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Repurchase Agreements

Flexible Repurchase Agreements ("Flex Repos") combine the security of owning U.S. Government Obligations, fixed interest rates, the withdrawal flexibility of a money market account and the high yield of a medium- or long-term investment.

Flex Repos are provided by a variety of large banks and broker dealers. They are an agreement by the Flex Repo Provider to sell U.S. Government and Agency Securities to the issuer, pay a stated interest rate, and repurchase these securities on notification by the issuer. The terms of the Flex Repo allow withdrawals at any time, without cost or penalty, for any purpose stated in the issuer's indenture or resolution. Since funds may be withdrawn at any time, there is no risk that there will be a loss of principal due to adverse interest rate movements.

The securities (sometimes referred to as the collateral) under the Flex Repo can be delivered to, and held by, the issuer's bond trustee or a third party custodian. If the Flex Repo Provider appoints the custodian, the Flex Repo is termed a Tri-party Repurchase Agreement. These collateral securities are usually equal to at least 103% of funds under the Repo and are marked-to-market on either a daily or a weekly basis.

Since Flex Repo withdrawals are permitted on a flexible basis and are always at par, there is no need to periodically "mark to market."

Flex Repos can pay a guaranteed fixed or floating rate. The floating rate can be indexed to SIFMA, LIBOR, U.S. Treasuries or other rates. The floating rate Flex Repo has the most application for investment of proceeds associated with floating rate financings.

The following attributes combine to make Flexible Repurchase Agreements an ideal investment vehicle for construction funds, debt service reserve funds, capitalized interest funds, and most other funds or accounts associated with tax-exempt bond financings.

  • The repurchase agreement guarantees a fixed yield, or spread versus an index rate, determined in advance.
  • The repurchase agreement eliminates market risk and reinvestment risk.
  • Funds may be withdrawn without cost or penalty for any permitted purpose.
  • The bond issuer has collateral to protect against adverse counterparty credit events.
  • Since withdrawals at par are permitted at any time, there is no need to "mark to market" the investment.

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