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Put Agreement
A U.S. Treasury Put Agreement is a contractual obligation that
allows an issuer of tax-exempt bonds to own U.S. Treasury securities
while shifting all of the market risk and reinvestment risk to
a third party. In this way, the bond issuer enjoys all of the safety
of principal of U.S. Treasury ownership while eliminating all of
the market and reinvestment risks.
An issuer of tax-exempt bonds purchases a U.S. Treasury Security
(or Securities), and an associated Put Agreement. The combination
results in a highly secure investment with a guaranteed yield,
regardless of when the Treasury Security is sold. The Treasury/Put
Agreement yield is determined through a competitive bid process.
When funds are needed, the trustee simply sells the Treasury by
utilizing the Put Agreement, at the price calculated to provide
the guaranteed yield. The terms of the Put Agreement, allow the
bond issuer to withdraw any amount of money, at any time, without
any cost or penalty, for any program purpose.
In order to completely eliminate the issuer's minimal credit/performance
exposure to the Put provider, the Put provider will pledge U.S.
Treasury and Agency securities as collateral. The value of the
collateral will be equal to the difference between the current
market value of the Treasury that the issuer owns and the resale
price, multiplied by 103%. The resale price is recalculated periodically,
usually daily, weekly or monthly. The trustee or a mutually acceptable
third party custodian will hold the collateral.
Implementation of a Put Agreement is very straightforward. Winters & Co.
will prepare a draft bid form and, after approval by you, will
distribute this to the universe of potential bidders. This process
helps assure compliance with the Treasury regulations requiring
competitive bidding to demonstrate an "arms length transaction" and "fair
market value." The winning bidder will prepare all documentation
and distribute this to the interested parties for review and comments.
- The issuer owns U.S. Treasuries, always a permitted investment.
- The
Put Agreement guarantees a fixed yield, or spread versus an
index rate, determined in advance.
- The Put Agreement eliminates
market risk and reinvestment risk.
- Credit exposure to the Put
Agreement provider is eliminated by collateralization.
- The fixed
rate provided by the Treasury Put structure can reduce administrative
costs.
- Funds are available at any time, without cost or penalty.
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