Variable rate demand obligations (VRDO) are long-term debt instruments typically sold by municipalities. The rates on VRDOs are set at periodic remarketings based on the bids of potential buyers.

As of the end of June 2010, the VRDO market stood at an estimated $404.6 billion on approximately 15,100 CUSIPs outstanding. Since 2008, the VRDO market, like the municipal auction rate securities (municipal ARS) market, has been shrinking as new issues declined and issuers disfavoured variable rate tax-exempts, down $44.7 billion to $404.6 billion end-June 2010 from $449.4 billion end-June 2009.

California, New York, and Texas had the largest amount of VRDOs outstanding, at $54.4 billion, $46.7 billion, and $23.9 billion outstanding, respectively, at the end of June 2010. Of the $404.6 billion outstanding VRDOs, 90.8 percent are revenue-based issues, with relatively few general obligation ($35.9 billion) outstanding. By tax status, tax-exempt bonds accounted for 75.6 percent ($306.0 billion) of all issues, followed by AMT (19.1 per-cent, or $77.4 billion).

VRDOs require a liquidity backstop in the form of third-party letters of credit (LOCs) or standby bond purchase agreements (SBPAs) or, more rarely, from issuers themselves. Liquidity arrangements are largely from LOCs rather than SBPAs. As of end June 2010, $37.1 billion in letters of credit were scheduled to expire in 2010, fol-lowed by $93.1 billion in 2011; in the case of standby bond purchase agreements, $204.5 million were scheduled to expire in 2010, followed by $646.7 million in 2011. In recent years, the number of banks participating in the market for LOCs and SBPAs has shrunk, making the liquidity products less available and more expensive to borrowers.

About the Report

A brief update to the municipal VRDO market for the period 2009 to June 30, 2010.

Credits

SIFMA Research

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