Proper Risk Management Enables DelVal to Provide Lower-Cost Financing to Borrowers in Every Interest Rate Environment

DelVal operates similarly to a "non-profit, co-op" bank.  DelVal periodically raises funds through the issuance of fixed and variable rate bonds, at or below its desired cost of funds, to originate Loans to political subdivisions in Pennsylvania.  The stability and cost-effectiveness of the Loan Program depend upon the ability of DelVal to manage the interest rate risk of the debt that it issues and the Loans that it originates.  

DelVal executes effective, efficient hedging transactions, interest rate swaps, to eliminate its interest rate risk and to maintain the cost-effectiveness of Loan Program into the future.  Borrowers ("Participants") are not party to these hedging transactions, however Participants in the DelVal Loan Program benefit greatly from DelVal's hedging strategy.  DelVal's use of hedging transactions to eliminate interest rate risk gives it stability during interest rate movements and resilience during market shocks, such as the Global Financial Crisis, Covid-19, and Silicon Valley Bank's implosion.  This stability and resilience enables DelVal to provide the most cost-effective Loans possible to Participants, regardless of the current or future interest rate environment.  As a result, Participants avoid paying generally higher costs of issuance and interest rates.

Details on how DelVal accomplishes the funding of the Loan Program and the elimination of interest rate risk are provided below:

DelVal issues the type of debt that will minimize its cost-of-funds, and DelVal only issues if it can achieve its cost-of-funds target.  DelVal has issued (i) fixed rate bonds, (ii) floating rate bonds indexed to the Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank and Term-SOFR published by the CME Group Benchmark Administration, and (iii) daily and weekly variable rate demand bonds.

DelVal executes hedging transactions under master interest rate swap and derivatives agreements (each an "ISDA") with multiple financial counterparties (each a "Counterparty").

DelVal's funding goal is to maintain a floating rate cost-of-funds tied to the Municipal Swap Index published by the Securities Industry and Financial Markets Association (the "SIFMA Index").  The floating cost-of-funds maintains DelVal's competitiveness in rising or falling interest rate environments.  The daily and weekly variable rate demand bonds move in concert with the SIFMA Index, but the fixed rate, SOFR, and Term SOFR bonds create interest rate risk for DelVal.  DelVal mitigates this risk by executing hedging transactions under which DelVal receives a fixed rate, SOFR, or Term SOFR payment and DelVal pays the SIFMA Index.

DelVal takes interest rate risk whenever it provides a fixed interest rate on a Loan.  The fixed rate received from the Loan may be lower than the SIFMA Index in the future.  DelVal mitigates this risk be executing a hedging transaction under which it pays a fixed rate and receives the SIFMA Index.

Similarly, DelVal takes interest rate risk when investments pay a rate indexed to SOFR.  DelVal mitigates this risk by executing a hedging transaction under which it pays SOFR and receives the SIFMA Index.  This transaction locks the return on the investment to a fixed spread over the SIFMA Index.

DelVal's interest rate risk is eliminated through the summation of all the separate hedging transactions discussed above.

DelVal has executed ISDA's with six Counterparties:

  • Bank of America, N.A.,
  • Barclays Bank PLC,
  • Citibank, N.A.,
  • PNC Bank, N.A.,
  • Royal Bank of Canada, and
  • Toronto-Dominion Bank.

Please see “Management's Discussion and Analysis” and “Note 6. Derivative Financial Instruments” in DelVal's Financial Statements posted on the “DelVal Financial Information” page for more information.

The current market values of the hedging transactions, the Interest Rate Swap Management Policy adopted by the DelVal Board, and ISDA's are posted in the document library below.

Swap Management Policy and Master Interest Rate Swap Agreements