The Philadelphia public school district will pay $63 million to Morgan Stanley, Goldman Sachs and Wells Fargo Bank to cancel interest-rate swaps whose value has collapsed as US interest rates stay at record lows, as part of a $426 million debt refinancing deal.
School district business manager Michael Masch told me last year the district had bought the swaps in the early 2000s to try to preserve low borrowing costs in case US interest rates rose. Instead, rates have fallen, enriching the banks that sold the contracts to Philadelphia while costing taxpayers millions.
Today, Masch said the payments to end the swaps would be folded into the district's new bond issue and the costs would be paid by taxpayers over time, with interest. He said the district would also save money because the new bonds are issued at lower rates than previous bonds which were paid off along with the swaps. He couldn't immediately equate the savings and costs of the new arrangement.
Bloomberg LP's Dunstan McNichol reported the massive loss here after reviewing documents for a pending School District bond sale.