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City of Raleigh

Financial Section

7. Interest rate swaps 

2005 Swap 

The City entered into an interest rate swap agreement for the Downtown Municipal Improvement Projects 

Series 2005B variable rate certificates of participation effective January 20, 2005.  The synthetic fixed rate swap 

effectively changes these variable rate demand obligations (VRDOs) to the fixed rate of 4.36%. 

The certificates of participation and the related swap agreement mature on February 1, 2034.  The swap notional 

amount of $173,370,000 matches the variable rates certificates of participation.  Beginning in February 2015, the 

notional value of the swap and the principal amount of the associated debt started to decline annually.  Under 

the swap agreement, the City pays the counterparty a fixed interest payment semiannually at 4.36% of the 

notional amount and receives a variable interest payment equivalent to the Bond Market Association Municipal 

Swap Index (BMA).  At June 30, 2016, the swap had a negative fair value to the City of $49,043,708.  This mark to 

market valuation was established by market quotations obtained by the counterparty, representing an estimate 

of the amount that would be paid for replacement transactions. As of June 30, 2016, the City was not exposed to 

credit risk because the swap had a negative fair value.  However, should interest rates change and the fair value 

of the swap becomes positive, the City would be exposed to credit risk in the amount of the derivative’s positive 

fair value.  At June 30, 2016, Citibank NA, the counterparty, was rated “A1” by Moody’s Investor’s Service, “A” 

by Standard and Poor’s Ratings Services, and “A+” by Fitch Ratings. The derivative contract uses

the 

International Swap Dealers Association Master Agreement, which includes standard termination events, such as 

failure to pay and bankruptcy.  Termination could result in the City being required to make or being entitled to 

receive an unanticipated termination payment based on the market value on the date of termination. As rates 

vary, variable rate bond interest payments and net swap payments will vary.  The principal and interest 

payments shown below are components of the business‐type activities demand bond debt service requirements 

as reported on page 44. 

Using rates as of June 30, 2016, debt service requirements of the variable rate debt and net swap payments, 

assuming current interest rates remain the same for the term of the 2005B variable rate certificates, were as 

follows: 

Fiscal Year

Variable Rate

Interest Rate

Total

Ending June 30

Principal

Interest

Swaps, Net*

Interest

2017‐2019

25,245,000

$         

2,032,042

$      

19,576,990

$        

21,609,032

$            

2020‐2024

50,580,000

2,949,376

28,414,720

31,364,096

2025‐2029

63,570,000

1,810,929

17,446,755

19,257,684

2030‐2034

33,975,000

651,654

6,278,130

6,929,784

Total

173,370,000

$       

7,444,001

$      

71,716,595

$        

79,160,596

$            

*Computed using 4.36% less floating rate paid to the City (0.41% at June 30, 2016) times $188,425,000 less accumulated 

annual reductions. 

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