CREDIT RATINGS AND RATING PRESENTATIONS

Transcription

1 CREDIT RATINGS AND RATING PRESENTATIONS Prepared by: Lindsay Sovde Managing Director Public Finance (206) WPPA Finance and Administration Conference June 2014 Since Member SIPC and NYSE. Piper Jaffray & Co.

2 Credit rating Like your personal credit rating, a higher credit rating results in a lower borrowing cost. With bonds, investors view the credit rating as an indication of risk (i.e. likeliness to default on payments). A higher bond credit rating results in lower interest rates because investors feel this is an indication of reduced risk. Therefore, the higher the credit rating, the lower the interest rate on the bonds. Historically, an issuer would pursue a underlying credit rating once it could qualify in the A category. If an issuer does not have an underlying credit rating, it is referred to as non-rated. 1

3 Port LTGO credit ratings Moody s Ratings Port of Anacortes, WA Port of Bellingham, WA Port of Benton, WA Port of Bremerton, WA Port of Camas-Washougal, WA Port of Chelan County, WA Port of Edmonds, WA Port of Everett, WA Port of Grays Harbor, WA Port of Longview, WA Port of Olympia, WA Port of Port Angeles, WA Port of Port Townsend, WA Port of Skagit County Port of Tacoma, WA Port of Vancouver, WA Port of Walla Walla, WA Standard & Poor s Ratings Port of Seattle, WA AAA Port of Vancouver, WA AA- Port of Tacoma, WA AA Port of Brownsville, WA AA- Port of Manchester, WA A Port of Pasco, WA Port of South Whidbey, WA AA- Port of Grandview, WA AA- Port of Camas-Washougal, WA A+ 2

4 Recent rating agency criteria changes GO bonds Standard and Poor s new methodology: Scorecard approach Economy 30% Management 20% Liquidity 10% Budgetary Performance 10% Budget Flexibility 10% Institutional Framework 10% Debt and Contingent Liabilities 10% Moody s new methodology: Scorecard approach Economy 30% Tax base 10% AV per capita 10% Wealth 10% Financing 30% Fund Balance 10% Fund Balance Trend 5% Cash Balance 10% Cash Balance Trend 5% Management 20% Institutional Framework 10% Operating History 10% Debt/Pensions 20% Debt to AV 5% Debt to Revenue 5% Moody s adjusted net pension 5% liability (3 year avg) to AV Moody s adjusted net pension 5% liability (3 year avg) to revenue 3

5 Credit rating criteria What are the criteria used to determine a bond rating? Legal Status/Provisions Clear authority to issue bonds Clear authority to levy taxes, rates or charges Legal restrictions on future debt issuance Want on-going performance to be well in excess of minimal levels guaranteed by legal covenants (e.g. debt service coverage, cash flows, operational strategies etc.). Ability to pay Community economics: size and diversity of employment base, population and population growth, assessed value and growth in assessed value, income/wealth levels of customer base, number of customers (for revenue bonds), and concentration of taxpayers or customers (for GO or revenue bonds) Revenue stream: How does the revenue stream compare to the debt service that it will be used for (debt service coverage)? Predictability: Is the revenue predictable? Does it depend on factors affecting supply or demand outside of the Issuer's control? Do net revenues depend on expenses that are not under the control of the Issuer? Does revenue depend on future customer growth? Are revenues diverse or is there reliance on a single revenue stream? Flexibility: Can revenues be increased quickly if needed to meet debt service payments? Future actions needed: Does revenue depend on future rate increases? Are rates competitive such that the market will absorb future rate increases? Will contracts need to be renegotiated before the debt is retired? 4 Construction risk

6 Credit rating criteria (cont.) Fiscal responsibility Evidence of willingness to raise rates, past record of payment, size of reserves, clean audits or prompt remedy for audit findings. Evidence of stable fiscal performance through all phases of economic and weatherrelated cycles. Management factors Ability to implement measures on a timely basis to shape financial/operating conditions (versus reacting to external events) Rate setting policies Fund balance and working capital reserve policy Debt affordability reviews and policies Multi-year financial forecasting Quarterly financial reporting and monitoring Pay-as-you-go capital funding policies Contingency planning policies Policies regarding non-recurring revenue Five-year capital improvement plan integrating operating costs 5

7 Credit rating criteria (cont.) Fiscal policies Promote financial stability Improve ability to weather financial risk and disruptions Offer guidance and consistency with financial management and planning decisions Can help stabilize rates over time Common fiscal policies Fund balances (cash, capital, rate stabilization) Revenue sufficiency Capital funding Debt policies Rate setting 6

8 Example fiscal policies Operating Fund days of O&M (12%-25%) Capital Fund Rate Stabilization Reserve* Revenue Sufficiency 1 2% of original cost of assets; Cost of replacing major piece of equipment or asset; Rolling average of capital program 10-25% of revenue (maximum variability of revenue) Rates cover O&M costs, debt service, annual capital refurbishment/replacement and reserve fund contributions. Capital Funding % of capital program or cost of annual refurb./replacement Debt Policies Rate Setting Debt will not be issued for longer than the life of the asset being funded Rates will be set to provide debt service coverage of at least 1.25 percent on all senior debt and target 1.5 Rates will be adopted for a period of 2-6 years as a part of the budget process. 7

9 Capital funding plan What is your capital funding philosophy? Pay as you go (cash funding) Use of debt or combination of debt/cash Understanding nature of capital projects can determine if funding should be cash, debt or a combination Debt financing spreads costs between existing and future ratepayers Those projects repairing, replacing, refurbishing existing assets in use by existing customers are appropriate to rate (cash) fund Identify annual capital funding needs List available funding source Existing reserves Rate (cash) funded capital -> impacts rates directly 1:1 How will funding deficiency be met Debt (loans/bonds) -> impacts rates via debt service payment 8

10 Revenue sufficiency Financial Plan will evaluate rate sufficiency of existing ongoing rates Important to understand portion of revenue that comes from fixed charges and variable charges May need to restructure rates if more debt incurred (revenue stability) Care should be taken if offsetting ongoing expenses with unpredictable revenue If beginning fund balance is eroding, it is likely rates are not set at necessary level Once fund balance depleted rates will need to go up What other miscellaneous revenue is available (fees/charges)? Understanding existing rate sufficiency can avoid large unexpected rate increases in the future 9

11 Debt capacity How much debt can you support? Some helpful calculations: Ratio Formula Target Debt to Equity Ratio Debt Service Coverage Ratio Statutory Capacity Total Debt Total Net Assets (Total Revenue less Total O&M expenses) debt service (P&I) Depends on issuer type 60% - 70% debt in general range 1.25 minimum; Target 1.50 or greater ideal Reserve some for emergencies; based on policy and funding needs 10

12 Preparing a rating presentation Short form Usually completed for straightforward issues Stable financials, low debt burden, strong debt service coverage Conference call Long form Needed when there is a story to tell Long period of time since last rating update Expecting an upgrade or preventing a downgrade First credit rating Conference call or in-person (their office or yours) What is the presentation setting like? Two analysts Informal setting Analysts typically have experience rating similar bond issues 11

13 What information should be included in a presentation? Presentation Outline Tailored for each issuer depending on specific strengths/challenges Chapter 1 Introductions Chapter 2 Overview of the Issuer Chapter 3 The Bonds Chapter 4 The System (for revenue bonds) Chapter 5 Financial Operations Chapter 6 Budgets Chapter 7 Financial Policies Chapter 8 Economic Information 12

14 In providing the information contained herein to a municipal entity or obligated person, Piper Jaffray is not recommending an action to any municipal entity or obligated person recipient, is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to any municipal entity or obligated person with respect to the information and material contained in this communication. Piper Jaffray is acting for its own interests, and any municipal entity or obligated person recipient of this information should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the municipal entity or obligated person deems appropriate before acting on this information or material. 13