Rocket Scientists with Attitude

Rice Financial carves out a profitable niche in the municipal interest-rate swaps market

Bill Hobby. Ellis remains active in Apex Pryor’s investment banking decisions.

As for future deals, Rice Financial is eyeing the State of California as ripe for an interest-rate swap deal, although other municipalities in the Golden State have done similar issues. Recently, California passed a law allowing the state to issue variable-rate debt for the first time, an opportunity for Rice Financial’s brand of fiscal engineering.

Of course, it hasn’t always been easy for Rice Financial to hawk its wares, especially back in 1994. Derivatives got a bad name then after Orange County, California, suffered losses of nearly $2 billion in its investment pool, leading to the county filing for bankruptcy because of leveraged investments in certain securities, including interest rate-based derivatives to hedge its risk. County Treasurer Robert Citron was accused of failing to disclose the highly leveraged nature of some of the securities in the county’s investment pool.

Citron eventually pleaded guilty to six felony counts in 1995. Orange County sued several Wall Street firms, most notably Merrill Lynch, the county’s financial advisor. Merrill Lynch settled out of court with the county and other local agencies for $437 million in 1998.

Rice Financial has carved out an enviable position in the municipal derivatives market as a pioneer in structuring first-of-its kind deals before its larger Wall Street competitors. Due to the nature of the derivatives market, however, it’s difficult to determine the exact number of deals. Municipal derivatives transactions are a private and generally unregulated sector of the tax-exempt market.

For example, the firm executed a $140 million interest-rate swap for Dade County, Florida, the first floating-to-floating interest-rate swap of its kind, back in 1997. The deal reportedly lowered Dade County’s borrowing costs to less than 3% and provided more than $20 million of cash-flow savings over the life of the deal.

In another deal in 1995, Rice Financial helped bring the Raiders football team back to Oakland. The Oakland-Alameda County Coliseum Authority wanted to finance improvements that were being made to the Raiders’ stadium. But the city couldn’t borrow in the tax-exempt market for stadium repairs and the rates in the taxable market were too high for a cost-efficient transaction. Rice Financial effectively converted $140 million of the commercial paper to a fixed rate using a floating-to-fixed interest-rate swap structure, saving the city $13 million to $16 million in additional debt service.

Despite the fact that Rice Financial was negotiating the idea of doing a derivatives deal right around the time the Orange County scandal broke, it managed to win the transaction.

More recently, Rice, along with Goldman Sachs, won a portion of a forward interest rate swap on $200 million of outstanding bonds issued to finance the construction of Denver International Airport. Merrill Lynch also won a piece of that deal.

“We looked at their debt service and came up with some technical advice and kept proposing ideas every two months or so. Then they stepped us up,” says Jones. Rice Financial snagged that deal nine months after Apex Pryor began

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