Bonds 101. Presented by Alyson Price. April 5, 2013

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1 Bonds 101 Presented by Alyson Price April 5, 2013

2 Zions Bank Public Finance 2

3 All Public Finance Offices 3

4 Our Primary Services Financial Advisory Services Municipal Studies Underwriting Services Direct Purchaser Services 4

5 Additional Services Continuing Disclosure Equipment Lease Financing Bond Election Services Capital Facilities Planning Impact Fee Analysis Special Assessment Area Administration 5

6 Utah FA Market Share (by Par amount) 10 Years (2003 through 2012) Source: Thompson Reuters 6

7 Characteristics of a Bond A bond is an agreement between a lender and a borrower The lender agrees to loan the borrower funds for some specified period of time; The borrower agrees to repay the loan in full on the specified date; The borrower also agrees to pay interest on the loan, through the repayment date, as compensation to the lender for the use of his/her money. The amount of the loan is called the principal amount, par amount, or face value The date on which the loan is to be repaid is the maturity date The rate at which interest is paid is the coupon rate 8

8 What is Tax Exempt Financing? Bonds - long term IOUs that governments issue to borrow money The federal government cannot tax states and individual states do not tax themselves Investors who buy tax-exempt bonds do not pay taxes on interest they earn, so they are willing to accept lower interest rates 9

9 Who Borrows in the US Municipal Market? Infrastructure State and Local Government State and Local Authorities Transportation Water and Sewer Non-Profit Entities Healthcare Institutions Private Schools Colleges and Universities Student Loan Authorities Museums Private Sector Entities for Limited Purposes Pollution Control Industrial Development Airports & Seaports Housing State and Local Housing Authorities Housing Developers Public Power Public Utilities Resource Recovery Independent Power Projects 10

10 Growth of the U.S. Municipal Market $2.1 billion $14 billion $66 billion $361 billion $1.3 trillion $3.7 trillion Source: Article on Municipal Bonds by Mayraj Fahim, 20 March

11 Top 5 Utah Issuers in 2012 (Par Amount) Utah State Board of Regents Utah Transit Authority Utah County Riverton City UAMPS $638,900, ,500, ,400, ,000, ,700,000 12

12 Methods of Financing Public Projects Save up and set aside Pay as you go Grant Financing Debt Financing Combination 13

13 Methods for Financing Capital Projects Source: Zions Bank Public Finance 14

14 Characteristics of Different Types of Bonds Source: Zions Bank Public Finance 15

15 Participants in Issuing Municipal Bonds 16

16 How Bonds Are Sold Competitive Negotiated Debt Financing Which security Instrument? Bond election Preparing issue for market Rating Process Bond Sale Disclosure The Market Private Placement Competitive Sale: Underwriters compete Negotiated Sale: Underwriter preselected Private Placement: Bypass underwriter to access investors 17

17 Competitive vs Negotiated Sale Once upon a time in the 1960s, when most bonds were still sold at auction [competitive sale] bankers said negotiation should be used only for large issues, or unknown issuers, or difficult to sell bond issues, or for bonds that needed explanation. In return, they charged more to sell bonds this way. In the 1970s, Wall Street told issuers it could sell all of their bonds at better prices through negotiation. Negotiation allowed them to tailor a sale, they said, to get the maximum number of buyers. Wall Street sold. Main Street bought - and today we have negotiation outnumbering auction by 4 to 1. Joe Mysak Bloomberg News, March 25,

18 Recent Competitive Sale Results Davis School District, Utah $20,000,000 General Obligation School Bonds, Series 2013A Sale Date: March 21, 2013 Underwriters TIC Bid Difference from Winning Bid Janney Montgomery Scott LLC % -- Piper Jaffray % % William Blair & Company, LLC % % Stifel Nicolaus & Company, Inc % % Robert W. Baird & Co., Inc % % Morgan Stanley & Co, LLC % % Jefferies & Company, Inc % % Source: i-deal LLC 19

19 Municipal Bond Teeter Totter Price Interest Rate 21

20 Historical MMD Interest Rates Source: Thomson Reuters 22

21 20 Year Bond Buyer Index Interest Rate Trend January 1988 to March 2013 Source: Bond Buyer Index 23

22 Municipal Credit The basic analytical factors used to determine credit-worthiness vary depending upon the type of bonds General Obligation Bonds Financial Statements Analysis Debt Affordability Tax Generating Capacity Economic Fundamentals Management/Administrative Controls Revenue Bonds Debt Service Coverage Stability of Pledged Revenues Economic characteristics which affect revenues Essentiality of the Enterprise Financial Statement Analysis + + Common Credit Factors Security Legal Authorization Legal Covenants 24

23 Municipal Bond Ratings Source: Zions Bank Public Finance 25

24 The Four Primary Rating Factors Economy Finances Rating Process Management Debt 26

25 Tax Exempt Bond Credit Spreads Source: Thomson Reuters 27