Muni Bonds Best Prac9ces

Transcription

1 Muni Bonds Best Prac9ces Monday, June 1, :30 2: CPE Moderator: Rodney Miller, City of Hickory, NC Speakers: Pat McCoy Metropolitan Transporta9on Authority, NY Kenton Tsoodle City of Oklahoma City, OK

2 DEBT MANAGEMENT POLICY & SELECTING THE FINANCE TEAM S2 2

3 DEBT MANAGEMENT POLICY S3 3

4 Debt Issuance Integra9on with CIP o Debt Management Policy and CIP Use policy to establish parameters for issuing debt rela9ve to capital projects Par9cularly with respect to objec9ves to be achieved before and a>er issuance Also use for guidance with respect to debt affordability use debt policy as control points rela9ve to managing CIP 4

5 Debt Issuance Integra9on with CIP o Examples of Debt Policy Control Points from Various Debt Policies: The general City por9on of the CIP, including debt service, shall be funded at no more than $1 per $1,000 in property taxes per year. Projects cos9ng less than $1 million will not be funded with borrowings unless part of a larger group of related projects. Final maturity of the debt issued shall not be longer than the useful life of the capital asset acquired or constructed, and less than 20 years. 5

6 Debt Issuance Integra9on with CIP o Examples of Debt Policy Control Points From Various Debt Policies (con9nued): The City will establish a targeted level of change in the property tax levy necessary for debt service to develop guidelines for the level of borrowing to be used to support the annual capital budget. New revenue sources should not be pledged toward a bond issue un9l there is an historical trend that establishes the credit- worthiness of the revenue stream. 6

7 SELECTING AND MANAGING THE ENGAGEMENT OF MUNICIPAL ADVISORS S7 7

8 Importance of Selec9on/Hiring Order o GFOA Best Prac9ce Unless the issuer has sufficient in- house exper9se and access to market informa9on, it should hire a municipal advisor prior to undertaking a debt financing. o Issuers should hire a MA and bond counsel before hiring other outside professionals, including UW o Municipal advisor should assist with: Assessing the objec9ves of the financing Iden9fying strategies and priori9es Selec9ng the method of sale that best fits the financing Evalua9ng other members of the external financing team Providing expert advice regarding the bond sale 8

9 Role of the Municipal Advisor o Role May Vary According To: The exper9se of issuer staff Type of bonds Method of sale Scope of services o Rela9onship May Be Transac9onal or on a Retainer Basis o MA has a Fiduciary Responsibility to Represent the Issuer, and Only the Issuer, in Debt Financings. o Assists in a Broad Array of Capital Planning and Debt Issuance Tasks o O`en Acts as Extension of Staff 9

10 Municipal Advisor: Compe99ve Sale o Helps Determine Timing of Offering o Assists in Structuring the Bond Issue o Assists in Preparing the Preliminary Official Statement (POS), May Prepare POS, which is the disclosure document delivered to the investors who purchase the bonds o Adver9ses Upcoming Bond Sale to Investor Community o Verifies Accuracy of all Bids Received o Makes a Recommenda9on to Issuer to Accept or Reject the Bid or Offer 10

11 Municipal Advisor: Nego9ated Sale o Assists with Underwriter RFP and selec9on process o Assists in Structuring the Bond Issue o Assists in preparing the Preliminary Official Statement (POS), may prepare POS, which is the disclosure document delivered to the investors who purchase the bonds o Adver9ses Upcoming Bond Sale to Investor Community o Advises Issuer with Respect to Pricing Scale o Advises Issuer on Day of Pricing with Respect to Any Proposed Changes in Response to Market Condi9ons (pricing changes, call features, discounts, premiums, etc.) o Assists Issuer with Nego9a9on of Terms with UW 11

12 BP: Selec9ng Municipal Advisors o Unless the issuer has sufficient staff exper9se and access to market informa9on, GFOA recommends that issuers hire a municipal advisor prior to undertaking a debt financing. o Selec9on of municipal advisor should be based on merit and generally done through a Request for Proposals (RFP) process. Experience with similar financings: type, size, structure, state Access to 9mely market informa9on o Independent vs. Underwriter- based Advisors o Pricing advisor vs. Municipal Advisor o Municipal advisor will work with issuer to determine appropriate method of sale (compe99ve or nego9ated) and therefore should be hired before considera9on of underwriters. Implied Best Prac9ce = municipal advisor should be selected prior to selec9ng method of sale. 12

13 Managing Your MA Rela9onship o Ongoing Communica9on of Priori9es, Objec9ves and Expecta9ons Match to specific issuer project/financing needs Ac9ve vs. passive Con9nuity of MA staff Con9nued educa9on o Use of Mul9ple MAs Project- or task- specific Pricing and/or post- pricing specialists 13

14 SNAPSHOT: MA RULE o Regula9ng Municipal Advisors July 1 MA Has an Explicit Federal Fiduciary Duty to Issuer Only MA May Provide Advice to Issuers Unless Exemp9on is Met DIFFERENT PRACTICE THAN HAS PREVIOUSLY TAKEN PLACE Exemp9ons: Have an MA meaningfully engaged RFP responses Underwriter has been hired o GFOA Alert - hgp://gfoa.org/gfoa- alert- ma- rule- and- issuers 14

15 SELECTING BOND COUNSEL S15 15

16 BP: Selec9ng Bond Counsel o Selec9on of bond counsel should be based on merit and generally done through a Request for Proposals (RFP) process. RFP should address scope of services, term of contract, evalua9on criteria and the selec9on process. o Key Qualifica9ons of Bond Counsel Include: Experience with similar financings: type, size, structure, state Specialized tax advice beyond normal bond counsel services Exper9se in federal securi9es laws and regula9ons Be aware of rela9onships that might pose conflict of interest o Determine if other specialty counsel is needed Disclosure Counsel Special Tax Counsel 16

17 SELECTING AND MANAGING THE METHOD OF SALE OF BONDS S17 17

18 BP: Selec9ng & Managing the Method of Sale o State and local governments should sell their debt using the method of sale that is most likely to achieve the lowest cost of borrowing. o Method of sale decision should be made based on a thorough analysis of the relevant ra9ng, security, structure and other factors pertaining to the proposed bond sale. o Unless the issuer has sufficient staff exper9se and access to market informa9on, GFOA recommends that issuers hire a municipal advisor prior to undertaking a debt financing. 18

19 The Method of Sale Decision Environment o Issuers should not use a poten9al underwriter to assist in the method of sale decision unless that firm has agreed not to underwrite the bonds. o Under MSRB Rule G- 23, a firm ac9ng as an issuer s municipal advisor is not allowed to resign in order to serve as underwriter for the proposed bonds. o Issuers should be aware of the key fiduciary rela9onships that do and do not exist between the municipal advisor, bond counsel, underwriter and the issuer. 19

20 The Method of Sale Decision Environment o Rela9onship between issuer and underwriter is one of common purpose but also compe9ng objec9ves, especially at 9me of bond pricing. The underwriter is not the issuer s municipal advisor and has no legal fiduciary duty to the issuer. o MSRB Rule G- 17 requires underwriter to iden9fy responsibility to deal fairly at all 9mes with both issuers and investors, and disclose poten9al conflicts. 20

21 Compe99ve vs. Nego9ated Sales: The Decision o The finance officer s decision or recommenda9on regarding the method in which bonds will be sold will be a leading factor in determining the financing cost of the bonds. o Method of Sale decision should be addressed in the issuer s debt or financial policies. 21

22 Determining Method of Sale Factors Favoring Competitive Sale: o Rating of the proposed is expected to be in the A or better category. o The bonds are general obligations, full faith and credit obligations or are revenue bonds secured by a strong, known and long-standing revenue stream (e.g. water, sewer, electric). o The bond structure is not expected to include exotic products that require extensive explanation to the market. The majority of local government bond issues should align within these categories Factors Favoring Negotiated Sale: o Rating of the proposed bonds is expected to be in the BBB or lower category. o Bond insurance or other credit enhancement is not available or not cost-effective. o The bond structure has features such as pooled borrowers, variable rate debt, deferred interest bonds or other bonds expected to require extensive communication with the market. o The issuer desires to target specific participants such as disadvantaged business enterprises (DBEs), retail investors or local firms. o Other factors that the issuer, in consultation with the municipal advisor, believes favor the use of a negotiated sale. 22

23 Compe99ve vs. Nego9ated Sales: Defini9ons o Compe99ve Sale: Bond issue is prepared by the issuer and municipal advisor and then offered for sale to underwriters at specified date and 9me. Bonds are awarded to the firm that offers the lowest True Interest Cost (TIC). Bids usually submiged electronically. o Nego9ated Sale: The underwriter of the bonds is selected in advance of the sale and the pricing of the bonds (coupons, yields, spread) is nego9ated by the underwriter and the issuer (with their municipal advisor). 23

24 Dollar Amount of Long-Term Bonds Issued: Competitive vs. Negotiated $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $ Billions Competitive Negotiated

25 WHEN TO USE COMPETITIVE METHOD OF BOND SALES 25

26 Compe99ve Sale o Issuer Sells Bonds Which Are Awarded to the Underwriter That Bids with the Lowest Interest Cost o On Day of Sale, Bids are Received, Usually Electronically, and Lowest TIC Bidder Receives Award o Most Key Provisions of Bonds Cannot be Revised A`er Bid is Awarded. Restructuring of Maturity Amounts is Usually Allowed. 26

27 o Advantages Compe99ve Sale Lowest interest cost and underwriter discount on the bonds offered on that day in the market Appearance of an open and fair process o Disadvantages Less flexibility in structuring and 9ming Possible risk premium & increased financing cost in unstable markets Less control over demand & interest rates No control over the distribu9on of bonds 27

28 Marke9ng Bonds o Compe99ve Sale brokers conduct limited pre- marke9ng efforts, but cannot sell the bonds un9l they own them. As a result, underwriters must bid based on their es9mate of investor demand. o The underwriter takes the risk that investor demand will be weaker than an9cipated (they can t sell the bonds at the price they paid), as well as market risk, the risk that market interest rates increase (and market value decreases) before they sell all of the bonds. 28

29 Mechanics of Compe99ve Sale o Obtaining Ra9ngs and If Desired, Insurance Provide informa9on to ra9ng agencies and insurers at least two weeks in advance Decision on whether to let bidders choose insurers at 9me of sale o Determining When To Sell Evalua9ng Market Condi9ons Calendar of other transac9ons in market Economic releases Communicate with prospec9ve bidders Can sell on 24- hour no9ce or with pre- determined date 29

30 Mechanics of Compe99ve Sale o Prepare no9ce of sale (NOS) bid parameters are important Govern pricing flexibility for bidders Call provisions Allowable discount Minimum/maximum coupons Maximum price- per- maturity Basis of award (TIC) o Distribute POS and NOS at least 3 5 days in advance of sale, depending upon credit and market factors 30

31 Mechanics of Compe99ve Sale o Receive and Verify Bids Technology allows for a much more efficient bid process Determine bidding planorm: electronic, fax, hand- delivery Common prac9ce to receive bids over the internet (Parity and MuniAuc9on) Provide instruc9ons for good- faith deposit Common prac9ce for bidders to use surety bond to sa9sfy good- faith deposit Verify bids and no9fy winning bidder 31

32 Why Select Compe99ve Sale? o Compe99on can Produce Lower Borrowing Costs Compe99ve market establishes interest rates rather than nego9a9ng interest rates with one firm Issuer assured that it receives the best price (lowest yield) available in market on the day of sale Underwriters provide aggressive bids to buy bonds and must compete against all other firms 32

33 Why Select Compe99ve Sale? o Eliminates Need for RFP Process for Selec9ng Underwriters Eliminates poli9cal pressure to engage preferred firms or provide favorable terms Eliminates any cri9cism for favori9sm in selec9on process from firms not selected Frees staff 9me to not have to create and issue RFP 33

34 WHEN TO USE NEGOTIATED METHOD OF BOND SALE 34

35 When to Use Nego9ated Offering o o Issuer (in consulta9on with their municipal advisor) determines that it is in the issuer s best interest to select a firm to underwrite the bonds in advance of the sale Some Bonds could be unique in nature: Start- up revenue producing enterprise Major expansion of revenue- producing facility Non- rated issuer or series of bonds Infrequent (very) issuer with unique characteris9cs or revenue stream(s) Issue size (par amount) may make it difficult to bring to market under compe99ve offering Complicated structure Story Bond Refundings 35

36 Examples of Nego9ated Offerings o Interim financing for u9lity or other revenue- supported projects Construc9on financing un9l project is complete and revenues generated o o o o Unique forms of Revenue Bonds that are non rated Appropria9on- backed financings, rated or otherwise Housing/Health care/conduit financing Advance refunding 36

37 When to Use Nego9ated Offering o Issuer Should Take the Following Steps: Select Underwriter through formal RFP process Promotes fairness Objec9vity Transparency Ask MA to dra> RFP for your review Consider Firm creden9als Experience with similar debt Underwri9ng approach for your issue Underwri9ng Spread/Discount Pricing benchmark Compe99ve bids Once received, MA should summarize responses 37

38 DESCRIPTION OF NEGOTIATED BOND SALES 38

39 What Is Being Nego9ated? o Membership of the Team and Roles o Liability Among Managers o Underwriter s Compensa9on o Interest Rate and the Price That Bonds are Sold to Final Investors o Sales Credit Among Team (large orders) o Risk Taken by Underwri9ng Team 39

40 The Benefits of Using an MA in a Nego9ated Sale o GFOA recommends the use of a Municipal Advisor on nego9ated issues unless the Issuer has considerable experience and access to market informa9on independent from Underwriters o Municipal Advisors can work with the Issuer to determine a compe99ve process to select a nego9ated underwriter. Issuers have the benefit of a nego9ated sale and the benefits of a compe99ve selec9on process. Municipal Advisors can also review in- depth market informa9on including primary and secondary market trades to advise the Issuer regarding suitable firms with appropriate distribu9on capabili9es. Before, during and a>er, the Municipal Advisor can also provide constant real- 9me market informa9on to verify the pricing yields and couponing structures being suggested by the underwriter(s). 40

41 The Benefits of Using an MA in a Nego9ated Sale l For example, if the Municipal Advisor is able to nego9ate a 5 basis point improvement in the yields with the Underwriter on a $10 million, 20 year level debt service financing, the savings translates to approximately $38,

42 SELECTING AND MANAGING UNDERWRITERS FOR NEGOTIATED BOND SALES 42

43 BP: Selec9ng Underwriters o If a Nego9ated Sale is Deemed Appropriate: Unless the issuer has extensive in- house bond pricing experience and access to current bond market data, issuers should engage the services of a municipal advisor to assist in the nego9ated sale process (if not already done). Recognize that the role of the underwriter and the municipal advisor are separate roles and cannot be provided by same party. Select underwriters through a Request for Proposals (RFP) that rewards firms with demonstrated experience underwri9ng the types of bonds the issuer proposes to sell. RFP promotes fairness, objec9vity and transparency 43

44 BP: Selec9ng Underwriters o Key underwriter selec9on criteria may include: Relevant experience with type of bonds being proposed. Experience should include both the firm s investment bankers and underwriters ( the desk. ) The firm s distribu9on capabili9es. Can the underwriter access ins9tu9onal and retail buyers? Understanding of the issuer s financial situa9on and how to approach financing issues such as bond structure, ra9ng strategies and investor marke9ng. Documenta9on of the underwriter s par9cipa9on in the issuer s recent compe99ve sales or the compe99ve sales of other issuers in the same state. The proposed spread, or underwriter s discount, should be requested in the RFP, but should rarely be the primary decision criterion. Proposed spread is most useful in pricing nego9a9ons, but not as a basis for selec9ng the underwriter. 44

45 MANAGING THE BOND SALE 45

46 Sales and Marke9ng: Key Ac9vi9es o Market bond deal- - organize roadshow of mee9ngs & investor calls to describe transac9on Investor call: Underwriter schedules na9onal conference call with a targeted investor group Internet conference: Similar to the investor conference call; method of reaching a large pool of poten9al investors o Determine sale date based on market condi9ons & issuer needs o Send marke9ng materials (i.e. the preliminary official statement, ra9ng legers) to investors o Send an internal Sales Point Memo to the underwri9ng desk 46

47 Underwri9ng Syndicate Underwriting Team Senior Manager Interfaces with the issuer and financial advisor Generally solicits for and accepts priority orders from investors Coordinates with the other managers; accepting orders Allocates bonds to underwriting team to fulfill orders Co-Managers Place orders/support the underwriting; generally through retail and member orders Share underwriting risk Provide additional market information Selling Group Underwriting firms that are invited to submit orders, but generally have no liability Generally used occasionally on large transactions to increase retail sale outreach Key Factors: Size of the bond issue Structure (e.g., retail maturi9es and ins9tu9onal maturi9es) Bond distribu9on goals (e.g., gerng bonds to local investors) Asen9on from investment bankers and the ongoing development of financing ideas 47

48 Summary o Remember fundamental rela9onship between buyer (underwriter) and seller (issuer) is one of compe9ng objec9ves o Finance officer s responsibility is to taxpayer and ratepayers to ensure costs of debt repayment are most favorable in short and long- term 48

49 COST OF ISSUANCE INCURRED IN DEBT TRANSACTIONS 49

50 Fees Charged in a Bond Issuance o Direct Costs of Issuance Costs of Issuance in a Publically Offered Debt Transac8on o Underwriter s Discount Expenses Charged by Underwriters in Nego8ated Sales 50

51 Expenses Charged by the Underwriter o Components of the Spread Takedown (largest component) Management Fee Expenses Risk o Commonly accepted underwriter s expenses, include: Underwriter s counsel; Reasonable travel costs incurred as part of the transac9on; External data service fees; Charges for communica9on, including the ra9ng agency presenta9on, mailing, prin9ng, and telephone expenses; and, CUSIP fees. 51

52 Direct Costs Paid by Issuer o Municipal Advisor o Legal Counsel (including Bond Counsel, Issuer Counsel, Disclosure Counsel) o Bond Trustee o Escrow Verifica9on Agent o Auditor o Ra9ng Agencies o Prin9ng/Distribu9on Costs o Pricing Verifica9on Agent 52

53 BP Debt Issuance Transac9on Costs o Understand Difference In Explicit UW Costs Shown in Nego9ated vs. Compe99ve Sales Where They Are Embedded in Bid o Municipal Advisor Use RFP Process and Define Scope of Services Recommended Fees Paid on Hourly/Fixed Fee Basis, Not Con9ngent on Bond Sale or Out of Bond Proceeds However, GFOA acknowledges the prac9ce of paying out of proceeds 53

54 BP Debt Issuance Transac9on Costs o Legal Counsel Use RFP Process and Define Scope of Services Paid Hourly or Flat Fee o Bond Trustee (Paying agent, Escrow agent, Dissemina9on agent) Select Through RFP Process One 9me upfront fee + annual fee + transac9on fee o Escrow Verifica9on Agent (refundings) Select Through RFP Process 54

55 BP Debt Issuance Transac9on Costs o Ra9ngs Agencies Have policy to determine how many ra9ngs to secure RATINGS FEES ARE NEGOTIABLE!! o Pricing Verifica9on Agent If separate service from MA, pay flat fee 55

56 PRICING BONDS IN A NEGOTIATED SALE 56

57 Effec9ve Pre- Pricing Process is Cri9cal to Achieving the Lowest Interest Cost o Pre- Pricing Call (1 day before pricing) with Issuer, Underwriter(s) and MA: Market condi9ons, compe9ng transac9ons, supply, etc. Recommended bond structure and the pricing to go out with a scale the next day Coupons/Yields Call Features Plans for release of the wire, 9ming of the order period, etc. for the next day 57

58 Pricing Comp Sheet Ins. Rating Insurer Calls Underwriter Underlying Coupon Aaa/AAA/AAA AAA/AAA NR/AAA AAA/AAA Aaa/AAA/AAA AMBAC FSA AMBAC MBIA MBIA Par Par Par Par Par Bear Stearns & Co., Inc. Merrill Lynch & Co. George K. Baum & Co. Stifel, Nicolaus & Co., Inc. Stifel, Nicolaus & Co., Inc. Aa3/AA+/AA- Aa2/AA/AA+ AA- MMD MMD Yield AAA Spread Coupon Yield AAA Spread Coupon Yield MMD AAA Spread Coupon Yield MMD AAA Spread Coupon Yield % 3.32% 3.21% 11 bps % 3.60% 3.56% 4 bps 4.00% 3.34% 3.22% 12 bps % 3.39% 3.26% 13 bps % 3.60% 3.53% 7 bps 4.00% 3.49% 3.33% 16 bps % 3.72% 3.60% 12 bps 4.00% 3.68% 3.54% 14 bps 4.00% 3.61% 3.52% 9 bps 3.75% 3.59% 3.42% 17 bps % 3.74% 3.60% 14 bps 4.00% 3.69% 3.54% 15 bps 4.00% 3.64% 3.52% 12 bps 5.00% 3.72% 3.51% 21 bps % 3.78% 3.62% 16 bps 5.00% 3.61% 3.51% 10 bps 4.00% 3.71% 3.55% 16 bps 4.00% 3.66% 3.54% 12 bps 5.00% 3.82% 3.60% 22 bps % 3.84% 3.66% 18 bps 5.00% 3.65% 3.53% 12 bps 4.00% 3.74% 3.56% 18 bps 4.00% 3.70% 3.57% 13 bps 5.00% 3.91% 3.68% 23 bps % 3.89% 3.70% 19 bps 5.00% 3.69% 3.55% 14 bps 4.00% 3.78% 3.58% 20 bps 4.00% 3.75% 3.60% 15 bps 5.00% 3.98% 3.76% 22 bps % 3.95% 3.75% 20 bps 5.00% SNA 3.58% N/A 5.00% 3.82% 3.61% 21 bps 4.00% 3.79% 3.64% 15 bps 5.00% 4.06% C 3.82% 24 bps % 4.01% 3.80% 21 bps 5.00% SNA 3.61% N/A 5.00% 3.85% C 3.64% 21 bps 4.00% 3.83% C 3.68% 15 bps 5.00% 4.17% C 3.88% 29 bps % 4.06% C 3.85% 21 bps 5.00% SNA C 3.65% N/A 5.00% 3.89% C 3.67% 22 bps 4.25% 3.91% C 3.72% 19 bps 5.00% 4.21% C 3.93% 28 bps % 4.11% C 3.89% 22 bps 5.00% 3.84% C 3.70% 14 bps 4.25% 4.00% C 3.70% 30 bps 5.00% 3.96% C 3.77% 19 bps 5.00% 4.24% C 3.97% 27 bps % 4.13% C 3.93% 20 bps 5.00% 3.89% C 3.75% 14 bps 4.00% 4.10% C 3.72% 38 bps 5.00% 3.97% C 3.82% 15 bps 5.00% 4.30% C 4.01% 29 bps % 4.20% C 3.96% 24 bps 4.25% 4.00% C 3.78% 22 bps 4.00% 4.16% C 3.74% 42 bps 4.00% 4.20% C 3.85% 35 bps 5.00% 4.32% C 4.05% 27 bps % 4.23% C 3.99% 24 bps 4.50% 4.21% C 3.76% 45 bps 4.00% 4.23% C 3.88% 35 bps 5.00% 4.36% C 4.09% 27 bps % 4.26% C 4.02% 24 bps 5.00% 3.97% C 3.83% 14 bps 4.50% 4.27% C 3.78% 49 bps 4.25% 4.25% C 3.91% 34 bps 5.00% 4.40% C 4.13% 27 bps MMD AAA Spread 58

59 EXPENSES CHARGED BY UNDERWRITERS IN NEGOTIATED SALES 59

60 Elements of UW Compensa9on (Spread or Discount) $100,000,000 Issuer Series 2007 Per Bond Total Total Underwriter's Discount $ 7.53 $ 753, Components of Underwriter's Discount Average Takedown $ 5.00 $ 500, Management Fee , Structuring Fee , Combined Expenses , Total $ 7.53 $ 753, Estimated Breakdown of Expenses Underwriter's Counsel $ 0.50 $ 50, TBMA , CUSIP DTC Day Loan , Bond Desk Syndicate , Overhead , Travel and Out-of-Pocket , Total $ 0.78 $ 78, o Takedown Commission paid per bond e.g., $5.00 per $1,000 bond o Management Fee compensates the investment banker for structuring the bond issue o Underwriter Expense required fees paid by underwriter, also includes underwriter s counsel, travel, and misc. expenses o Risk??? 60

61 INVESTMENT OF BOND PROCESS 61

62 Investment of Bond Proceeds o Principals of good investment management and understanding of inherent risks in inves9ng bond proceeds cri9cal Establish good guidelines for permised investments to reduce credit risk SAFETY Good cash flow es9mates mi9gate market risk LIQUIDITY Integra9on of knowledge of expected and future market condi9ons with other cash flows to reduce opportunity risk YIELD 62

63 BP - Investment of Bond Proceeds o Obtain Projected Cash Flow Schedules From Project Managers o Inform Internal Investment Officer of Incoming Funds o Bid Investment Agreements as Needed o Develop Process for Monitoring Balances in Trustee Held Accounts o Ac9vely Monitor Construc9on Ac9vi9es o Develop Procedures for Reinvestment of Bond Proceeds o Know Who Can Work With You on the Investment of Bond Proceeds (e.g., Investment Advisor vs Broker/Dealer) 63

64 Investment of Bond Proceeds o Ini9al Investment Generally the Easier Part Project cash flows Capitalized Interest Debt Service Reserve Fund Cost of Issuance o Reinvestment Generally the Really Hard Part Develop process to monitor and make reinvestment decisions Use of cash flow expecta9ons v. reality 64

65 ANALYZING AND ISSUING REFUNDING BONDS 65

66 Op9onal Redemp9on o Most tax- exempt municipal bonds have an op:onal call feature which allows issuers to repurchase bonds at a specified price on certain dates in the future Call date usually 8-10 years No9fica9on: typically 30 to 60 days prior to call December 1, 2022 to November 30, December 1, 2023 to November 30, December 1, 2024 and therea>er

67 Rolling Down the Yield Curve 6.00% "Rolling Down the Yield Curve" 5.00% 4.00% 3.00% 2.00% 1.00% Original Coupon Refunding Coupon 0.00%

68 Types of Refundings Current: Refunding bonds sold within 90 days of Call Date of refunded bonds Escrow Yield unrestricted No limit to number of current refundings Refunding Bonds Bond proceeds used to fund Defeasance Escrow Defeasance Escrow Refunding Bonds June 1, 2009 Less than 90 days Call Outstanding Bonds Call 1999A Bonds September 1,

69 Types of Refundings Advance: Refunding bonds sold more than 90 days to the 1st Op9onal Call Date of refunded bonds Escrow yield restricted to arbitrage yield of refunding bonds 1 Advance Refunding allowed per IRS Regula9ons Refunding Bonds Bond proceeds used to fund Defeasance Escrow Defeasance Escrow Refunding Bonds June 1, 2009 More than 90 days Pay Principal & Interest due on Refunded Bonds until the Call Date Call Outstanding Bonds Call 2001A Bonds August 1,

70 Economics of Refunding Bonds o Absolute difference in interest rates on old refunded bonds vs. new refunding bonds o Remaining term and amount of refunded bonds o Length of the escrow period o Efficiency of the escrow Ability to earn the escrow yield limit Investment dates vs. refunded bond payment dates o Cau9ons: Nega9ve arbitrage (earnings) in escrow Extension of call date 70

71 HOW TO EVALUATE A REFUNDING 71

72 Issuer Objec9ves 1. Meet Savings Threshold GFOA recommends 3-5% NPV as star9ng point Debt Policy should discuss Threshold Savings 2. Cash Flow Structuring 3. Consolida9on of Debt 4. Remove Restric9ve Covenants Or Combina:on of Above Objec:ves 72

73 Measuring Savings Year Original Bonds Refunding Bonds Cash Flow Savings , ,203 35, , ,203 34, , ,848 27, , ,018 31, , ,808 29, , ,208 31, , ,208 28, , ,668 35, , ,703 31, , ,163 32, , ,173 32, , ,573 32, , ,178 32, , ,958 27, , ,533 23, , ,470 28, , ,270 29, , ,680 30, , ,050 31, , ,700 28,050 $ 9,996,900 $ 9,381,608 $ 615,293 NPV Savings $ 440,023 Savings as % Refunded Bonds 7.15% Savings as % Refunding Bonds 6.69% $510,000 $500,000 $490,000 Saving $480,000 $470,000 $460,000 $450,000 $440, n n n Refunding Bonds ~$30,000 Annual Cash Flow Savings $440,293 NPV Savings 7.1% of Refunded Bonds Original Bonds n 6.7% of Refunding Bonds 73

74 Savings Targets o Establish guidelines in debt policy o Opportunity cost analysis o Different perspec9ve for current and advance refunding o Net present value as % of par value (refunding or refunded par) o Absolute savings o Savings in excess of COI 74

75 How to Evaluate a Refunding o Current vs. Historical Interest Rate Levels o Shape of yield curve o Term to maturity (years remaining) o Absolute level of savings: minimum $ threshold (e.g. $1 million) o NPV Savings as % of par o Consider future opportuni9es lost 75

76 Historical & Current Interest Rates are Useful for Understanding Market Trends o Historical interest rates provide context to current rates and insight into how rates change Compare current rates to historical ranges Iden9fy current trends Establish how rapidly rates have moved up or down 76

77 Monitor Refunding Opportuni9es o Part of overall good debt management o Review in context of mul9ple factors: New money needs Consolida9on of refunding candidates to increase savings, minimize workload Saving thresholds Preserva9on of one- 9me advance refunding opportunity Generally minimum 3% NPV for advance refundings Debt restructuring opportuni9es 77

78 BP Analyzing and Issuing Refunding Bonds o Evalua9ng Criteria for Refundings Financial and Policy Objec9ves Financial Savings/Results Bond Structure and Escrow Efficiency o Have Policy in Place Regarding Framework for Refundings When/How to Determine if Refunding Should be Considered Be Consistent with Other Policies Set a Minimal Cost Savings Target 78

79 SEC Rules o Securi9es Act of 1933 Registra9on Exemp9on for Municipal Securi9es An9fraud Provisions Applied to Munis o Securi9es Exchange Act of 1934 Repor9ng Exemp9on for Municipal Securi9es An9fraud Provisions Applied to Munis (especially Rule 10b- 5) Disclosure statements must be accurate and not suffer from any material omission o Tower Amendment 1975 Neither the SEC nor the MSRB may require issuers, directly or indirectly, to make a filing to either body prior to the sale of securi9es Indirect applica9on through underwriters of rules that, in effect, place ongoing informa9on requirements on issuers 79

80 DISCLOSURE AND POST ISSUANCE COMPLIANCE 80

81 SEC Rules o SEC Rule 15c2-12 Amendments Made in 1994 Sea change to Muni Disclosure Underwriters may not purchase bonds unless issuer has contractually promised to provided specific con9nuing disclosure for the life9me of the bonds. Ongoing financial informa9on Filing no9ce of specified material events Timing for Making Filings Annual Financial Informa9on no set SEC standards, GFOA recommends no later than 6 months following end of FY Material Events Bonds Issued < 12/2011 in a 9mely manner Bonds Issued > 12/ days from the date of the event 81

82 Primary Market Disclosure o The Official Statement (and Preliminary OS) Purpose Help Sell Bonds Protec9ons to issuers and Underwriter under Federal Securi9es Laws Role of Professionals Credit Ra9ngs Credit Enhancements Financial Informa9on o Private Placements Bank Loans and Other o Conduit Borrowers o Refundings 82

83 Preparing the Preliminary Statement o Disclosure is the Responsibility of the Issuer o Within the Government, Engage the Appropriate Departments, Agencies to Iden9fy, Describe and Confirm Material Informa9on State: economist, OFM, actuary, DOT City: Budget director, other senior directors o Determine the Role of Outside Professionals Determine the Content and Organiza9on of Material for the POS and OS and the Frequency of Updates 83

84 From POS to OS o Make POS Available to Prospec9ve Investors Electronically On the Issuer s website Through a printer distribu9on system Through the underwriter ( if nego9ated transac9on) o Underwriters are not Permiged to Purchase the Bonds Un9l the POS has Been Distributed 84

85 From POS to OS o Once the Bonds Have Been Sold, Update the POS and Complete the Final Sizing and Pricing Informa9on in a Final Official Statement o Post the OS on EMMA o Issuers Must Inform Underwriters of Material Changes for 25 Days A`er the Closing 85

86 Con9nuing Disclosure Agreement o The Con9nuing Disclosure Agreement Developing the CDA Understanding the Requirements Set Within Document for Ongoing Disclosure Filings Annual Financial Informa9on filed by a certain date Material Event No9ce Filings No9ce of Failure to Provide Required Disclosures Who Makes Filing Issuer Required to File at EMMA and State Informa9on Depositories (MI, OH, TX) 86

87 UNDERSTANDING YOUR CONTINUING DISCLOSURE RESPONSIBILITIES 87

88 Disclosure Policies and Procedures o Prepare wrigen documenta9on to Iden9fy key players (by 9tle and name) Responsibili9es of key players Iden9fy key documents/reports Set up reminder system of when documents are due Memorialize the annual repor9ng requirements per the CDA o Create centralized contact informa9on Central phone number with voice mail address debtmanagement@mygovernment.gov Ensure mul9ple employees with ability to access and respond to /voice mail inquiries check daily o Develop process for speaking to en9re market Encourage use of general for investors to communicate EMMA pos9ngs to speak to the market Iden9fy one individual responsible for speaking on behalf of government regarding bonds 88

89 Understanding Your Con9nuing Disclosure Responsibili9es o Con9nuing Disclosure Agreement (SEC Rule 15c2-12) Timeframe Type of informa9on to be provided Material Events o For many governments, a Comprehensive Annual Financial Report (CAFR) may fulfill annual financial disclosure requirements o If a government s CDA states that informa9on will be provided that is outside the scope of the CAFR, that informa9on may be included as a supplement to the CAFR when filing with EMMA 89

90 Understanding Your Con9nuing Disclosure Responsibili9es o Governments should make annual filings as soon as annual audited financial informa9on is complete GFOA recommends within 180 days a>er end of FY (180 Days does not equal 6 months!) Prompt filing reduces risk that informa9on may be found inadequate or misleading because of subsequent events o GFOA recommends that governments do NOT indicate on EMMA that they will provide informa9on 120 or 150 days following the fiscal year 90

91 Understanding Your Con9nuing Disclosure Responsibili9es o Voluntary Disclosures A>er consul9ng with internal and external legal counsel: A government may wish to provide other financial informa9on to investors (via web site and link in EMMA) that goes beyond what is specified in the CDA Examples of addi9onal informa9on that could be disclosed: Annual budgets, Financial plans, Revenue forecasts, Investment informa8on, Monthly financial reports 91

92 Understanding Your Con9nuing Disclosure Responsibili9es o Voluntary Disclosures If an en9ty chooses to post unaudited interim financial informa9on as part of its voluntary disclosures: It must be clearly described as such on the document A government may wish to include addi9onal disclaimer language regarding unaudited informa9on Issuer s should design a system of internal controls to ensure the accuracy, completeness, consistency, and freshness of informa9on posted 92

93 Muni Bonds Best Prac9ces

94 Please provide feedback on the session o Quick Text Feedback 1. Step 1 - Text GFOA to Step 2 - Did the session meet your expecta9ons for being high quality and relevant to your job? Exceeded Expecta9ons Text M9EXC Met Expecta9ons Text M9MET Did Not Meet M9NOT o To provide more detailed evalua9on on the session or full conference go to

95 APPENDIX

96 MAINTAINING AN INVESTOR RELATIONS PROGRAM 96

97 Maintaining an Investor Rela9ons Program o GFOA recommends that governmental bond issuers consider developing an investor rela9ons program. o Benefits of developing a program: Beser investor awareness of the credit Possible beser pricing Assists with public s awareness 97

98 Maintaining an Investor Rela9ons Program o Assists with providing full and comprehensive disclosure of annual financial, opera9ng, and other significant informa9on in a 9mely manner consistent with federal, state and local laws o How to establish an investor rela9ons program: Determine who should be responsible for external communica9ons about the en9ty s debt issues Develop a Disclosure Board that will help determine what kind of informa9on should be disclosed and provided to issuers Implement a process for handling investor calls 98

99 Maintaining an Investor Rela9ons Program o Determine what informa9on to post on web site o Understand the appropriate concerns/requests of investors o Iden9ty issuances with the use of CUSIP numbers o Use your web site and post a link to your financial info on EMMA o Create documents in searchable PDF format o Determine 9ming of the release of informa9on related to any debt sales o When a single investor poses a ques9on, it should be answered in a manner so that all investors can know the informa9on o Keep a database of investors/interested par9es o Alert database members of upcoming bond sales, new informa9on, etc. 99

100 USING A WEB SITE FOR DISCLOSURE 100

101 Using a Web Site for Disclosure o When using web sites to disseminate informa9on electronically: Keep it simple Ensure proper security of web site Use proper disclaimers about the informa9on being presented Unaudited informa9on Stale informa9on o The SEC has embraced and promoted electronic disclosure 101

102 Using a Web Site for Disclosure o Governments and bond issuers use their web sites to disseminate informa9on to the municipal securi9es market regarding: The en9ty s debt, The en9ty s financial condi9on, and Other related informa9on o Your web site is an integral part of effec9ve communica9on with investors and the marketplace and should be a part of an investor rela9ons program 102

103 Using a Web Site for Disclosure o Considera9ons for Web Site Disclosure: Informa9on solely intended for investors should be segregated from other informa9on and clearly iden9fied as being intended for investors A formal process for reviewing and approving any informa9on posted on the web site should be required to ensure accuracy, consistency, and completeness of the informa9on Historical or outdated informa9on should be marked and segregated from current informa9on through the use of a library or archive accessible on the site 103

104 Using a Web Site for Disclosure o Items governments should consider pos9ng on their web sites are: Rela9ng to the sale of bonds: Preliminary Official Statements (POS), Audited financial statements, Feasibility reports, and Other related documents to a bond sale Informa9on to report post- sale of bonds: Con9nuing disclosure filings Already prepared budgetary informa9on 104

105 Using a Web Site for Disclosure o Costs to consider are: Staff 9me to prepare informa9on for electronic pos9ng, So>ware necessary to convert files to a searchable portable document format (PDF), and Effort and expense necessary to design, deploy and maintain a web page solely for disclosure 105

106 Using a Web Site for Disclosure o Issuers should be familiar with the SEC s Interpre9ve Release on Use of Electronic Media or o See o Have all informa9on that is posted on a government s web site reviewed by legal counsel 106

107 WEB SITE PRESENTATION OF OFFICIAL DOCUMENTS 107

108 Web Site Presenta9on of Official Financial Documents o While pos9ng financial documents on a web site is a tremendous resource to ci9zens and an important investor rela9ons tool: Governments should be reminded that web site pos9ng DOES NOT meet the con9nuing disclosure responsibili9es for issuers of municipal debt set forth in Securi9es and Exchange Commission Rule 15c

109 EMMA o Electronic Municipal Market Access System - Replaced Numerous NRMSIRs o All Submissions Must Be Made Electronically in PDF- Readable Format o Mandatory and Voluntary Submissions o Numerous Resources on Site Regarding How to Use System o State and Local Government Toolkit hsp://msrb.org/msrb- For/Issuers/Issuer- Toolkit.aspx o 109

110 DISCLOSURE IN OFFICIAL STATEMENTS RELATED TO PENSION FUNDING OBLIGATIONS 110

111 Disclosure of Pension Obliga9ons o Growing interest to investors and ra9ng agencies o Much of the informa9on about a government s pension obliga9ons can already be found in the CAFR and budget o Issuers need to determine if their pension liabili9es could affect their ability to make debt service payments o Issuers should discuss with counsel how much informa9on about their pension funding liabili9es are material informa9on to investors Are debt service payments and pension plan funding coming from the same revenue source? Is there poten9al down the road that pension plan funding could crowd out debt service payments? Is the priority of payment to the payment fund superior to debt service payments? 111

112 UNDERSTANDING BANK LOANS 112

113 Bank Loan BP o Numerous ques9ons to ask about these transac9ons Compared to Debt Issuance including the use of outside professionals to determine the validity of their use (see Best Prac9ce) o Different Types of Terms and Risks Fees Terms/Balloon Payments Unique prepayment/call provisions o Does Government Have Authority to do a Bank Loan? o Is the Bank Loan Compe99vely Bid? o How Is the Loan Accounted For? 113

114 Bank Loan Disclosures o Disclosure of bank loan informa9on is not required in and of itself, but issuer and counsel need to determine if the bank loan and the priority of repayment count as being a material issue for outstanding bond deals. o Ra9ng Agencies Encourage Voluntary Disclosure of Bank Loans o Can Be Filed in EMMA 114

115 ADVISORIES 115

116 USE OF DEBT- RELATED DERIVATIVE PRODUCTS 116

117 Deriva9ves o Exercise Cau9on When Considering These Products o Ensure Statues Permit Use of Swaps o Staff Must Have Significant Market Understanding and Ability to Constantly Monitor o Must be Able to Answer all Ques9ons in GFOA Deriva9ves Checklist o New Regula9ons: Issuer MUST USE a Swap Advisor that is Independent From Swap Dealer o Understand the Risks Interest Rate Counterparty For Example, 2008 Financial Crisis! 117

118 PENSION OBLIGATION BONDS 118

119 Pension Obliga9on Bonds o Governments Should Exercise Cau9on When Issuing POBs o Items to Consider: Are You Legally Able to Issue and is This Permised By The Fund? POBs Should Not be Considered a Subs9tute for Prudent Pension Plan Funding You Could Compare Debt Service Schedule to Pension UAAL Amor9za9on Schedule Use TIC to get es9mated net present value savings Es9mated net present value savings should be compared against the spread between TIC and plan s actuarial investment return assump9on Monitor and understand market changes could impact this type of structure 119

120 Pension Obliga9on Bonds o Items to Consider: Pension Liabili9es May S9ll Grow in the Future POBs Should be Structured so that principal payments are not deferred and bond maturity is not greater than the current unfunded UAAAL amor9za9on period Determine if a large contribu9on such as POB proceeds would affect the pension system s asset alloca9on Review POB issuance and its interac9on with the en9ty s debt burden and debt capacity Mul9- employer plans may have other considera9ons that need to be addressed 120

121 OPEB BONDS 121

122 BP Use Considerable Cau9on When Considering OPEB Bonds o Considerable Cau9on is Warranted When Considering the Use of Issuing OPEB Bonds o Playing Interest Rate Roulege o Consult Municipal Advisor o Public Policy Dialogue Warranted o Health Care Costs/OPEB Liabili9es are Difficult to Predict (moreso than life expectancy) o Health Care Costs are Vola9le and Difficult to Predict o Resolve Trust Fund and Investment Procedures and Guidelines Prior to Issuance 122