Citi on Variable Rate Demand Notes
Citi published "A Primer on Variable Rate Demand Notes. It says, "This primer seeks to explain the basics of Variable Rate Demand Notes (VRDNs) or Variable Rate Demand Obligations (VRDOs). VRDNs are instruments with long-term nominal maturities but which bear variable, short-term interest adjusted at pre-determined intervals. A defining feature of the VRDN is the put option, whereby a holder can tender the note, with sufficient advance notice, and receive par plus accrued interest. Thanks to the features available to the VRDN issuers and holders explained in this primer, VRDNs have the liquidity and principal preservation characteristics of money market paper, allowing for pricing on the short end of the curve. VRDNs must be supported by credit/liquidity support facilities. There are four basic combinations of options, which we describe in detail below. We also explain the current conditions surrounding the VRDN market and the history of VRDNs during the 2008 crisis, as well as VRDN documentation such as the liquidity facility agreements and the indenture." It adds, "Starting in 2008, turmoil in the money markets caused tectonic shifts in the supply-demand dynamic surrounding VRDNs. At the time, much of the VRDN universe was covered by SBPAs supplemented by bond insurance. As various insurers were downgraded, tax-exempt money managers began to put the notes back in droves. Remarketings failed with increased frequency as more and more MMFs, the traditional buyer base for VRDNs, were interested in tendering their notes, not buying more.... SIFMA did eventually fall back down, especially once crossover buyers like foreigners and tax-exempt entities bought the paper because the nominal rates were so attractive. However, the lessened demand from MMFs led to a decline in the outstanding market size. That decline still continues, and the market's size is a fraction of its 2008 highs."
