Variable rate demand obligations (VRDOs, also sometimes labeled VRDNs, variable rate demand notes, or VRDBs, variable rate demand bonds) are long-term debt instruments typically issued by municipalities. The rates on VRDOs are set at periodic remarketings based on the bids of potential buyers.

Since the beginning of 2010, the outstanding VRDO universe has shrunk at double the pace of issuance, averaging a decline of $3.6 billion per month in outstanding. As of end-June, about $364.6 billion remained outstanding, down $8.5 billion, or 2.3 percent, from end-March’s outstanding of $373.1 billion; about a quarter ($80.4 billion) were issued from the 2008 period.

VRDOs require a liquidity backstop in the form of third-party letters of credit (LOCs), standby bond purchase agreements (SBPAs) or, more rarely, from issuers themselves (self liquidity). Liquidity arrangements are more generally in the form of LOCs rather than SBPAs. As of end-June 2011, $74.3 billion of liquidity arrangements were scheduled to expire in 2011, followed by $105.4 billion in 2012, for a total of $179.7 billion. Self-liquidity arrangements ticked up slightly and currently represent $53.2 billion (or 13.8 percent of the universe by dollar amount); however, self liquidity generally remains scarce, with issuers opting for self liquidity tending to be large (and relatively liquid) institutions or companies, such as universities (e.g., University of Texas) and energy companies (e.g., Chevron, Exxon Mobil).

As of end-June, the average extension for renewals of liquidity facilities was 628 days; the median extension was 366 days (1 year). For the entire universe, the average length of all liquidity facilities, as of end-June, was 1,485 days (4.06 years); the median length was 521 days (1.4 years).

About the Report

A brief update to the municipal VRDO market for the period of December 31, 2009 to June 30, 2011. Also includes a list of bank bonds as of end-June 2011.

Credits

SIFMA Research

• Managing Director, Director of Research: Kyle Brandon
• Manager: Sharon Sung