Innovative Bond Structure Sidesteps Credit Crisis

Avoids Liquidity Woes and Costs of Refunding Callable Debt

NEW YORK, Jan. 12 /PRNewswire/ -- An unintended consequence of the Freddie and
Fannie bailout is that other, better-run agencies not under the Treasury
umbrella are having trouble refunding callable debt. However, at least one
issuer -- the Tennessee Valley Authority (TVA) -- mitigated this problem with
an innovative "Ratchet Bond," which allows it to benefit from lower interest
rates without refunding. The idea was brought to TVA by their advisors, Andrew
Kalotay Associates, Inc. (http://www.kalotay.com)

A Ratchet Bond is like a conventional floating rate bond, but its coupon can
be reset only downward. TVA issued two of these structures with 30-year
maturities, totaling over $1 billion in size. Over the last six years, the
coupon on the first issue has declined from 6.75% to 5.46%; the second from
6.50% to 5.17%. Because of the Ratchet Bonds automatic reset feature, TVA
reduced its interest expense without incurring the customary fees associated
with tapping into the capital markets.

"Ratchet Bonds can be a debt manager's lifeline in stormy markets," says Dr.
Andrew Kalotay, president of Andrew Kalotay Associates, who helped TVA with
the first Ratchet Bond issue in 1998. "By relying exclusively on callable
bonds, federal agencies, corporations, and municipalities are missing out on
the benefit of today's record-low Treasury yields."

Dr. Kalotay also points out the considerable expense borne by issuers from
recurrent calling and refunding cycles. For example, in the second half of
December alone, Freddie Mac called more than 700 issues totaling $29 billion.
The associated reissuance cost, even by conservative estimates, exceeds $50
million.

"Ratchet Bonds are superior to callable bonds in two significant ways," he
says. "Their coupons decline in tandem with Treasury yields (or benchmark
rates) regardless of the credit environment. In addition, Ratchet Bonds
eliminate the ongoing reissuance expense associated with refunding callable
bonds."

(Details about TVA's ratchet issues can be found at:
http://www.tva.gov/finance/opportun/parrs.htm and
http://www.tva.gov/finance/opportun/parrsreset.htm)

About Andrew Kalotay Associates

Andrew Kalotay Associates, Inc. (http://www.kalotay.com) is a leading provider
of high precision, high speed fixed income analytics and debt management
advisory services.

SOURCE Andrew Kalotay Associates, Inc.

Andrew Kalotay, PhD of Andrew Kalotay Associates, +1-212-482-0900,
andy@kalotay.com