FEBRUARY 2019 CLIENT TRAINING BOND PRICING

Transcription

1 FEBRUARY 2019 CLIENT TRAINING BOND PRICING PFM Financial Advisors N Community LLC House Road, Suite 500 pfm.com Charlotte, NC PFM 1

2 Overview Opposing Objectives Scale Benchmarks PFM s Approach to Credit Spreads Coupon and Call Date Considerations Competitive vs. Negotiated Competitive Sale Basics Negotiated Sale Basics PFM s Pricing Process PFM 2

3 Opposing Objectives PFM 3

4 Pricing Independence Issuer Investor Sales Force PFM 4

5 Investment Banks Represent Investors The Underwriters have financial and other interests that differ from those of the Issuer. Unlike a municipal advisor, the Underwriters do not have a fiduciary duty to the Issuer (or any other person or entity) under the federal securities laws and are, therefore, not required by federal law to act in the best interests of the Issuer or any other party without regard to their own financial or other interests. The Underwriters have a duty to purchase the Bonds from the Issuer at a fair and reasonable price, but must balance that duty with their duty to sell the Bonds to Investors at prices that are fair and reasonable. - Typical underwriter disclosure statement provided to Issuer under new MA regulations. PFM has a fiduciary duty to represent only the interests of the Issuer Issuer PFM 5

6 PFM s Pricing Process PFM 6

7 PFM s Pricing Process We enter every pricing with an independent opinion of where the issuer s bonds should price. We begin our pricing preparations a week or more before we receive the underwriters target scales. We prepare an Issuer Target Scale prior to the pricing and distribute it to our client (and the bankers). We are proactive throughout the pricing by monitoring order flow, intra-day interest rate movements, and competing primary/secondary offerings. We conduct post-pricing analysis to demonstrate to our clients how well the financing priced on a relative basis and what, if any, improvements and/or corrective actions are required for the next sale. PFM 7

8 PFM s Quantitative Pricing Approach 1) Analyze the client s pricing history relative to market benchmarks 2) Analyze how comparable primary market deals are pricing relative to market benchmarks 3) Analyze how comparable secondary market trades are pricing relative to market benchmarks 4) Consider state-and sector-specific trading ranges 5) Adjust/interpolate credit spreads for the maturity date(s) of the current issuance 6) Create an initial target scale 7) Share target scale and pricing worksheet with client (and banking team) prior to pricing PFM 8

9 Scale Benchmarks PFM 9

10 Characteristics of a Useful Benchmark Comparability It needs to represent the same segment of the current market, i.e. the lowest credit-risk/highest credit quality, the most liquid category, triple A general obligation bonds. Consistency It needs to reset daily with the market and possess the same attributes everyday, i.e. ten year par call, exact annual maturities, etc. Independence It needs to be developed by an informed, independent third-party observer of the market. PFM 10

11 Characteristics of a Useful Benchmark The MMD Curve is the most widely used benchmark in the municipal market. MMD Curve refers to the AAA-rated G.O. Curve Municipal market s risk-free rate proxy MMD represents the current market rate for various maturities, assuming a 5% coupon and a 10-year par call MMD is produced by Thomson Municipal Market Monitor (TM3), an informed, independent third-party market observer MMD is derived from the stated yields of all daily bond trades, both in the primary and secondary markets. The scale is primarily a statistical representation of executed trade data. PFM 11

12 Sample of Primary & Secondary Market Yields Twenty-Year Maturity 2,500 Total Observations PFM 12

13 Distribution of AAA-rated GO Yields Twenty-Year Maturity 2,500 Total Observations PFM 13

14 Municipal Market Data Yield Curves Twenty-Year Maturity PFM 14

15 Understanding MMD PFM 15

16 Understanding MMD PFM 16

17 Understanding MMD: YTM vs. YTW PFM 17

18 Understanding MMD: Alternative Coupon Curves PFM 18

19 Understanding MMD: Alternative Coupon Curves PFM 19

20 Other Benchmarks (BVAL) Bloomberg AAA Fair Market Value Curve (BVAL) Data dependent (trading activity) Update hourly (Starting at 9AM EST) Not widely available PFM 20

21 Other Benchmarks (MMA) Municipal Market Analytics (MMA) Consensus (Left) Primary market buyers pricing scale showing a consensus bid price Derived by polling municipal market participants, including underwriters and institutional investors on a daily basis PFM 21

22 Interpolated MMD *Monthly interpolated MMD AAA yields are estimated using a straight line calculation between the current, early, mid and late dated MMD AAA yields, and are meant to approximate intra-year MMD AAA yields. PFM 22

23 Why Use a Benchmark? PFM 23

24 Benchmarks A method of measuring the value of a section of the bond market A tool used by issuers, investors and other financial professionals to describe the market, and to compare the rate of return on specific securities A tool that allows performance to be compared relative to a point in the market, accounting for differences in couponing, call feature, and credit. A metric that should track the same spot in the market, so that performance can be measured across time and different market environments PFM 24

25 PFM s Approach to Credit Spreads PFM 25

26 Understanding Bond Yield Metrics *Re-offer yield is also referred to as the stated yield or yield-to-worst All price negotiations / yield discussions are centered around the Re-offer yield (stated yield) which is the yield-to-worst for the INVESTOR A higher coupon premium bond has a better chance of being called, but a bigger kick to maturity if it is not called For a given coupon, the price an investor is willing to pay for a bond is inversely related to the yield. PFM 26

27 Traditional Approach to Credit Spreads: Re-offer Yield ISSUER PRICING ANALYSIS Series 2017 Maturity Date Par Amount Coupon Reoffering Yield (ROY) Yield To Maturity (YTM) 5% AAA G.O. Scale ROY Spread YTM Spread 6/1/18 15,000, % 0.320% 0.320% 0.300% 2 bps 2 bps 6/1/19 15,000, % 0.580% 0.580% 0.560% 2 bps 2 bps 6/1/20 15,000, % 0.910% 0.910% 0.880% 3 bps 3 bps 6/1/21 15,000, % 1.260% 1.260% 1.230% 3 bps 3 bps 6/1/22 15,000, % 1.550% 1.550% 1.500% 5 bps 5 bps 6/1/23 15,000, % 1.880% 1.880% 1.830% 5 bps 5 bps 6/1/24 15,000, % 2.190% 2.190% 2.140% 5 bps 5 bps 6/1/25 15,000, % 2.490% 2.490% 2.440% 5 bps 5 bps 6/1/26 15,000, % 2.740% 2.740% 2.670% 7 bps 7 bps 6/1/27 15,000, % 2.920% 2.920% 2.850% 7 bps 7 bps OAY Non-Call Scale OAY Spread 6/1/28 15,000, % 3.080% 3.217% 3.010% 7 bps 21 bps 3.183% 3.025% 16 bps 6/1/29 15,000, % 3.250% 3.478% 3.180% 7 bps 30 bps 3.364% 3.205% 16 bps 6/1/30 15,000, % 3.420% 3.704% 3.350% 7 bps 35 bps 3.518% 3.393% 13 bps 6/1/31 15,000, % 3.570% 3.888% 3.500% 7 bps 39 bps 3.655% 3.551% 10 bps 6/1/32 15,000, % 3.720% 4.051% 3.620% 10 bps 43 bps 3.789% 3.690% 10 bps 6/1/33 15,000, % 3.870% 4.198% 3.730% 14 bps 47 bps 3.919% 3.818% 10 bps 6/1/34 15,000, % 3.990% 4.311% 3.830% 16 bps 48 bps 4.018% 3.918% 10 bps 6/1/35 15,000, % 4.205% 4.205% 3.930% 28 bps 28 bps 4.117% 4.018% 10 bps 6/1/36 15,000, % 4.317% 4.317% 4.030% 29 bps 29 bps 4.216% 4.118% 10 bps 6/1/37 15,000, % 4.411% 4.411% 4.130% 28 bps 28 bps 4.314% 4.218% 10 bps Issuance Par: 300,000, Average Life: 10.5 years 1 1 Non-Interpolated MMD Option Value Analysis PFM 27

28 Traditional Approach to Credit Spreads PFM 28

29 Traditional Approach to Credit Spreads PFM 29

30 Problem with Traditional Approach to Credit Spreads The traditional approach of gathering comparable Issuer s re-offer yields and the Issuer s historical re-offer yields to derive a spread to the MMD AAA doesn t allow for an apples-to-apples comparison for various coupon levels. PFM 30

31 Yield-to-Maturity (YTM) Approach to Credit Spreads ISSUER PRICING ANALYSIS Series 2017 Maturity Date Par Amount Coupon Reoffering Yield (ROY) Yield To Maturity (YTM) 5% AAA G.O. Scale ROY Spread YTM Spread 6/1/18 15,000, % 0.320% 0.320% 0.300% 2 bps 2 bps 6/1/19 15,000, % 0.580% 0.580% 0.560% 2 bps 2 bps 6/1/20 15,000, % 0.910% 0.910% 0.880% 3 bps 3 bps 6/1/21 15,000, % 1.260% 1.260% 1.230% 3 bps 3 bps 6/1/22 15,000, % 1.550% 1.550% 1.500% 5 bps 5 bps 6/1/23 15,000, % 1.880% 1.880% 1.830% 5 bps 5 bps 6/1/24 15,000, % 2.190% 2.190% 2.140% 5 bps 5 bps 6/1/25 15,000, % 2.490% 2.490% 2.440% 5 bps 5 bps 6/1/26 15,000, % 2.740% 2.740% 2.670% 7 bps 7 bps 6/1/27 15,000, % 2.920% 2.920% 2.850% 7 bps 7 bps OAY Non-Call Scale OAY Spread 6/1/28 15,000, % 3.080% 3.217% 3.010% 7 bps 21 bps 3.183% 3.025% 16 bps 6/1/29 15,000, % 3.250% 3.478% 3.180% 7 bps 30 bps 3.364% 3.205% 16 bps 6/1/30 15,000, % 3.420% 3.704% 3.350% 7 bps 35 bps 3.518% 3.393% 13 bps 6/1/31 15,000, % 3.570% 3.888% 3.500% 7 bps 39 bps 3.655% 3.551% 10 bps 6/1/32 15,000, % 3.720% 4.051% 3.620% 10 bps 43 bps 3.789% 3.690% 10 bps 6/1/33 15,000, % 3.870% 4.198% 3.730% 14 bps 47 bps 3.919% 3.818% 10 bps 6/1/34 15,000, % 3.990% 4.311% 3.830% 16 bps 48 bps 4.018% 3.918% 10 bps 6/1/35 15,000, % 4.205% 4.205% 3.930% 28 bps 28 bps 4.117% 4.018% 10 bps 6/1/36 15,000, % 4.317% 4.317% 4.030% 29 bps 29 bps 4.216% 4.118% 10 bps 6/1/37 15,000, % 4.411% 4.411% 4.130% 28 bps 28 bps 4.314% 4.218% 10 bps Issuance Par: 300,000, Average Life: 10.5 years 1 1 Non-Interpolated MMD Option Value Analysis PFM 31

32 YTM Approach to Credit Spreads PFM 32

33 YTM Approach to Credit Spreads PFM 33

34 Problem with YTM Approach to Credit Spreads The traditional approach of gathering comparable The approach of gathering comparable Issuer s YTM and the Issuer s re-offer yields and the Issuer s historical re-offer Issuer s historical YTM to derive a spread to the MMD AAA fails yields to recognize to derive the a spread relative to value the MMD of embedded AAA doesn t call options at various allow coupon for an apples-to-apples levels and call dates. comparison for various coupon levels. PFM 34

35 Option Adjusted Spread (OAS) Issuer can clearly identify the relatively cheap or expensive nature of a given price Provides a market-dependent, apples-toapples basis for measuring relative value Callable Yield = Value of Call Feature + Non-callable Yield Bonds with different call features (i.e. redemption dates, call premiums, coupons, etc.) should pay different yields Bonds with different credit risk should pay different yields 15 bps 2 bps Value of Call Feature Credit Spread Total Trading Spread 17 bps OAS analysis separates these premiums to allow side-by-side valuation of bonds with different call features, in order to isolate credit spread Benchmark Non-callable MMD AAA GO OAS analysis separates these premiums to allow side-by-side valuation of bonds with similar credit risk, in order to evaluate and identify relative value of different call features PFM 35

36 Finding the Option Value 1) Projected Interest Rates the Binomial Tree The first step in valuing a call option requires establishing a reasonable estimate of future interest rates, or more properly, a distribution of interest rates along which issuer s call option may be valued. 2) Projected Interest Rates the Binomial Tree PFM creates a binomial tree that meets several constraints. First, the interest rates estimated for any node on the tree reflect current market estimates for what those rates should be. Second, the ratio of the high to low rate for any given node is constant throughout the tree to reflect estimated volatility. In this way a lognormal distribution of forward rates is established that is consistent with market estimates of future interest rate environments. Finally, the tree is calibrated to endure consistent pricing relative to current market rates. C i = max( , 0) 0.35 A B 0.71 C 0.00 C i = max( , 0) D E F 3) Option Value Having established an interest rate distribution for each interest payment date for a given bond, PFM s OV model next values the embedded call option for that bond. To do so, the remaining cash flows for a given bond are discounted to a given node at the short-term rates established in the binomial tree. PFM 36

37 PFM s Approach to Finding the Appropriate Credit Spread Enter comparable & historical bond data Run Option Adjusted Yield model to derive the implied call option values Based on implied option values, derive comparable & historical non-callable bond yields Calculate comparable & historical non-callable bonds spreads to non-callable MMD yield Provides Issuer s target non-callable spreads Should produce more reliable targets Comparable Issuer's Non- Callable Rate - MMD Non- Callable Scale = Comparable Issuer's Credit Spread PFM 37

38 PFM Approach to Credit Spreads ISSUER PRICING ANALYSIS Series 2017 Maturity Date Par Amount Coupon Reoffering Yield (ROY) Yield To Maturity (YTM) 5% AAA G.O. Scale ROY Spread YTM Spread 6/1/18 15,000, % 0.320% 0.320% 0.300% 2 bps 2 bps 6/1/19 15,000, % 0.580% 0.580% 0.560% 2 bps 2 bps 6/1/20 15,000, % 0.910% 0.910% 0.880% 3 bps 3 bps 6/1/21 15,000, % 1.260% 1.260% 1.230% 3 bps 3 bps 6/1/22 15,000, % 1.550% 1.550% 1.500% 5 bps 5 bps 6/1/23 15,000, % 1.880% 1.880% 1.830% 5 bps 5 bps 6/1/24 15,000, % 2.190% 2.190% 2.140% 5 bps 5 bps 6/1/25 15,000, % 2.490% 2.490% 2.440% 5 bps 5 bps 6/1/26 15,000, % 2.740% 2.740% 2.670% 7 bps 7 bps 6/1/27 15,000, % 2.920% 2.920% 2.850% 7 bps 7 bps OAY Non-Call Scale OAY Spread 6/1/28 15,000, % 3.080% 3.217% 3.010% 7 bps 21 bps 3.183% 3.025% 16 bps 6/1/29 15,000, % 3.250% 3.478% 3.180% 7 bps 30 bps 3.364% 3.205% 16 bps 6/1/30 15,000, % 3.420% 3.704% 3.350% 7 bps 35 bps 3.518% 3.393% 13 bps 6/1/31 15,000, % 3.570% 3.888% 3.500% 7 bps 39 bps 3.655% 3.551% 10 bps 6/1/32 15,000, % 3.720% 4.051% 3.620% 10 bps 43 bps 3.789% 3.690% 10 bps 6/1/33 15,000, % 3.870% 4.198% 3.730% 14 bps 47 bps 3.919% 3.818% 10 bps 6/1/34 15,000, % 3.990% 4.311% 3.830% 16 bps 48 bps 4.018% 3.918% 10 bps 6/1/35 15,000, % 4.205% 4.205% 3.930% 28 bps 28 bps 4.117% 4.018% 10 bps 6/1/36 15,000, % 4.317% 4.317% 4.030% 29 bps 29 bps 4.216% 4.118% 10 bps 6/1/37 15,000, % 4.411% 4.411% 4.130% 28 bps 28 bps 4.314% 4.218% 10 bps Issuance Par: 300,000, Average Life: 10.5 years 1 1 Non-Interpolated MMD Option Value Analysis PFM 38

39 PFM Approach to Credit Spreads PFM 39

40 PFM Approach to Credit Spreads PFM 40

41 PFM Approach to Credit Spreads ISSUER PRICING ANALYSIS Series 2017 Maturity Date Par Amount Coupon Reoffering Yield (ROY) Yield To Maturity (YTM) 5% AAA G.O. Scale ROY Spread YTM Spread 6/1/18 15,000, % 0.320% 0.320% 0.300% 2 bps 2 bps 6/1/19 15,000, % 0.580% 0.580% 0.560% 2 bps 2 bps 6/1/20 15,000, % 0.910% 0.910% 0.880% 3 bps 3 bps 6/1/21 15,000, % 1.260% 1.260% 1.230% 3 bps 3 bps 6/1/22 15,000, % 1.550% 1.550% 1.500% 5 bps 5 bps 6/1/23 15,000, % 1.880% 1.880% 1.830% 5 bps 5 bps 6/1/24 15,000, % 2.190% 2.190% 2.140% 5 bps 5 bps 6/1/25 15,000, % 2.490% 2.490% 2.440% 5 bps 5 bps 6/1/26 15,000, % 2.740% 2.740% 2.670% 7 bps 7 bps 6/1/27 15,000, % 2.920% 2.920% 2.850% 7 bps 7 bps OAY Non-Call Scale OAY Spread 6/1/28 15,000, % 3.080% 3.217% 3.010% 7 bps 21 bps 3.183% 3.025% 16 bps 6/1/29 15,000, % 3.250% 3.478% 3.180% 7 bps 30 bps 3.364% 3.205% 16 bps 6/1/30 15,000, % 3.420% 3.704% 3.350% 7 bps 35 bps 3.518% 3.393% 13 bps 6/1/31 15,000, % 3.570% 3.888% 3.500% 7 bps 39 bps 3.655% 3.551% 10 bps 6/1/32 15,000, % 3.720% 4.051% 3.620% 10 bps 43 bps 3.789% 3.690% 10 bps 6/1/33 15,000, % 3.870% 4.198% 3.730% 14 bps 47 bps 3.919% 3.818% 10 bps 6/1/34 15,000, % 3.990% 4.311% 3.830% 16 bps 48 bps 4.018% 3.918% 10 bps 6/1/35 15,000, % 4.205% 4.205% 3.930% 28 bps 28 bps 4.117% 4.018% 10 bps 6/1/36 15,000, % 4.317% 4.317% 4.030% 29 bps 29 bps 4.216% 4.118% 10 bps 6/1/37 15,000, % 4.411% 4.411% 4.130% 28 bps 28 bps 4.314% 4.218% 10 bps Issuance Par: 300,000, Average Life: 10.5 years 1 1 Non-Interpolated MMD Option Value Analysis PFM 41

42 State Series 2015 A Case Study on OAS STATE PRICING ANALYSIS Series 2017 Maturity Date Par Amount Coupon Reoffering Yield (ROY) Yield To Maturity (YTM) 5% AAA G.O. Scale ROY Spread YTM Spread ROY Spread YTM Spread 8/1/17 15,125, % 3.630% 3.630% 3.640% -1 bps -1 bps 5 bps 5 bps 8/1/18 15,995, % 3.680% 3.680% 3.650% 3 bps 3 bps 3 bps 3 bps 8/1/19 16,915, % 3.730% 3.730% 3.680% 5 bps 5 bps 5 bps 5 bps 8/1/20 17,890, % 3.770% 3.770% 3.710% 6 bps 6 bps 6 bps 6 bps 8/1/21 18,920, % 3.830% 3.830% 3.750% 8 bps 8 bps 8 bps 8 bps 8/1/22 20,005, % 3.860% 3.860% 3.800% 6 bps 6 bps 6 bps 6 bps 8/1/23 21,155, % 3.890% 3.890% 3.850% 4 bps 4 bps 4 bps 4 bps 8/1/24 22,375, % 3.960% 3.960% 3.900% 6 bps 6 bps 6 bps 6 bps 8/1/25 23,660, % 3.990% 3.990% 3.950% 4 bps 4 bps 4 bps 4 bps 8/1/26 25,020, % 4.050% 4.050% 4.010% 4 bps 4 bps 4 bps 4 bps OAY Non-Call Scale 8/1/27 26,460, % 4.120% 4.120% 4.080% 4 bps 4 bps 4 bps 4 bps 4.175% 4.079% 10 bps 8/1/28 27,980, % 4.180% 4.287% 4.140% 4 bps 15 bps 4 bps 15 bps 4.248% 4.149% 10 bps 8/1/29 29,590, % 4.210% 4.352% 4.170% 4 bps 18 bps 4 bps 18 bps 4.276% 4.189% 9 bps 8/1/30 31,290, % 4.240% 4.409% 4.200% 4 bps 21 bps 4 bps 21 bps 4.299% 4.220% 8 bps 8/1/31 33,090, % 4.260% 4.451% 4.220% 4 bps 23 bps 4 bps 23 bps 4.308% 4.240% 7 bps 8/1/32 34,990, % 4.280% 4.489% 4.240% 4 bps 25 bps 4 bps 25 bps 4.319% 4.260% 6 bps 8/1/33 37,005, % 4.310% 4.529% 4.270% 4 bps 26 bps 4 bps 26 bps 4.339% 4.290% 5 bps 8/1/34 39,130, % 4.330% 4.559% 4.290% 4 bps 27 bps 4 bps 27 bps 4.348% 4.310% 4 bps 8/1/35 41,380, % 4.770% 4.770% 4.310% 46 bps 46 bps 46 bps 46 bps 4.761% 4.330% 43 bps 8/1/36 43,770, % 4.790% 4.790% 4.330% 46 bps 46 bps 46 bps 46 bps 4.790% 4.350% 44 bps Issuance Par: 541,745, Average Life: 12.2 years 1 1 Price: $ Price: $ Non-Interpolated MMD Interpolated MMD Option Value Analysis OAY Spread PFM 42

43 Lost Value $2,633,253.34: loss of 3.1% NPV PFM 43

44 Price Views & OAS Analysis PFM 44

45 Price Views: Coupon Comparison PFM 45

46 Option Value Analysis Water Revenue Option Analysis PFM 5% Coupon Scale PFM Lower Coupon Scale Callable Scale Callable Scale PFM 5% Coupon Scale Maturity Amt Maturity Coupon ROY YTM Price OV Implied Non-Call Scale (Non-Adv. Rfdg.) Coupon ROY YTM Price OV Implied Non-Call Scale (Non- Adv. Rfdg.) - PFM Lower Coupon Scale $ 15,915,000 10/1/ % 2.660% 2.954% % 4.000% 2.780% 2.941% % (3.7) bps $ 16,175,000 10/1/ % 2.750% 3.141% % 4.000% 2.930% 3.125% % (5.2) bps $ 16,420,000 10/1/ % 2.820% 3.289% % 4.000% 3.070% 3.280% % (7.3) bps $ 16,635,000 10/1/ % 2.910% 3.435% % 4.000% 3.210% 3.418% % (7.9) bps $ 16,860,000 10/1/ % 2.980% 3.550% % 4.000% 3.300% 3.507% % (6.3) bps $ 39,750,000 10/1/ % 3.040% 3.647% % 4.000% 3.390% 3.588% % (5.7) bps $ 24,330,000 10/1/ % 3.100% 3.734% % 4.000% 3.480% 3.662% % (5.4) bps $ 57,625,000 10/1/ % 3.140% 3.801% % 4.000% 3.540% 3.712% % (4.6) bps $ 60,615,000 10/1/ % 3.180% 3.862% % 4.000% 3.580% 3.745% % (2.8) bps $ 63,740,000 10/1/ % 3.210% 3.912% % 4.000% 3.610% 3.771% % (1.3) bps $ 34,550,000 10/1/ % 3.210% 3.941% % 4.000% 3.610% 3.777% % 0.0 bps PFM 46

47 Coupon and Call Date Considerations PFM 47

48 Coupon Considerations Couponing Industry Standard 5% CPNs vs 4% CPNs vs Discount CPN (<$100 $$ price) Call Features Industry Standard 10yr par call vs shorter calls Both impact borrowing costs and optionality Lowest borrowing costs Yield to Call (YTC) vs Yield to Maturity (YTM) Gross production Par Amount vs Proceeds PFM 48

49 Call Date Considerations Why use Lower Coupons or Shorter Calls? Refunding vs. new money Blocksize: too small or too large Market tone Financial Analysis should rule the day G-11(f) Issuer determines what to sell to the market, not the syndicate Short Call Misconceptions and Considerations There is no additional YTC cost for Short Calls in fact, it can be substantially lower There is an additional YTM cost for Short Calls in fact, it can be substantially higher Issuers considering shorter calls should have the need and high likelihood of using the short call for structural purposes Issuers should not assume short calls provide greater refunding savings, in fact, they typically do not PFM 49

50 Coupon and Call Date Considerations Standard structure for most issues is a 5% Coupon 10yr Par Call Structure All price negotiations / yield discussions are centered around the Re-offer yield (stated yield) which is the yield-to-worst for the INVESTOR Could be either YTC or YTM Very important to understand the pricing differences of Non-callable vs Callable bonds and Premium Coupon vs Par/Discount Coupon bonds A higher coupon premium bond has a better chance of being called, but a bigger kick to maturity if it is not called there is a trade off between YTC and YTM PFM 50

51 Coupon Considerations Price Discussions generally begin with spread talk Spread for 5% coupons vs lower coupons are obtained for comparison With that information, what should an Issuer sell? Lower Coupons have higher YTCs Lower Coupons have lower YTMs Lower Coupons vs 5% Coupon Maturity Call CPN YTC YTM Price 10yr 4% 3.300% 3.480% /1/ yr 5% 3.000% 3.490% bps 1 bps How do you measure relative value between coupon structure? 12/1/ yr 3.500% 3.897% 3.740% yr 5% 3.240% 3.887% bps 15 bps 12/1/ yr 4% 3.810% 3.907% yr 5% 3.360% 4.157% bps 25 bps PFM 51

52 Traditional 10-Year Par Call or Shorter Calls Standard call feature is a 10-year par call Standard 10-year par call spreads vs shorter call spreads are obtained for comparison With that information, what should an issuer sell? Short Call vs Standard 10yr Par Call Maturity Call CPN YTC YTM Price Shorter calls have lower Yield-to-Call Shorter calls have higher Yield-to-Maturity How do you measure relative value between call? 10/1/ /1/ /1/2038 5yr 5.00% 2.40% 3.59% $ yr 5.00% 2.55% 2.64% $ bps (95)bps $ yr 5.00% 2.55% 4.00% $ yr 5.00% 2.83% 3.42% $ bps (57)bps $ yr 5.00% 2.71% 4.21% $ yr 5.00% 2.99% 3.78% $ bps (43)bps $ PFM 52

53 Coupon and Call Date Considerations How to measure the relative value of Coupon and Call Feature alternatives? Option Adjusted Spread or Option Adjusted Yield analysis (OAS/OAY) Traditional measure Analysis used to assess relative value of various coupon and call date structures OAS does not take into account the difference in gross proceeds to the Issuer Investor metric Implied Non- Callable Yield (OAS) Callable Yield Value of Embedded Call Option Discount Cash-flow Analysis Discounted Cash-flow Analysis takes into account gross proceeds and calculates all metrics on an NPV basis at the time of issuance Analysis that factors in gross production Issuer metric PFM 53

54 Sample Target Scale PFM 54

55 Discounted Cashflow Model This approach monetizes the trade-offs between YTC and YTM, as well as the difference in principal issued of various coupon structures Discounted Cashflow Analysis expresses relative on an NPV basis Issuer Perspective PFM s Discounted Cash-flow Analysis uses the issuer s current yield curve (borrowing costs), and calculates the yield curve shift where an issuer would be indifferent to better help make structural decisions PFM 55

56 Competitive vs. Negotiated PFM 56

57 Competitive vs. Negotiated PFM believes that mixing the use of competitive and negotiated sales is the optimal approach to an Issuer s financings: Empirical data suggest competitive sales produce lower TICs Competitive sales provide benchmarks for negotiated sales Negotiated sales motivate firms to bring innovative ideas to the Issuer Negotiated sales provide maximum flexibility to optimize the structure & execution of refundings and other complex transactions Rewarding firms that support the issuer competitive sales by including them in future negotiated sale syndicates results in better pricing PFM 57

58 Competitive vs. Negotiated: Empirical Evidence No study of the tax exempt market has ever found circumstances under which the issuer s costs for a negotiated sale are less than those of an equivalent issue sold through a competitive bidding process (all else being equal). Almost all studies conclude that competitive sales produce lower borrowing costs. Two out of seven concludes no difference, including most recent study. Fruits, Booth, Pozdena & Smith (2008) examines and critiques previous studies. Studies on the cost advantage of competitive vs. negotiated sales: Joehnk & Kidwell (1979) 32 bps Sorenson (1979) bps Mease (1985) up to 76.7 bps Simonsen & Robbins (1996) bps Leonard (1996) (No difference) Robbins (2000) bps Simonsen & Robbins (2001) bps Fruits, Booth, Pozdena & Smith (2008) (No difference) PFM 58

59 Competitive vs. Negotiated: Decision Matrix PFM 59

60 Competitive vs. Negotiated NEGOTIATED SALE COMPETITIVE SALE Hire underwriting syndicate Syndicate pre-markets BONDS PFM & Sr. underwriter negotiate pricing wire scale Pricing wire released & bonds offered directly to investors Create Notice of Sale Issuer & PFM pre-market SALE to underwriters Underwriters work-up & submit bids Issuer & PFM evaluate & accept lowest conforming bid (true interest cost) Underwriting syndicate takes orders Final price negotiated PFM 60

61 Competitive Sale Basics PFM 61

62 Competitive Sales COMPETITIVE SALE Create Notice of Sale Issuer & PFM pre-market SALE to underwriters Underwriters work-up & submit bids Issuer & PFM evaluate & accept lowest conforming bid (true interest cost) PFM 62

63 Tailoring Bid Terms to Market Conditions Will Enhance Pricing for Competitive Sales PFM begins contacting trading desks at least a week in advance, to start marketing the sale and to understand current market conditions PFM is constantly striving to provide the most flexible bid parameters for it s clients that current market conditions will permit PFM s bidding parameters table and NOS language allows: Flexibility in changing the par amount both maturity-by-maturity and in the aggregate Flexibility in changing the sale date Flexibility in adding or removing refunding components Description Page No. Description REDEMPTION DATES Dated Date: Delivery Date 5 Optional: On or after June 1, Delivery Date: On or about June 6, 2025 at 100% INTEREST 11 Mandatory: Each sinking fund installment date for Interest Payment Dates: June 1 and December 1 5 term bonds at 100% 5 First Interest Payment: December 1, PRICING Coupon Multiples: 1/8 or 1/20 of 1% 7 Max. Reoffering Price: Maximum Difference 7 Each Maturity: 110.0% 8 Between Coupons: 4.00% 7 Aggregate: 108.0% 8 Maximum TIC: 5.50% PRINCIPAL 7 Min. Reoffering Price: Each Maturity: 98.0% 8 Adjustment Increases: Aggregate: 99.0% 8 Each Maturity: + 15% 9 PROCEDURAL Aggregate: + 10% 9 Sale Date: May 25, Adjustment Decreases: Bid Submission: PARITY* only 1,6 Each Maturity: Any amount 9 All or None?: Yes 7 Aggregate: - 10% 9 Bid Aware Method: Lowest TIC 9 Term Bonds: One or more on or after Bid Confirmation: Fax signed PARITY* June 1, 2026 (sinking screen 7 fund installments must Award of Bid: Within 6 hours 2 equal amortization) 5 Good Faith Deposit: $1,000, Year (June 1) Principal Amount** Year (June 1) Principal Amount** 2016 NC $2,020, T $5,815, NC 2,595, T 6,060, NC 5,185, T 6,325, NC 5,295, T 6,615, NC 5,410, T 6,905, NC 5,540, T 4,660, NC 5,685, T 4,860, NC 6,175, T 1,015, NC 6,165, T 1,065, NC 6,225, T 1,115, T 6,125, T 1,170, T 6,140, T 1,225, T 5,255, T 1,280, T 5,520, T 1,340, T 5,755, T 1,405,000 Page No. NC: Non-callable T: May be designated as sinking fund installments for term maturity or maturities * If numerical (excluding page numbers) or date references contained in the body of this Notice of Sale conflict with the Bidding Parameters Table, the body of this Notice of Sale shall control. Consult the body of this Notice of Sale for a detailed explanation of the items contained in the Bidding Parameters Table, including interpretation of such items and methodologies used to determine such items. ** Subject to change both before and after award as provided herein. PFM 63

64 Competitive Sales COMPETITIVE SALE Create Notice of Sale Issuer & PFM pre-market SALE to underwriters Underwriters work-up & submit bids Issuer & PFM evaluate & accept lowest conforming bid (true interest cost) PFM 64

65 Competitive Sale Bidding Summary PFM 65

66 Competitive Sale Bidding Summary (cont d) PFM 66

67 Negotiated Sale Basics PFM 67

68 Negotiated Sales NEGOTIATED SALE Hire underwriting syndicate Syndicate pre-markets BONDS PFM & Sr. underwriter negotiate pricing wire scale Pricing wire released & bonds offered directly to investors Underwriting syndicate takes orders Final price negotiated PFM 68

69 Underwriting Team Senior Managing Underwriter Runs the book, leads pricing negotiations, accepts orders, allocates the bonds, and pays takedown to syndicate members. Co-Managers Other firms in the syndicate, submit pricing thoughts, market bonds, and submit orders. Selling Group Other firms who assist in selling and marketing the bonds only during retail order period. PFM 69

70 Underwriting Spread Components Takedown - Sale commission, compensation to the underwriter for placing the bonds with investors. Underwriting Fee - Compensation for the risk entailed in underwriting the issuer s bonds. Expenses - The costs incurred to bring the deal to market. Expenses may include MSRB fees, Cusip fees, printing, calls, travel, and other direct costs. Management Fee - Fee paid to the senior manager for managing the deal. It includes the services that go along with being the manager such as structuring and cash flow analysis. PFM 70

71 Underwriter Takedowns Pricing Wire $245,750,000* SERIES 2017 A MOODY'S: A2 S&P: A FITCH: A+ DATED:07/06/2017 FIRST COUPON:01/01/2018 DUE: 01/01 MATURITY AMOUNT* COUPON PRICE (Pts) ADD'L TAKEDOWN 1/1/2018 1,045M 3.00% /8 (Approx. $ Price ) 1/1/2019 5,200M 3.00% /8 (Approx. $ Price ) 1/1/2019 3,965M 5.00% /8 (Approx. $ Price ) 1/1/2020 2,995M 4.00% /8 (Approx. $ Price ) 1/1/2020 6,805M 5.00% /8 (Approx. $ Price ) 1/1/ ,880M 5.00% /8 (Approx. $ Price ) 1/1/ ,470M 5.00% /8 (Approx. $ Price ) 1/1/ ,815M 5.00% /8 (Approx. $ Price ) 1/1/2024 3,595M 5.00% /8 (Approx. $ Price ) 1/1/ ,710M 5.00% /8 (Approx. $ Price ) 1/1/ ,270M 5.00% (Approx. $ Price ) Average Takedown Maturity Takedown Weighted Weighted Par Takedown Compensation 1/1/2018 $ % $ 0.02 $ 3,919 1/1/2019 $ % $ 0.08 $ 19,500 1/1/2019 $ % $ 0.06 $ 14,869 1/1/2020 $ % $ 0.05 $ 11,231 1/1/2020 $ % $ 0.10 $ 25,519 1/1/2021 $ % $ 0.17 $ 40,800 1/1/2022 $ % $ 0.19 $ 46,763 1/1/2023 $ % $ 0.18 $ 44,306 1/1/2024 $ % $ 0.05 $ 13,481 1/1/2025 $ % $ 0.39 $ 96,413 1/1/2026 $ % $ 2.79 $ 685,398 Total 100% $ 4.08 $ 1,002, CALL FEATURES: No optional call * - APPROXIMATE SUBJECT TO CHANGE PFM 71

72 Underwriting Expenses Example MANAGEMENT FEE & UNDERWRITER'S EXPENSES Master Financing (Series 2017ABC) Underwriter's Discount $/1000 Amount Management Fee , Underwriter's Counsel (est) , Day Loan , Dalnet Wire Charge (17 Syndicate Members) DTC CUSIP Fees Internet Roadshow , Miscellaneous , IPREO (Tax-Exempt Only) , IPREO Order Monitor (Tax-Exempt Only) , PFM 72

73 Underwriting Syndicate Members Senior Managing Underwriter Runs the book, leads pricing negotiations, accepts orders, allocates the bonds, and pays takedown to syndicate members. Co-Managers Other firms in the syndicate, submit pricing thoughts, market bonds, and submit orders. Selling Group Other firms who assist in selling and marketing the bonds only during retail order period. PFM 73

74 Syndicate Members: Designations vs. Liabilities Designations Rules spelled out on the Pricing Wire. Underwriter compensation determined by bonds that are sold When placing an order, the investor specifies the syndicate member(s) to receive takedown the proportion of their order that goes to each designated firm (designation guidelines determined prior to sale) Used during institutional order periods with net designated policies Liabilities Spelled out in the Agreement Among Underwriters (AAU). Determines how unsold bonds are allocated to each Underwriter Determined after the order period has concluded. PFM 74

75 Priority of Orders 1 Retail (If used) Allows in-state and local firms/investors chance to participate in transaction. Usually broken up into in-state, and then national retail priority. 2(a) Group Net Sales commission is shared among syndicate members according to liability (AAU). 2(b) 3 Net Designated Sales commission is designated to firms by the investor. Member Orders Firms in syndicate place orders for their own clients, commission goes solely to the firm placing order. PFM 75

76 Priority of Orders 1 Retail (If used) Allows in-state and local firms/investors chance to participate in transaction. Usually broken up into in-state, and then national retail priority. 2(a) Group Net Sales commission is shared among syndicate members according to liability (AAU). 2(b) 3 Net Designated Sales commission is designated to firms by the investor. Member Orders Firms in syndicate place orders for their own clients, commission goes solely to the firm placing order. PFM 76

77 Priority of Orders Retail Pricing Wire Orders are designated and takedowns are allocated among members of the syndicate based on criteria set out in the Pricing Wire. PFM 77

78 Syndicate Compensation Retail Order Period PFM 78

79 Priority of Orders-Retail Professional Retail vs. Individual Retail Individual Retail- Also known as Mom and Pop, or 2 legged retail; are individual investors who place orders for specific bonds with their brokers. Historically, individual retail investors played a significant active role in the market with their brokers placing orders directly on their behalf. Orders were regularly from $5,000 - $50,000 increments, with some very wealthy individual investors placing larger orders. Professional Retail-Also known as Separately Managed Accounts (SMAs), are large money managers who invest money for a large number of individual investors. Post financial crisis, an increasing number of retail brokers choose to place orders on behalf of their retail clients thru their firms money managers. Rather than deal with the complicated, credit nuanced municipal market, professional managers place large orders on behalf of their many retail brokers and their clients. Orders from $500,000-$5,000,000 and higher are common. PFM 79

80 Priority of Orders 1 Retail (If used) Allows in-state and local firms/investors chance to participate in transaction. Usually broken up into in-state, and then national retail priority. 2(a) Group Net Sales commission is shared among syndicate members according to liability (AAU). 2(b) 3 Net Designated Sales commission is designated to firms by the investor. Member Orders Firms in syndicate place orders for their own clients, commission goes solely to the firm placing order. PFM 80

81 Priority of Orders Group Net The AAU determines how takedown will be allocated amongst the syndicate after institutional orders are placed. PFM 81

82 Priority of Orders Net Designated Orders are designated and takedowns are allocated among members of the syndicate based on criteria set out in the Pricing Wire. PFM 82

83 Syndicate Compensation Institutional Order Period PFM 83

84 Allocating Unsold Bonds The AAU determines the liability of each firm in the syndicate and how unsold balances (bonds) will be allocated. PFM 8484

85 Negotiated Sales NEGOTIATED SALE Hire underwriting syndicate Syndicate pre-markets BONDS PFM & Sr. underwriter negotiate pricing wire scale Pricing wire released & bonds offered directly to investors Underwriting syndicate takes orders Final price negotiated PFM 85

86 PFM s Pricing Process PFM 86

87 PFM s Pricing Process We enter every pricing with an independent opinion of where the issuer s bonds should price. We begin our pricing preparations a week or more before we receive the underwriters target scales. We prepare an Issuer Target Scale prior to the pricing and distribute it to our client (and the bankers). We are proactive throughout the pricing by monitoring order flow, intra-day interest rate movements, and competing primary/secondary offerings. We conduct post-pricing analysis to demonstrate to our clients how well the financing priced on a relative basis and what, if any, improvements and/or corrective actions are required for the next sale. PFM 87

88 Bond Pricing Timeline PFM 88

89 PFM s Quantitative Pricing Approach 1) Analyze the client s pricing history relative to market benchmarks 2) Analyze how comparable primary market deals are pricing relative to market benchmarks 3) Analyze how comparable secondary market trades are pricing relative to market benchmarks 4) Consider state-and sector-specific trading ranges 5) Adjust/interpolate credit spreads for the maturity date(s) of the current issuance 6) Create an initial target scale 7) Share target scale and pricing worksheet with client (and banking team) prior to pricing PFM 89

90 PFM s Quantitative Pricing Approach 1) Analyze the client s pricing history relative to market benchmarks 2) Analyze how comparable primary market deals are pricing relative to market benchmarks 3) Analyze how comparable secondary market trades are pricing relative to market benchmarks 4) Consider state-and sector-specific trading ranges 5) Adjust/interpolate credit spreads for the maturity date(s) of the current issuance 6) Create an initial target scale 7) Share target scale and pricing worksheet with client (and banking team) prior to pricing PFM 90

91 Client Historical Pricing Analysis MEAG PRICING ANALYSIS Series 2017A Maturity Date Maturity Year Call Date Par Amount Coupon Reoffering Yield To Yield To Yield Call Maturity (ROY) Price (YTC) (YTM) 5% AAA G.O. Scale ROY Spread YTC Spread 11/15/ , % 0.700% % - 70 bps 11/15/ ,810, % 0.990% % 0.390% 60 bps 60 bps 11/15/ ,945, % 1.330% % 0.690% 64 bps 64 bps 11/15/ ,980, % 1.770% % 1.030% 74 bps 74 bps 11/15/ ,055, % 2.150% % 1.380% 77 bps 77 bps 11/15/ ,135, % 2.540% % 1.720% 82 bps 82 bps 11/15/ ,250, % 2.910% % 2.130% 78 bps 78 bps 11/15/ ,395, % 3.210% % 2.420% 79 bps 79 bps 11/15/ ,555, % 3.400% % 2.610% 79 bps 79 bps 11/15/ ,780, % 3.570% % 2.790% 78 bps 78 bps 11/15/ ,770, % 3.700% % 2.940% 76 bps 76 bps 11/15/ /1/27 2,105, % 3.840% % 3.840% 3.060% 78 bps 79 bps 78 bps 3.837% 3.126% 71 bps 11/15/ /1/27 1,840, % 3.840% % 3.918% 3.060% 78 bps 78 bps 86 bps 3.894% 3.126% 77 bps 11/15/ /1/27 4,125, % 3.960% % 3.960% 3.150% 81 bps 84 bps 81 bps 3.942% 3.241% 70 bps 11/15/ /1/27 24,105, % 4.000% % 4.170% 3.240% 76 bps 76 bps 93 bps 3.974% 3.351% 62 bps 11/15/ /1/27 25,000, % 4.080% % 4.274% 3.320% 76 bps 76 bps 95 bps 4.016% 3.446% 57 bps 11/15/ /1/27 4,670, % 4.220% % 4.220% 3.400% 82 bps 86 bps 82 bps 4.144% 3.536% 61 bps 11/15/ /1/27 4,850, % 4.310% % 4.310% 3.480% 83 bps 91 bps 83 bps 4.226% 3.626% 60 bps 11/15/ /1/27 5,040, % 4.290% % 4.505% 3.560% 73 bps 73 bps 95 bps 4.151% 3.716% 44 bps 11/15/ /1/27 5,285, % 4.350% % 4.563% 3.640% 71 bps 71 bps 92 bps 4.199% 3.806% 39 bps 11/15/ /1/27 5,545, % 4.530% % 4.530% 3.720% 81 bps 90 bps 81 bps 4.404% 3.886% 52 bps Issuance Par: 1 128,410, Average Life: years 1 1 Non-Interpolated MMD YTM Spread Option Value Analysis OAY Non-Call Scale OAY Spread PFM 91

92 Comparable Transaction Analysis SEATTLE WA MUNI LIGHT & PWR REV PRICING ANALYSIS WA Seattle Muni Light Pwr Maturity Date Maturity Year Call Date Par Amount Coupon Reoffering Yield To Yield To Yield Call Maturity (ROY) Price (YTC) (YTM) 5% AAA G.O. Scale ROY Spread YTC Spread 8/1/ ,965, % 0.330% % - 33 bps 2/1/ ,770, % 0.420% % 0.370% 5 bps 5 bps 2/1/ ,555, % 0.900% % 0.730% 17 bps 17 bps 2/1/ ,985, % 1.450% % 1.090% 36 bps 36 bps 2/1/ ,005, % 1.790% % 1.510% 28 bps 28 bps 2/1/ ,250, % 2.130% % 1.810% 32 bps 32 bps 2/1/ ,925, % 2.440% % 2.100% 34 bps 34 bps 2/1/ ,415, % 2.850% % 2.460% 39 bps 39 bps 2/1/ ,350, % 3.210% % 2.780% 43 bps 43 bps 2/1/ ,930, % 3.490% % 3.060% 43 bps 43 bps 2/1/ ,550, % 3.740% % 3.310% 43 bps 43 bps 2/1/ /1/27 13,185, % 3.980% % 4.052% 3.510% 47 bps 47 bps 54 bps 4.035% 3.520% 52 bps 2/1/ /1/27 13,870, % 4.250% % 4.347% 3.690% 56 bps 56 bps 66 bps 4.281% 3.710% 57 bps 2/1/ /1/27 14,580, % 4.410% % 4.515% 3.860% 55 bps 55 bps 66 bps 4.403% 3.889% 51 bps 2/1/ /1/27 15,325, % 4.580% % 4.673% 4.020% 56 bps 56 bps 65 bps 4.535% 4.058% 48 bps 2/1/ /1/27 16,110, % 4.630% % 4.725% 4.160% 47 bps 47 bps 56 bps 4.584% 4.218% 37 bps 2/1/ /1/27 9,380, % 4.790% % 4.933% 4.380% 41 bps 41 bps 55 bps 4.730% 4.476% 25 bps 2/1/ /1/27 9,900, % 4.790% % 5.025% 4.480% 31 bps 31 bps 54 bps 4.742% 4.586% 16 bps 2/1/ /1/27 10,460, % 4.890% % 5.104% 4.580% 31 bps 31 bps 52 bps 4.831% 4.695% 14 bps 2/1/ /1/27 11,035, % 5.080% % 5.144% 4.680% 40 bps 40 bps 46 bps 4.984% 4.795% 19 bps 2/1/ /1/27 11,630, % 5.110% % 5.165% 4.780% 33 bps 33 bps 38 bps 5.021% 4.883% 14 bps 2/1/ /1/27 12,255, % 5.140% % 5.185% 4.840% 30 bps 30 bps 34 bps 5.044% 4.931% 11 bps 2/1/ /1/27 40,885, % 5.397% % 5.397% 4.880% 52 bps 63 bps 52 bps 5.198% 4.951% 25 bps Issuance Par: 1 296,315, Average Life: years 1 1 Non-Interpolated MMD YTM Spread Option Value Analysis OAY Non-Call Scale OAY Spread PFM 92

93 Comparable Transaction Analysis MEAG Comparable Transaction Analysis Issuer: SEATTLE MUNI LIGHT & POWER BONNEVILLE, WA POWER HOUSTON, TEXAS UTILITY SYSTEM SOUTHERN CALIFORNIA PUBLIC PWR Series: A State: WA WA TX CA Sector: ELECTRIC & PUBLIC POWER ELECTRIC & PUBLIC POWER ELECTRIC & PUBLIC POWER ELECTRIC & PUBLIC POWER Pledge: REVENUE REVENUE REVENUE REVENUE Sale Date: 1/12/2017 3/10/2017 2/23/2017 1/20/2017 Par Amount: $296,315,000 $311,245,000 $273,275,000 $169,350,000 Underwriter: CITIGROUP GLOBAL MKTS INC CITIGROUP GLOBAL MKTS INC RICE FINANCIAL PROD GRP GOLDMAN SACHS & COMPANY Sale Type: COMPETITIVE NEGOTIATED NEGOTIATED NEGOTIATED Tax Status: TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT Underlying Ratings: Aa2/AA-/NR Aaa/AA/AA NR/AA/AA- NR/AA-/AA- Insured Ratings: Insurer: First Call Date: 2/1/2027 7/1/ /15/2027 NON-CALLABLE Maturity Year Coupon Interpolated Interpolated Interpolated Interpolated Coupon Coupon Coupon Spread Spread Spread Spread < bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps bps PFM 93

94 PFM s Quantitative Pricing Approach 1) Analyze the client s pricing history relative to market benchmarks 2) Analyze how comparable primary market deals are pricing relative to market benchmarks 3) Analyze how comparable secondary market trades are pricing relative to market benchmarks 4) Consider state-and sector-specific trading ranges 5) Adjust/interpolate credit spreads for the maturity date(s) of the current issuance 6) Create an initial target scale 7) Share target scale and pricing worksheet with client (and banking team) prior to pricing PFM 94

95 Secondary Trade Analysis Comparable Tax-Exempt Public Power Trades Last Traded Ratings (M/S) Trade Amount (000's) Weighted Avg. Yield Avg. Spread to MMD Year Maturity Coupon Issue State Insurance / MODESTO CALIF IRR DIST EL CA 5/29/2017 A2/A+ *** 4, bps 12/ MEMPHIS TENN ELEC SYS REV TN 5/26/2017 AA2/AA+ *** 2, bps SNOHOMISH CNTY WASH PUB U WA 5/22/2017 AA3/AA- *** 2, bps / CALIFORNIA ST DEPT WTR RE CA 5/27/2017 AA2/AA *** 2, bps 5/ LOWER COLO RIV AUTH TEX T TX 5/28/2017 A2/A *** 1, bps 5/29/2017 A2/A *** 1, bps 7/ ENERGY NORTHWEST WASH ELE WA 5/28/2017 AA1/AA- *** 6, bps 5.00 ENERGY NORTHWEST WASH ELE WA 5/26/2017 AA1/AA- *** 1, bps INTERMOUNTAIN PWR AGY UTA UT 5/26/2017 A1/A+ *** 4, bps WISCONSIN PUB PWR INC SYS WI 5/28/2017 A1/AA FSA 2, bps 10/ JEA FLA ST JOHNS RIV PWR FL 5/27/2017 AA2/AA- *** 1, bps 5/28/2017 AA2/AA- *** 1, bps 12/ SOUTH CAROLINA ST PUB SVC SC 5/27/2017 A1/AA- *** 2, bps / GEORGIA MUN ELEC AUTH PWR GA 5/27/2017 A1/AA SFSA 3, bps 2/ SEATTLE WASH MUN LT & PWR WA 5/29/2017 AA2/AA *** 1, bps 5/ CALIFORNIA ST DEPT WTR RE CA 5/22/2017 AA2/AA FSA 2, bps 5/26/2017 AA2/AA FSA 1, bps 7/ LOS ANGELES CALIF DEPT WT CA 5/26/2017 AA3/AA- *** 1, bps 10/ JEA FLA ELEC SYS REV SUBO FL 5/26/2017 AA3/A+ *** 1, bps / NEBRASKA PUB PWR DIST REV NE 5/22/2017 A1/A *** 3, bps 7/ ENERGY NORTHWEST WASH ELE WA 5/29/2017 AA1/AA- *** 2, bps / OMAHA PUB PWR DIST NEB SE NE 5/26/2017 A1/A *** 3, bps 5/ CALIFORNIA ST DEPT WTR RE CA 5/27/2017 AA2/AA *** 1, bps 5/29/2017 AA2/AA *** 8, bps 10/ JEA FLA ST JOHNS RIV PWR FL 5/28/2017 AA2/AA- *** 2, bps / MUNICIPAL ELEC AUTH GA SU GA 5/29/2017 A2/A *** 7, bps 2/ OMAHA PUB PWR DIST NEB SE NE 5/26/2017 A1/A *** 4, bps 5/28/2017 A1/A *** 3, bps / CALIFORNIA ST DEPT WTR RE CA 5/27/2017 AA2/AA *** 2, bps 7/ SOUTHERN CALIF PUB PWR AU CA 5/26/2017 NR/AA- *** 6, bps 5.00 ENERGY NORTHWEST WASH ELE WA 5/21/2017 AA1/AA- *** 2, bps / CALIFORNIA ST DEPT WTR RE CA 5/26/2017 AA2/AA *** 4, bps 5/28/2017 AA2/AA *** 12, bps 5/29/2017 AA2/AA *** 6, bps 6/ GRAND RIVER DAM AUTH OKLA OK 5/26/2017 AA1/AA+ BHAC 5, bps MISSOURI JT MUN ELEC UTIL MO 5/27/2017 A2/NR *** 6, bps 9/ KENTUCKY ST MUN PWR AGY P KY 5/27/2017 A3/AA- NATL 2, bps / ENERGY NORTHWEST WASH ELE WA 5/28/2017 AA1/AA- *** 1, bps 9/ DOUGLAS CNTY WASH PUB UTI WA 5/29/2017 AA3/AA *** 1, bps PFM 95

96 Secondary Trade Analysis All MEAG Trades Since 3/1/2017 Last Traded Ratings (M/S) Trade Amount (000's) Weighted Avg. Yield Avg. Spread to MMD Year Maturity Coupon Issue State Insurance / MUNICIPAL ELEC AUTH GA SU GA 4/7/2017 A2/A *** 1, bps 4/8/2017 A2/A *** 1, bps / MUNICIPAL ELEC AUTH GA GE GA 5/13/2017 A2/A *** 5, bps 5/19/2017 A2/A *** 5, bps 6.25 GEORGIA MUN ELEC AUTH PWR GA 5/27/2017 A1/AA SFSA 3, bps / MUNICIPAL ELEC AUTH GA GE GA 3/2/2017 A2/A *** 5, bps 3/3/2017 A2/A *** 7, bps 4/6/2017 A2/A *** 1, bps 4/9/2017 A2/A *** 2, bps 4/10/2017 A2/A *** 3, bps 11/ MUNICIPAL ELEC AUTH GA RE GA 4/30/2017 A1/A *** 2, bps / MUNICIPAL ELEC AUTH GA SU GA 5/8/2017 A2/A *** 1, bps 5/15/2017 A2/A *** 1, bps / MUNICIPAL ELEC AUTH GA SU GA 5/29/2017 A2/A *** 7, bps / MUNICIPAL ELEC AUTH GA SU GA 3/20/2017 A2/A *** 2, bps 5/1/2017 A2/A *** 2, bps 5/8/2017 A2/A *** 1, bps 5/14/2017 A2/A *** 1, bps / MUNICIPAL ELEC AUTH GA SU GA 5/5/2017 A2/A *** 1, bps / GEORGIA MUN ELEC AUTH PWR GA 3/2/2017 A1/A+ *** 4, bps PFM 96

97 PFM s Quantitative Pricing Approach 1) Analyze the client s pricing history relative to market benchmarks 2) Analyze how comparable primary market deals are pricing relative to market benchmarks 3) Analyze how comparable secondary market trades are pricing relative to market benchmarks 4) Consider state-and sector-specific trading ranges 5) Adjust/interpolate credit spreads for the maturity date(s) of the current issuance 6) Create an initial target scale 7) Share target scale and pricing worksheet with client (and banking team) prior to pricing PFM 97

98 Initial Target Scale MEAG (A2/A/A+) A Pricing Worksheet PFM 5% Coupon Scale Year Principal Coupon ROY YTC YTM Price Spread to 5/16/2017 5/16/2017 5/16/2017 Interpolated Interpolated MMD AAA MMD MMD G.O. Spread Differential 1/1/ $ 880, % 0.650% bps 0.55% 0.67% -12 bps 1/1/ $ 2,710, % 1.080% bps 0.88% 1.02% -14 bps 1/1/ $ 4,190, % 1.530% bps 1.23% 1.35% -12 bps 1/1/ $ 6,075, % 1.930% bps 1.53% 1.61% -8 bps 1/1/ $ 8,585, % 2.260% bps 1.86% 1.94% -8 bps 1/1/ $ 6,650, % 2.620% bps 2.22% 2.29% -7 bps 1/1/ $ 8,260, % 2.920% bps 2.52% 2.57% -5 bps 1/1/ $ 5,570, % 3.140% bps 2.74% 2.77% -3 bps 1/1/ $ 122,790, % 3.370% bps 2.92% 2.96% -4 bps Total Par $ 165,710,000 Avg Life 7.6 years Call Date: PV01 $ 126,738 Non-Callable PFM 98

99 PFM s Quantitative Pricing Approach 1) Analyze the client s pricing history relative to market benchmarks 2) Analyze how comparable primary market deals are pricing relative to market benchmarks 3) Analyze how comparable secondary market trades are pricing relative to market benchmarks 4) Consider state-and sector-specific trading ranges 5) Adjust/interpolate credit spreads for the maturity date(s) of the current issuance 6) Create an initial target scale 7) Share target scale and pricing worksheet with client (and banking team) prior to pricing PFM 99

100 Negotiated Sales NEGOTIATED SALE Hire underwriting syndicate Syndicate pre-markets BONDS PFM & Sr. underwriter negotiate pricing wire scale Pricing wire released & bonds offered directly to investors Underwriting syndicate takes orders Final price negotiated PFM 100

101 MEAG Power Case Study PFM 101

102 MEAG Power Case Study The table below compares PFM s price thoughts with the consensus scale PFM 102

103 MEAG Power Case Study Prior to releasing the pricing wire, PFM engaged the Underwriter to negotiate going out to the market with a lower spreads. The table below compares PFM s thoughts to what was released to the market. PFM 103

104 Negotiated Sales NEGOTIATED SALE Hire underwriting syndicate Syndicate pre-markets BONDS PFM & Sr. underwriter negotiate pricing wire scale Pricing wire released & bonds offered directly to investors Underwriting syndicate takes orders Final price negotiated PFM 104

105 Initial Pricing Wire PFM 105

106 Negotiated Sales NEGOTIATED SALE Hire underwriting syndicate Syndicate pre-markets BONDS PFM & Sr. underwriter negotiate pricing wire scale Pricing wire released & bonds offered directly to investors Underwriting syndicate takes orders Final price negotiated PFM 106

107 MEAG Electronic Order Entry (EOE) Book $245,750,000* MEAG (A2/A/A+) Series 2017A Maturity Coupon Yield Spread to Interpolated MMD Amount ($000's) Total Orders ($000's) Total Balance ($000's) Total Subscription 1/1/ ,045 3,570 (2,525) 342% 1/1/ ,200 5, % 1/1/ ,965 31,255 (27,290) 788% 1/1/ ,995 2, % 1/1/ ,805 36,815 (30,010) 541% 1/1/ ,880 23,375 (12,495) 215% 1/1/ ,470 19,470 (7,000) 156% 1/1/ ,815 30,490 (18,675) 258% 1/1/ ,595 3,820 (225) 106% 1/1/ ,710 36,860 (11,150) 143% 1/1/ , ,070 (639,800) 497% TOTAL: 245, , % PFM 107

108 MEAG EOE Maturity Detail PFM 108

109 MEAG EOE Maturity Detail PFM 109

110 MEAG Power Case Study Following very strong demand for the 10-year bonds, MEAG was not only able to reprice at lower yields, but they were also able to upsize the entire transaction by $200 million. PFM 110

111 Repricing Wire PFM 111

112 Verbal Award After finalizing the structure for the bonds and making any necessary adjustment to the yields after the order period, the underwriters will provide the final interest rate scale. Upon approval of the final scale, the underwriter will offer to buy the bonds, and ask for the verbal award. PFM 112

113 MEAG Power Case Study One of the most important aspects of what PFM does, is the negotiation prior to the release of the wire. If MEAG would have gone out with the consensus scale, they would not have achieved the difference shown below: Initial Target Spreads to MMD (bps) Final Spreads to MMD (bps) Maturity PFM Underwriter Difference PFM Final Difference Scale Improvement bps 31 bps 21 bps 10 bps 0 bps -10 bps 31 bps bps 38 bps 18 bps 20 bps 10 bps -10 bps 28 bps bps 47 bps 17 bps 30 bps 22 bps -8 bps 25 bps bps 55 bps 15 bps 40 bps 34 bps -6 bps 21 bps bps 59 bps 19 bps 40 bps 45 bps 5 bps 14 bps bps 63 bps 23 bps 40 bps 49 bps 9 bps 14 bps bps 65 bps 25 bps 40 bps 54 bps 14 bps 11 bps bps 66 bps 26 bps 40 bps 51 bps 11 bps 15 bps bps 67 bps 22 bps 45 bps 46 bps 1 bps 21 bps PFM 113

114 PFM s Post Pricing Analysis PFM 114

115 Trade Evaluator PFM 115

116 Trade Evaluator (Continued) PFM 116