Derivative Financing

With the recent significant increase in the use of derivative products among municipal bond issuers, the major auditing firms, government regulators, rating agencies, bond insurers and institutional investors have come to expect periodic valuations, reports and policy review from a qualified, independent derivative specialist. The professionals at AFG understand the importance to the client of receiving prompt, accessible and accurate information concerning its outstanding swap portfolio, enabling the client to address all policy, rating agency, regulatory, accounting and legislative concerns. We are equally aware of our clients need to receive professional consultation on market opportunities and risks on a continuing and periodic basis. Unlike bonded indebtedness, swaps are obligations that need to be actively managed in order to maximize their benefit. As a recognized leader in this field, our firm has the expertise and personnel talent to serve our clients needs and to exploit market anomalies for our clients’ benefit.

AFG works closely with its clients in evaluating alternative financings structures. The analysis for swap agreements and other derivative products will generally include the performance of financing structures over various projected interest rate scenarios. AFG’s professionals have served as advisors for a variety of derivative products such as forward purchase and sale agreements, re-purchase agreements, swaps, swaptions and forward/warrant agreements.

As swap advisors, AFG has the ability to price BMA and LIBOR based spot and forward starting swaps, basis swaps, total return swaps, CAPS and swaptions, including European, Bermudan and American options. AFG employs a broad range analysis fed by real-time market data from a number of industry sources including Bloomberg. Our system capabilities and in-house market expertise include the ability to model any derivative product used in the municipal markets. We employ proprietary software which calculates the derivative valuations. In addition, we have several other proprietary models and our own in-house models and notification tools which enable us to better value and monitor swap transactions.

Examples of our derivative experience on which AFG’s professionals have worked include the following.

New Jersey Economic Development Authority
In 2003, the professionals of AFG advised the NJEDA on the competitively bid $3.0 billion notional par amount of fixed to floating LIBOR based swaps in connection with the School Construction Financing Program. These swaps effectively hedged a portion of the future borrowing expense associated with the School Construction Financing Program. These swaps were separated into six (6) distinct tranches of $500 million, each scheduled to commence on projected future borrowing dates. The amortization of each of the six (6) tranches is structured to provide approximately level debt service. In each swap, the NJEDA is paying a fixed rate and receiving 75% of one (1) month LIBOR. Also in connection with the School Construction Financing Program, our professionals served as financial advisor on the issuance of $600 million School Facilities Construction Bonds issued pursuant to the Educational Facilities Act to finance the cost of various school facilities projects being undertaken, by or for the benefit of, school districts throughout the State of New Jersey.

The School District of Philadelphia
In early 2004, AFG professionals assisted the School District of Philadelphia in entering into five swaption transactions. The percent of LIBOR transactions included the procurement of bond insurance commitments for the potential issuance of variable rate bonds and competitively bid selection of counterparties. The “European” option transactions yielded $51 million for the District in immediately available funds. Later in 2004, our professionals assisted the District with a synthetic advance refunding of the bonds to which the previously mentioned swaptions related. This transaction included the issuance of both tax-exempt (integrated with the swaps) and taxable (in a “cinderella” structure or taxable with the expectation of being converted to tax-exempt upon the expiration of the taxable refunding escrow) auction rate bonds and the conversion of the existing swaptions to spot starting swaps.

Ohio Public Facilities Commission
AFG’s professionals competitively bid the first LIBOR based forward starting swap for Ohio Public Finance Commission (“OPFC”) in June of 2005. The professionals of AFG worked with OPFC and bond counsel to update the Commission’s swap documents and coordinated the dissemination of the swap documents to the 12 qualified swap counterparties. We responded to inquiries on the documents and, as a result of improving market conditions, moved the bid date up to capture the market improvement. Most notable is the entire competitive process, including negotiations on the bid documents, was done in less than a week. The OPFC received 11 bids and awarded the swap in two $100 million pieces. The synthetic fixed rate swap achieved a rate of 3.202% for OPFC’s 20 year Common School Bonds.