Dallas Austin Chicago Houston Miami New York San Antonio San Diego

Transcription

1 January 2017 DIMMIT COUNTY, TEXAS Financing 101 Dallas Austin Chicago Houston Miami New York San Antonio San Diego

2 Financing Team Issuer A state, political subdivision, agency or authority which borrows money through bonds or notes. Each new issue requires the approval of the legislative body of the issuer, often through an ordinance or resolution. Financial Advisors Financial Advisors perform a variety of tasks, including: (1) analyzing the financing needs of the issuer (2) helping to choose an underwriter or organize a competitive sale (3) structuring the issue (4) working with the rating agencies and credit enhancers (5) advising on other matters related to the issuer s debt and capital plans Bond Counsel Represents the legal interests of the bondholders: (1) examines all applicable laws authorizing issuance of securities (2) confirms that all steps have been completed to assure proper authorization and issuance of securities (3) determines that all federal laws governing the issuance of the bonds are complied with Page 1

3 Financing Team (Cont d) Underwriters Buyers of municipal bonds. The two main ways that an underwriter can purchase bonds from an issuer are through a competitive sale or a negotiated sale. Competitive Sale Sold to lowest effective interest rate bidder in a competitive bidding process. Negotiated Sale Interest rates determined through negotiation with the underwriter. Private Placement Provider- Solicits bank bids on behalf of the Issuer. Underwriters Counsel Underwriters counsel represents the legal interests of the underwriters and potential bond holders in a negotiated issue. Rating Agencies Rating Agencies assign a rating (an alphabetic and/or numeric symbol used to give relative indications of credit quality) depending on the creditworthiness and rating criteria of an issuer. The three dominant rating agencies for municipal securities are Moody s Investors Service, Inc., Standard and Poor s, and Fitch. Bond Insurers Bond Insurance is a legal commitment by an insurance company to make payments of principal and interest on debt in the event that the issuer is unable to make those payments on time. The role of municipal bond insurance in the market is threefold: (1) to reduce interest costs to issuers, (2) to provide a high level of security to investors, and (3) to furnish improved secondary-market liquidity and price support. Page 2

4 Creditworthiness Bonds are assigned credit ratings based on ability and willingness to pay. Bond rating agencies consider economy, administration, finances, and debt. Bond ratings (investment grade) range from Baa/BBB to A/A to Aa/AA to Aaa/AAA. Bond ratings may contain modifiers within rating categories. Bond Rating Criteria Demographic and economic information Administration and governance Environmental conditions Demand characteristics Budgeting and planning Taxes and State assistance Expenditure control and financial flexibility Fund balance policy Capital improvement program (CIP) Debt issuance Page 3

5 Investment & Non Investment Grade Ratings Category S & P/Fitch Moody s Highest AAA Aaa Very Strong AA+ / AA / AA- Aa1 / Aa2 / Aa3 Strong but susceptible A+ / A / A- A1 / A2 / A3 Adequate BBB+ / BBB / BBB- Baa1 / Baa2 / Baa3 Junk Bond Status BB+ / BB / BB- Ba1 / Ba2 / Ba3 B+ / B / B- B1/ B2 / B3 CCC+ / CCC / CCC- Caa1 / Caa2 / Caa3 Lowest Grades CC / C / D Ca / C Page 4

6 Suggestions for Rating Meetings Estrada Hinojosa & Company is often asked to assist issuers in preparing for meetings with the rating agencies. Although many of the factors that determine ratings are outside the control of the local elected or appointed officials, there are ways in which an issuer can enhance the creditworthiness of a general obligation bond issue. Following are some practical suggestions for rating meetings: 1. Be strategic in considering what items to present in describing the community's economy, administration, finances, and debt. Explain significant trends, both positive and negative. 2. Remember that the rating agencies are primarily concerned with the creditworthiness of a financing. Economic conditions, management systems, and financial standards are relevant to the extent that they demonstrate or influence the issuer's willingness and ability to pay its obligations. 3. Organize the presentation to highlight the unique features of the community. Keep in mind that the analysts are acquainted with a wide range of issuers and familiar with common characteristics that issuers share. 4. Do not assume that the rating agencies have an institutional memory. Analysts rotate assignments often, and they have reviewed many other issuers since the last time bonds were sold. 5. Anticipate questions that likely will arise concerning new legislation, economic conditions, factors affecting large employers and taxpayers, and other topical items. 6. Respond candidly, clearly, completely, and concisely to questions. Feel free to ask for clarification or to offer further follow up. 7. Demonstrate a proactive, rather than a reactive, approach to opportunities and obstacles. Planning is an important consideration in providing for debt repayment. 8. Follow up with the rating agencies with letter and phone calls, stressing strong points and responding to unanswered questions. Page 5

7 Ten Ways to Obtain or Maintain an Investment Grade Bond Rating 1. Demonstrate a commitment to raise taxes and/or revenues as needed to support debt service or operation and maintenance. 2. Practice conservatism and realism in budgeting and capital improvements planning. 3. Establish an administrative framework which promotes long-range fiscal planning. 4. Plan and execute debt issuance with an eye toward rapid retirement of principal and minimal interest cost, when possible. 5. Identify appropriate levels and maintain adequate and stable fund balances in the general fund and retained earnings in the enterprise funds. 6. Adhere to generally accepted accounting principles and to the timely release of annual audits. 7. Provide complete and current financial information on a regular and timely basis. 8. Create an atmosphere that encourages private sector economic development without compromising financial integrity. 9. Address future plans for undeveloped areas as part of the comprehensive planning effort. 10. Coordinate with overlapping jurisdictions to address common concerns. Page 6

8 Bond Insurance Enhances the credit on the bonds - Third Party guarantee - Makes the bonds more attractive to investors Used if the credit is non-investment grade to move the credit to investment grade thereby lowering interest cost - Premium and new rate (less than) rate without insurance Page 7

9 Empowering Policy Makers Policymakers need to be empowered with all available information in order to make informed decisions regarding current and future funding needs. Financial Advisor and Bond Counsel should be co-pilots with respect to financing needs. TYPES OF FINANCING NEEDS New Money - Can issue Certificates of Obligation, Tax Notes or General Obligation Bonds (Bond Election) - Policymakers put together an assessment of funding needs - Financial Advisor works to prepare preliminary tax rate impact of funding needs - Examples of questions that should be addressed by Financial Advisor / Bond Counsel: - What is the cost of Bond Program? How much will taxes increase? - What is the projected tax increase on average home values [annual / monthly]? - What interest rates will be used in preliminary tax rate analysis? - What property value growth rates are used in analysis? - Will bond issues impact credit rating? - Bond Counsel works to address all legal issues Page 8

10 Empowering Policy Makers (cont.) TYPES OF FINANCING NEEDS (cont.) Refunding - Refunding is a refinancing of existing debt for cashflow savings. - Goals are to lower interest rate and lower debt service payments. - Financial Advisor should present value savings and impact of adverse market movements. - Policymakers must set guidelines outlining the levels to execute a refunding. - Policymakers customarily set savings thresholds for refundings at the range of 3% - 5% as a percentage of savings of the Refunded Bonds. FINANCING CHARACTERISTICS - Typical Bond Maturities (1-30 Years). - Par Value = Principal Amount Borrowed. - Call Option (Prepayment) = allows the borrower to pay back the debt at any time or after a given time frame (i.e. 10 yr. call). - Interest Rate on financing can be fixed or floating, our firms recommendation is to seek a fixed low interest rate for our clients. Page 9

11 Financing Characteristics - Payment Dates = semiannual i.e. March 1 st (Principal & Interest Payments) and September 1 st (Interest payments as well) - Certificates of Obligation (CO s) = Do not require voter approval, are double legal pledge provided by tax and revenues. CO s are payable from a combination of (i) levy and collection of continuing direct annual ad valorem taxes within the limits prescribed by the Texas Constitution, on all taxable property with the City, and (ii) a limited pledge of surplus net revenues of the City s Utility System not to exceed $1, General Obligation Bonds = Requires Voter Approval legal pledge, payable from a levy and collection of continuing direct annual ad valorem taxes within the limits prescribed by the Texas Constitution, on all taxable property with the City. - Tax Notes = does not require voter approval, payable from a levy and collection of continuing direct annual ad valorem taxes within the limits prescribed by the Texas Constitution, on all taxable property with the City. - Refunding Bonds = does not require voter approval, payable from a combination of (i) levy and collection of continuing direct annual ad valorem taxes within the limits prescribed by the Texas Constitution, on all taxable property with the City Page 10

12 Cost of Issuance - Financial Advisor s Fees and Expenses - Bond Counsel Fees and Expenses - Underwriter (s) and Underwriter (s) Counsel (if needed) Fees and Expenses - Private Placement Provider, Purchaser Counsel Fees and Expenses - Insurance Premium (if needed) - Printing Fees - Bank Fees - Rating Agency Fees Page 11

13 Disclaimer This document is intended for discussion purposes only and, in conjunction with oral presentations and further negotiations, is subject to the final terms of definitive transaction related written agreements, if appropriate, and is not a commitment to lend money, underwrite or purchase securities or commit capital, nor does it obligate this firm to enter into written agreements. Terms and conditions described herein are an indicative summary which may be amended or replaced by subsequent summaries. This document is intended for the exclusive use of the entity identified on the cover page hereof or otherwise identified as the recipient by a member of the firm and may contain information proprietary to Estrada Hinojosa, which by acceptance of this document obligates you to use discretion when sharing the proposed terms for any prospective transaction. Estrada Hinojosa does not provide accounting, tax or legal advice and any discussion of such matters herein should not be relied upon by you as a guarantee or commitment of a specific result should a transaction occur. All numbers and prices discussed herein are preliminary and indicative of market conditions on the date prepared and do not represent bids or offers, and you should determine, without reliance upon us, the economic risks and merits as well as the legal and tax consequences of any such transaction, keeping in mind that the results of analyses from any quantitative model which represent potential future events that may or may not occur, and that may not include every particular material fact related to a proposed transaction, are by their nature subject to further discussion and examination Estrada Hinojosa & Company, Inc. Member: FINRA & SIPC. All rights reserved. No part of this document may be reproduced in any manner without the written permission of Estrada Hinojosa & Company, Inc.