Variable-rate demand municipal bonds backed by bank letters of credit are sometimes called “low floaters.”
Although low floaters have been common in municipal bond circles for a long time, the credit crisis that hit in late 2008 resulted in an even larger number of low floaters being issued to refinance auction rate securities.
There has been a serious concern since 2008 that when the existing bank letters of credit were set to expire that many municipal borrowers would have trouble renewing their credit arrangements with their LOC banks.
At least for now, it seems that the fears of widespread failure to replace expiring letters of credit with new letters of credit has been calmed. The Wall Street Journal in a story dated today provides that of the $13.5 billion in bank letters of credit that have come up for renewal in the 1st quarter of this year with respect to outstanding municipal low floaters 85% have been renewed or replaced by another bank letter of credit. According to the WSJ article, only two bond issues with expiring letters of credit were unable to renew or replace those letters of credit.
This is certainly good news for the municipal bond industry. However, munis are not out of the woods quite yet. The largest number of expiring letters of credit come later in the year with $28.7 billion expiring in the 2nd quarter and $21.8 expiring in the 3rd quarter.
On top of recent reports that a new scrutiny is being taken with respect to the longstanding tax benefit for municipal bonds due to the ongoing financial and debt problems facing he country, it is not surprising that there are municipal bond watchers are jittery.
This is an area of tax law that merits close attention. The Build America Bond program that expired at the end of the year has been championed by some as a more efficient mechanism for municipal borrowing than traditional tax-exempt municipal bonds. As Congress moves toward a more high-profile debate over the soon-to-be-breached debt ceiling, do not be surprised to see a number of proposals put forth that could have a major impact on the muni bond industry.
As for now, though, the ability of municipal borrowers to keep their low floaters in place through the renewal or replacement of expiring letters of credit is a positive sign for the industry as a whole.