
those counterparties who have demonstrated their willingness to participate in
competitive transactions and have performed well. If it is determined that a Swap should
be competitively bid, the City may employ a hybrid structure to reward unique ideas or
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special effort by reserving a specified percentage of the swap to the firm presenting the
ideas on the condition that the firm match or better the best bid.
To provide safeguards on negotiated transactions, the City shall secure outside
professional advice from the City's Bond Counsel and the City's Financial Advisor prior
to structuring, documenting, and pricing the transaction. The City will require a fair price
opinion from an independent financial advisor or swap advisor whose compensation is
not dependent upon the execution of the swap transaction. In any negotiated transactions,
the counterparty shall be required to disclose all payments to third parties (including
lobbyists, consultants and attorneys) who had any involvement in assisting the
counterparty in securing business with the City.
5. Management of Swap Transaction Risk
Certain risks will be created if the City enters into various interest rate swap agreements
with numerous swap counterparties. In order to manage the associated risks, guidelines
and parameters for each risk category are as follows:
5.1. Counterparty Risk
Limiting swap agreements between the City and any single swap Counterparty can
reduce the risk of swap Counterparty default. In addition, the City may require the
posting of collateral by the swap Counterparty, with a mark -to -market as requested by
the City, in accordance with the guidelines described in Section 6,3 — Collateral
Requirements,
5.2. Termination Risk
5.2.1. Optional Termination:
The City should retain the right to terminate a swap agreement at anytime over the
term of the agreement at the then -prevailing market value of the swap. In general,
exercising the right to optionally terminate an agreement should produce a benefit
to the City, either through receipt of a payment from a termination, or if a
termination payment is made by the City, in conjunction with a conversion to a
more beneficial debt obligation. Termination value will be readily determinable
by one or more independent swap Counterparties, who may assume the swap
obligations of the City.
A Counterparty should not have the elective right to terminate the swap
agreement except when a termination option has been priced into the terms of the
swap at inception.
5.2.2. Mandatory Termination:
A termination payment may be required in the event of termination of a swap
agreement due to a Counterparty default or following a decrease in the credit
rating of the City. It is the intent of the City to review all available options prior to
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affecting a termination or making any termination payment. At a minimum, prior
to making any termination payment, the City should have sufficient time to
determine whether it is financially advantageous to obtain a replacement
Counterparty.
5.3. Interest Rate Risk:
The risk that the City's debt service costs associated with variable -rate debt increase
and negatively affect budgets, coverage ratios, and cash flow margins should be
considered in determining the appropriate interest rate structure for any swap
agreement. Variable -rate debt exposure may be created by a Swap from a fixed to a
floating interest rate, or a Swap that otherwise creates some type of floating-rate
liability. The interest rate risk presented by such a. Swap may be increased as interest
rates increase generally, as intra-market relationships change, or because of credit
concerns relating to the City or the relevant enterprise fund.
5.4. Amortization Risk (Term)
The slope of the swap curve, the marginal change in swap rates from year to year
along the swap curve, termination value, and the impact that the term of the swap has
on the overall exposure of the City should be considered in determining the
appropriate term of any swap agreement. Any swap designated as a hedge should
reflect the amortization of the debt that it is hedging.
5.5. Liquidity Risk
The City should consider if the swap market is sufficiently liquid (Le., if enough
potential qualified counterparties participate actively in the market to assure fair
pricing) for the type of swap being considered and the potential ramifications of an
illiquid market for such types of swaps. There may not be another appropriate party
available to act as an offsetting Counterparty.
5.6. Basis (Index) Risk (including Tax Risk)
Any index chosen as part of an interest rate swap agreement must be a recognized
market index, including but not limited to The Bond Market Association Municipal
Swap Index (BMA) or London Interbank Offering Rate (LIBOR).
The City should not enter into swap agreements that do not have a direct (one to one)
correlation with the movement of an index without analyzing the risk associated with
the enhancement.
The tax risk and impact to the City of each swap transaction should be detailed
through the Counterparty disclosure requirements outlined in Section 7 -- Form of
Swap Agreements and Other Documentation.
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5.7. Bankruptcy Risk
Bond or swap counsel will disclose to the City the bankruptcy risks and issues
associated with the Counterparty and type of swap chosen. Additionally, Bond or
swap counsel will disclose to the City the bankruptcy issues associated with the
method of collateral required to be posted.
6. Counterparty Approval Guidelines
6.1. Eligibility
The City will enter into interest rate swap transactions only with Counterparties. To
qualify as a Counterparty under this policy, at the time of entry into a swap
transaction, the selected swap provider(s) (i) must be rated at least AA-/Aa3/AA by at
least two of the three nationally recognized credit rating agencies (Standard & Poor's,
Moody's, and Fitch Ratings, respectively) and must have a minimum capitalization of
$50 million, or (ii) must obtain credit enhancement from a provider with respect to its
obligations under the transaction that satisfies the requirements of clause (i) of this
paragraph, given the undertaking involved with the particular transaction. The City
may not enter into an interest rate swap transaction with a firm that does not qualify
as a Counterparty.
The Counterparty must make available audited financial statements and rating reports
of the Counterparty (and any guarantor), and should identify the amount and type of
derivative exposure, and the net aggregate exposure to all parties (the City and
others), along with relevant credit reports at the time of entering into a swap and
annually thereafter unless the entity or credit enhancer is under credit or regulatory
review and in that case immediately upon notice by the appropriate agencies to the
entity.
6.2. Swap Counterparty Exposure Limits and Transfer
In order to limit and diversify the City's Counterparty risk and to monitor credit
exposure to each Counterparty, the City may not enter into an interest rate swap
agreement with a qualified swap Counterparty if the following exposure limits are
reached per Counterparty;
6.2.1. As a percent of total outstanding debt, the maximum notional amount of
interest rate swaps between a particular Counterparty (and its
unconditional guarantor, if applicable) and the City shall not exceed rating
agency guidelines. The net exposure total of all notional amounts between
each Counterparty and the City shall include the total amount of debt
outstanding and authorized. As such, notional amounts for fixed to
floating swaps may be used to "offset" the notional amounts for floating to
fixed swaps, or vice -versa. Exposure limit calculations shall be made net
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of insured termination payments. The Swap Advisor will provide a
memorandum setting forth this exposure limit calculation, which will
become a part of the official transcript for the transaction.
6.2.2. Limitations on transfers of swaps with a particular Counterparty should be ,
carefully analyzed. If the Counterparty unilaterally restricts transfer, then
the City should have the ability to terminate the swap without penalty if
the swap is transferred or the Counterparty is merged with another entity
that changes the credit profile of the swap Counterparty, unless the City
gives its prior written consent.
6.2.3. If the maximum notional limit for a particular Counterparty is exceeded
solely by reason of merger or acquisition involving two or more
counterparties, the City should expeditiously analyze the exposure, but
should not be required to "unwind" existing swap transactions unless the
City determines such action is in its best interest, given all the facts and
circumstances.
6.2.4. If the exposure limit is breached by a Counterparty, then the City should:
6.2.4.1. Conduct a review of the exposure limit calculation of the
Counterparty; and
6.2.4.2. Determine if collateral may be posted to satisfy the exposure
limits;
And
6.2.4.3. Enter into an offsetting swap transaction, if necessary.
6.2.5. The City will not enter into contracts with derivative product companies
("DPCs") that are classified as "terminating" or "Sub-T" DPC.'s by the
rating agencies.
6.3. Collateral Requirements
Collateral posting requirements between the City and each swap Counterparty should
not be unilateral in favor of the Counterparty. As part of the swap agreement, the
City or the swap Counterparty may require that collateralization to secure any or all
swap payment obligations be posted. Collateral requirements will be subject to the
following guidelines:
6.3.1. Collateral requirements imposed on the City should not be accepted to the
extent they would impair the City's existing operational flow of funds.
6.3.2. Each Counterparty will be required to provide a form of a Credit Support
Annex should the credit rating of the Counterparty fall below the
"AA/Aa3/AA-" category by at least two of the nationally recognized
rating agencies.
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6.3.3. A list of acceptable securities that may be posted as collateral and the
valuation of such collateral will be determined and mutually agreed upon
during negotiation of the swap agreement with each swap Counterparty.
6.3.4. The market value of the collateral should be determined on either a daily,
weekly, or monthly basis by an independent third party, as provided in the
swap documentation.
6.3.5. Failure to meet collateral requirements will be a default pursuant to the
terms of the swap agreement.
6.3.6. The City and each swap Counterparty may provide in the supporting
documents to the swap agreement for reasonable threshold limits for the
initial deposit and for increments of collateral posting thereafter.
6.3.7. The swap agreement may provide for the right of assignment by one of the
parties in the event of certain credit rating events affecting the other party.
The City (or the Counterparty) should first request that the Counterparty
(or the City) post credit support or provide a credit support facility, If the
Counterparty (or the City) does not provide the required credit support,
then the City (or the Counterparty) should have the right to assign the
agreement to a third party acceptable to both parties and based on terms
mutually acceptable to both parties. The credit rating thresholds to trigger
an assignment should be included in the supporting documents.
7. Form of Swap Agreements and Other Documentation
Each interest rate swap agreement will contain terms and conditions as set forth in the
International Swap & Derivatives Association, Inc. ("ISDA") Master Agreement and
such other terms and conditions included in any schedules, confirmations, and credit
support annexes as approved in accordance with the City's swap resolution pertaining to
that transaction. The Swap Advisor will provide a disclosure memorandum that will
include an analysis by the Swap Advisor of the risks and benefits of the transactions, with
amounts quantified. This analysis should include, among other things, a matrix of
maximum termination values over the life of the swap. The disclosure memorandum will
become a part of the official transcript for the transaction. The Swap Advisor will also
affirm receipt and understanding of the City's statement of swap policies and will further
affirm that the contemplated transactions fit within the swap policies as described.
7.1 Modification of Swaps
Each swap resolution should provide specific approval guidelines for the swap
transactions to which it pertains. These guidelines should provide for modifications
to the approved swap transactions, provided such modifications, unless considered
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and recommended by the Commission, do not extend the average life of the term of
the swap, increase the overall risk to the City resulting from the swap, or increase the
notional amount of the swap. The swap resolution should further designate which
City officers are authorized to cause such modifications.
7.2 Aggregation of Swaps
Unless the swap resolution states otherwise, the approval requirements set forth in
each swap resolution are applicable for the total notional amount of transactions
executed over a consecutive three-month period for a given security or credit,
Therefore, the notional amount of swap transactions including the average life of the
swap agreements over a consecutive three-month period are considered in total, (net of
the notional amount of a swap reversal) to determine what approval is required
pursuant to a particular swap resolution.
8. Reporting Requirements
City Administration shall review the Master Swap Policy and separately report the status
of all swap agreements, including mark -to -market valuations to the City Commission and
the Finance Committee on an annual basis including the probability of exercise and
economic impact if exercised.
Approved: (MM DD, YYYY)
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