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 Since funds may be withdrawn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.
may be withdrawn without cost or penalty for any permitted
- 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.