Ratings-Related Issuer Education Conference

Transcription

1 July 16, 2018 An Issuer s Guide to Rating Agency Presentations Ratings-Related Issuer Education Conference

2 Agenda What is a Credit Rating? Rating Process and Scale General Obligation Credit Factors Water & Sewer Utility Credit Factors GO Rating Criteria and Analysis Rating Agency Scorecards Credit Issues and Strengths Hot Topics in US Public Finance Resources 1

3 What is a Credit Rating? Denotes relative credit quality Assessment of issuers ability and willingness to repay debt in full and on time Measure of expected loss o Default probability times loss severity Independent opinion Forward-looking projection Used by investors as one component of investment decisions 2

4 A Credit Rating is NOT: An audit A recommendation to buy, sell or hold a security Static or permanent An opinion of a community s policy choices or quality of life 3

5 Credit Spreads Source: Thomson Reuters 4

6 Credit Spreads Source: Thomson Reuters 5

7 Credit Spreads Source: Thomson Reuters 6

8 Rating Process Documents Received Analysis Surveillance or New Bond Sale Call, meeting or visit Complete Analysis New Audit Received Preliminary Discussion Rating Committee Rating Released 7

9 Long-Term Obligation Ratings Scale (Moody s/s&p and Fitch) Rating Aaa/AAA Aa/AA A Baa/BBB Ba/BB B Caa/CCC Ca/CC C Relative credit risk Obligations rated Aaa/AAA are judged to be of the highest quality, with minimal credit risk Obligations rated Aa/AA are judged to be of high quality and are subject to very low credit risk Obligations rated A are considered upper-medium grade and are subject to low credit risk Obligations rated Baa/BBB are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics Obligations rated Ba/BB are judged to have speculative elements and are subject to substantial credit risk Obligations rated B are considered speculative and are subject to high credit risk Obligations rated Caa/CCC are judged to be of poor standing and are subject to very high credit risk Obligations rated Ca/CC are highly speculative and are likely in, or very near, default with some prospect of recovery of principal and interest Obligations rated C are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest Note: Moody s appends numerical modifiers 1, 2, and 3 and S&P and Fitch append + and - to each generic rating classification from Aa/AA through Caa/CCC. The modifier 1 or + indicates that the obligation ranks in the higher end of its generic rating category and the modifier 3 or - indicates a ranking in the lower end of that generic rating category 8

10 Credit Profile Analytics Rating Agency Analysts, as well as Institutional Investor Analysts, review different elements for General Obligation and Revenue Credits General Obligation Bonds (GO) Governance/Management Financial Position Debt Position / Pension and OPEB Economy Revenue Bonds Essentiality of Project Debt Service Coverage Bond Indenture and Covenants Flow of Funds In addition to the package provided to them, analysts gather data from public sources including annual financial statements, continuing disclosure filings, PUC Rate Filings and certain data base products such as Municipal Financial Ratio Analysis 9

11 Four Primary General Obligation Credit Factors Debt Position Finances RATING Management Economy 10

12 General Obligation Factors/Criteria (Moody s and S&P) Moody s S&P Global Pension and Other Post-Employment Benefit (OPEB) Liabilities Have Growing Significance 11

13 Water and Sewer Utility Factors/Criteria (Moody s and S&P) 12

14 Analysis Begins With Economy and Tax Base Governmental Tax Base - size, location, infrastructure, diversity, components of base Regional and local growth and economic trends Largest taxpayers and concentration Employment base Socio-economic indicators - income levels, population trends, housing values, unemployment, poverty, seasonal and tourism 13

15 Trend in Financial Performance is Often the Deciding Factor Operating performance Balance sheet/reserve level performance Structural Balance Quality of Revenue Streams o Diversity and Economic Sensitivity Financial flexibility Adequate liquidity Budgetary assumptions and budget vs. actual statement 14

16 Debt Analysis Includes Existing and Future Obligations Debt Levels Direct, overlapping & overall debt Self-supporting debt Debt limits & authorization Debt structure Maturity and amortization Exposure to variable rate debt and swap risk Capital plans & future borrowing Impact on future debt position Issuance restrictions and limits Pensions & other long-term liabilities Pension and OPEB funding status and size of liabilities Burden on annual budget 15

17 Management is the Hardest Factor to Quantify Policies and guidelines Ability to achieve budgetary targets Ability to make mid-year corrections Ability to recognize and respond to problems and constraints Ability to provide appropriate disclosure and timely financial statements Is management structure consistent with scope of operations? Structure of government and cooperation among elected and appointed boards and committees State oversight and limitations (local governments) 16

18 Information Used by Rating Agencies Preliminary Official Statement (POS/OS) or continuing disclosure document Independent Audits at least three years Independent Actuarial Studies Pension and OPEB Site visit or conference call State and Local disclosure websites Proposed/approved budget for current year Multi-year projections Capital Improvement Plan Consulting Engineer Study (utilities and other enterprises) Economic data US Census, Moody s economy.com, etc. Legal Documents Indenture, Resolution, Swap, SBPA, Letter of Credit Analysis relative to Medians and Comparable Credits 17

19 GO Scorecard A Relatively New Tool Purpose and Use of the Scorecard: Enhances the transparency of rating process Captures the key considerations that correspond to particular rating categories Not an exhaustive list of factors considered in every local government rating Each subfactor is a quantitative metric May notch up or down from the scorecard-indicated rating based on the additional below-the-line factors The scorecard acts as a starting point for a more thorough and individualistic analysis Final rating is determined by a Rating Committee 18

20 Sample GO Scorecard Overview Factors, Subfactors and Weights (Moody s) Moody's Local General Obligation Debt Rating Factors Sub-Factor Moody's Criteria Weights Factor 1: Economy (30%) Tax Base Size (MM) 10% Full Value Per Capita 10% Wealth (median family income) 10% Total Factor 1 30% Factor 2: Finance (30%) Fund Balance (% of Revenues) 10% Fund Balance Trend (5-Year change) 5% Cash Balance (% of Revenues) 10% Cash Balance Trend (5-Year change) 5% Total Factor 2 30% Factor 3: Management (20%) Institutional Framework 10% Operating History 10% Total Factor 3 20% Factor 4: Debt/Pensions (20%) Debt to Full Value 5% Debt to Revenues 5% Moody's Adjusted Pension Liability (3-Year Average) to Full Value 5% Moody's Adjusted Pension Liability (3-Year Average) to Revenues 5% Total Factor 4 20% 19

21 Sample GO Scorecard Overview Factors and Weights (S&P) S&P Local General Obligation Rating Factors Category Weight Institutional Framework 10% Economy 30% Management 20% Budgetary Flexibility 10% Budgetary Performance 10% Liquidity 10% Debt and Contingent Liabilities 10% 20

22 Scorecard Factor 1: Economy/Tax Base 30% (Moody s Example) ECONOMY/TAX BASE (30%) Very Strong Strong Moderate Weak Poor Very Poor Aaa Aa A Baa Ba B & Below Weight Tax Base Size: Full Value > $12B $12B n > $1.4B $1.4B n > $240M $240M n > $120M $120M n > $60M $60M 10% Full Value Per Capita > $150,000 $150,000 n > $65,000 $65,000 n > $35,000 $35,000 n > $20,000 $20,000 n > $10,000 $10,000 10% Socioeconomic Indices: MFI > 150% of US median 150% to 90% of US median 90% to 75% of US median 75% to 50% of US median 50% to 40% of US median 40% of US median 10% The tax base is the source of most local government revenues The tax base scorecard weight is reduced to 30%, which is still a significant weight o Lowered from 40% to reflect Moody s observation that some local governments have been either unwilling or unable to convert economic strength into revenues could be due to tax caps, anti-tax sentiment, timing lags or other similar obstacles Full value: The market value of taxable property accessible to the municipality Full value per capita: scales tax base strength to the number of residents Median Family Income (MFI): Important measure of the strength and resiliency of a tax base 21

23 Scorecard Factor 2: Finances 30% (Moody s Example) FINANCES (30%) Fund Balance as % of Revenues 5-Year Dollar Change in Fund Balance as % of Revenues Very Strong Strong Moderate Weak Poor Very Poor Aaa Aa A Baa Ba B & Below Weight > 30.0% > 25.0% for School Districts 30.0% n > 15.0% 25.0% n > 10.0% for SD 15.0% n > 5.0% 10.0% n > 2.5% for SD 5.0% n > 0.0% 2.5% n > 0.0% for SD 0.0% n > -2.5% 0.0% n > -2.5% for SD > 25.0% 25.0% n > 10.0% 10.0% n > 0.0% 0.0% n > -10.0% -10.0% n > % -2.5% -2.5% for SD -18.0% 10% 5% Cash Balance as % of Revenues 5-Year Dollar Change in Cash Balance as % of Revenues > 25.0% > 10.0% for School Districts 25.0% n > 10.0% 10.0% n > 5.0% for SD 10.0% n > 5.0% 5.0% n > 2.5% for SD 5.0% n > 0.0% 2.5% n > 0.0% for SD 0.0% n > -2.5% 0.0% n > -2.5% for SD > 25.0% 25.0% n > 10.0% 10.0% n > 0.0% 0.0% n > -10.0% -10.0% n > % -2.5% -2.5% for SD -18.0% 10% 5% Fund Balance (10%) the net financial resources available in the short term Cash Balance (10%) the paramount liquid resource available; excludes accruals 5-Yr. $ Change in Fund Balance and Cash Balance as % of Revs (each 5%) o o Incorporated to capture trend information; avoids overweighting point-in-time data The focus here is on whether financial reserves and liquidity are increasing in step with budgetary growth 22

24 Scorecard Factor 3: Management 20% (Moody s Example) MANAGEMENT (20%) Institutional Framework Operating History: 5-Year Average of Operating Revenues / Operating Expenditures Very Strong Strong Moderate Weak Poor Very Poor Aaa Aa A Baa Ba B & Below Weight Very strong legal ability to match resources with spending Strong legal ability to match resources with spending Moderate legal ability to match resources with spending Limited legal ability to match resources with spending Poor legal ability to match resources with spending Very poor or no legal ability to match resources with spending > 1.05x 1.05x n > 1.02x 1.02x n > 0.98x 0.98x n > 0.95x 0.95x n > 0.92x 0.92x 10% 10% Overall factor weight maintained at 20% Institutional Framework o o o Operating History o o New factor for US Local Governments Focuses on issuers legal ability to match revenues with expenditures based on their legal apparatus Standard inputs determined for each state/sector combination; revisited annually for possible updates Measures the degree that an issuer has demonstrated the practical ability and willingness to match revenues with expenditures Input: Five-year average of the ratio of operating revenues to operating expenditures 23

25 Scorecard Factor 4: Debt/Pensions 20% (Moody s Example) DEBT/PENSIONS (20%) Very Strong Strong Moderate Weak Poor Very Poor Aaa Aa A Baa Ba B & Below Weight Net Direct Debt / Full Value < 0.75% 0.75% n < 1.75% 1.75% n < 4% 4% n < 10% 10% n < 15% > 15% 5% Net Direct Debt / Operating Revenues 3-Year Average of Moody's Adjusted Net Pension Liability / Full Value 3-Year Average of Moody's Adjusted Net Pension Liability / Operating Revenues < 0.33x 0.33x n < 0.67x 0.67x n < 3x 3x n < 5x 5x n < 7x > 7x 5% < 0.9% 0.9% n < 2.1% 2.1% n < 4.8% 4.8% n < 12% 12% n < 18% > 18% 5% < 0.4x 0.4x n < 0.8x 0.8x n < 3.6x 3.6x n < 6x 6x n < 8.4x > 8.4x 5% Overall factor weight increased to 20% from 10% (to capture pension risks more fully) Specific metrics proposed: o o Debt: Measures the magnitude of debt obligations relative to resources (using the tax base as a proxy) and operations (using operating revenues as a proxy) Pensions: Utilize Moody s adjusted net pension liability metrics Three-year average is used to smooth the volatility inherent in the metric Debt breakpoints more restrictive than pensions reflecting the fixed nature of debt obligations; pension measures are estimates, may be volatile across years and can be renegotiated and reduced 24

26 GO Scorecard Notching Factors (Moody s Example) Adjustments/Notching Factors Description Economy/Tax Base Institutional presence Regional economic center Economic concentration Outsized unemployment or poverty levels Other analyst adjustment to Economy/Tax Base factor (specify) Finances Outsized contingent liability risk Unusually volatile revenue structure Other analyst adjustment to Finances factor (specify) Management State oversight or support Unusually strong or weak budgetary management and planning Other analyst adjustment to Management factor (specify) Debt/Pensions Unusually strong or weak security features Unusual risk posed by debt/pension structure History of missed debt service payments Other analyst adjustment to Debt/Pensions factor (specify) Other Credit event/trend not yet reflected in existing data sets Direction up up down down up/down down down up/down up/down up/down up/down up/down down down up/down up/down 25

27 Median Statistics US Cities NATIONAL CITIES - GLOBAL SCALE RATING MEDIANS Total Entities Rated Aaa Aa A Baa Ba Total Entities per Rating Total GF Revenues ($000) $47,305 $19,644 $7,309 $6,225 $17,328 GF Balance as % of Revenues Unassigned GFB as % of Rev Direct Net Debt as % of Full Value Debt Burden (Overall Net Debt as % FV) Total Full Value ($000) $7,091,842 $2,242,895 $625,708 $268,198 $1,121,662 Full Value Per Capita ($) $188, ,939 $65,995 $45,619 $57,569 Population 2000 Census 34,727 18,474 8,390 8,693 15,946 PCI as % of U.S. (2000 Census) Source: Moody s Investors Service 26

28 Pensions are growing problem, not a short-term issue for most 2 7 Combined Liabilities as Share of GDP Top 10 States Debt/ GDP Pensions/ GDP Source: Moody s Investors Service 27

29 Government Pension Liabilities at an All-Time High

30 2015 Moody s Default Study--Key Findings The number of defaults increased since the recession 4 defaults in defaults in defaults in 2013 including Detroit Average 4.5 defaults per year since 2008 Total of 99 defaults from Average 2.15 defaults per year since 1970 Default composition has shifted slightly Previous defaults were largely concentrated in the healthcare and housing sectors (70% of all defaults) 14 general government defaults in the period 9 general government defaults in the period Ultimate recovery rates for municipal bonds are higher than those for senior unsecured corporate bonds On average, municipal bonds recovered 65% versus 53% for corporate bonds 29

31 Default Counts by Sector:

32 Recent State and Local Government Credit Issues 3 1 Budget difficulties have increased with increasing evidence of structural imbalance in more State and local budgets In 2017 an unprecedented number of States did not pass their budgets on time Some States experienced shut downs and interruption or elimination of State Aid to Local Communities Local Credits were impacted in several States States and Local Communities have experienced growing Pension and OPEB Liabilities Economic conditions in many Northeast States lag the Nation 31

33 State and Local Governments Have Inherent Strengths 3 2 Governments exist in perpetuity Federal monetary policies benefit state and local economies State economies and those of large cities are broad-based and diverse State and local governments have strong mandates and incentives to pay bond debt Debt service, even when combined with unfunded pension and OPEB liabilities, is a small share of expense budgets State and local governments have a variety of powerful fiscal management tools at their disposal 32

34 Other Hot Topics in Public Finance Federal Tax Policy Distressed Cities and Bankruptcy Long-Term Liabilities for Pension and OPEB (Other Post-Employment Benefits) Enterprise Risk Issuer disclosure to investors and muni bond market Infrastructure Finance Green Bonds Resident and Mini- Bonds 33

35 Municipal Bond Resources Bond Buyer Bond Dealers of America Center for Retirement Research at Boston College Governmental Accounting Standards Board Municipal Securities Rulemaking Board Electronic Municipal Market Access (EMMA) Municipal Market Advisors Rating Agencies

36 Disclosure This communication is intended for issuers for educational and informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product or service. Financial transactions may be dependent upon many factors such as, but not limited to, interest rate trends, tax rates, supply, change in laws, rules and regulations, as well as changes in credit quality and rating agency considerations. The effect of such changes in such assumptions may be material and could affect the projected results. Any outcome or result HilltopSecurities, or any of its employees, may have achieved on behalf of our clients in previous matters does not necessarily indicate similar results can be obtained in the future for current or potential clients. HilltopSecurities makes no claim the use of this communication will assure a successful outcome. This communication is intended for institutional use only. For additional information, comments or questions, please contact Hilltop Securities Inc. 35

37 Municipal Advisor Disclosure Statement This disclosure statement ( Conflict Disclosures ) is provided by Hilltop Securities Inc. ( the Firm ) to you (the Client ) in connection with our current municipal advisory agreement, ( the Agreement ). These Conflict Disclosures provide information regarding conflicts of interest and legal or disciplinary events of the Firm that are required to be disclosed to the Client pursuant to MSRB Rule G-42(b) and (c)(ii). PART A Disclosures of Conflicts of Interest MSRB Rule G-42 requires that municipal advisors provide to their clients disclosures relating to any actual or potential material conflicts of interest, including certain categories of potential conflicts of interest identified in Rule G-42, if applicable. Material Conflicts of Interest The Firm makes the disclosures set forth below with respect to material conflicts of interest in connection with the Scope of Services under the Agreement with the Firm, together with explanations of how the Firm addresses or intends to manage or mitigate each conflict. General Mitigations As general mitigations of the Firm s conflicts, with respect to all of the conflicts disclosed below, the Firm mitigates such conflicts through its adherence to its fiduciary duty to Client, which includes a duty of loyalty to Client in performing all municipal advisory activities for Client. This duty of loyalty obligates the Firm to deal honestly and with the utmost good faith with Client and to act in Client s best interests without regard to the Firm s financial or other interests. In addition, because the Firm is a broker-dealer with significant capital due to the nature of its overall business, the success and profitability of the Firm is not dependent on maximizing short-term revenue generated from individualized recommendations to its clients but instead is dependent on long-term profitably built on a foundation of integrity, quality of service and strict adherence to its fiduciary duty. Furthermore, the Firm s municipal advisory supervisory structure, leveraging our long-standing and comprehensive broker-dealer supervisory processes and practices, provides strong safeguards against individual representatives of the Firm potentially departing from their regulatory duties due to personal interests. The disclosures below describe, as applicable, any additional mitigations that may be relevant with respect to any specific conflict disclosed below. I. Affiliate Conflict. The Firm, directly and through affiliated companies, provides or may provide services/advice/products to or on behalf of clients that are related to the Firm s advisory activities within the Scope of Services outlined in the Agreement. First Southwest Asset Management (FSAM), a SEC-registered affiliate of the Firm, provides post issuance services including arbitrage rebate and treasury management. The Firm s arbitrage team verifies rebate and yield restrictions on the investments of bond proceeds on behalf of clients in order to meet IRS restrictions. The treasury management division performs portfolio management/advisor services on behalf of public sector clients. The Firm, through affiliate First Southwest Advisory, provides a multi-employer trust tailor-made for public entities which allows them to prefund Other Post-Employment Benefit liabilities. The Firm has a structured products desk that provides advice to help clients mitigate risk though investment management, debt management and commodity price risk management products. These products consist of but are not limited to swaps (interest rate, currency, commodity), options, repos, escrow structuring and other securities. Continuing Disclosure services provided by the Firm work with issuers to assist them in meeting disclosure requirements set forth in SEC rule 15c2-12. Services include but are not limited to ongoing maintenance of issuer compliance, automatic tracking of issuer s annual filings and public notification of material events. The Firm administers two government investment pools for Texas governments; the Short-Term Asset Reserve Fund (TexSTAR) and 36

38 Municipal Advisor Disclosure Statement the Local Government Investment Cooperative (LOGIC). These programs offer Texas government entities investment options for their cash management programs based on the entities specific needs. The Firm and the aforementioned affiliate s business with a client could create an incentive for the Firm to recommend to a client a course of action designed to increase the level of a client s business activities with the affiliates or to recommend against a course of action that would reduce or eliminate a client s business activities with the affiliates. Furthermore, this potential conflict is mitigated by the fact that the Firm and affiliates are subject to their own comprehensive regulatory regime as a member of multiple self-regulatory organizations in which compliance is verified by not only internal tests but annual external examinations. II. III. Other Municipal Advisor or Underwriting Relationships. The Firm serves a wide variety of other clients that may from time to time have interests that could have a direct or indirect impact on the interests of Client. For example, the Firm serves as municipal advisor to other municipal advisory clients and, in such cases, owes a regulatory duty to such other clients just as it does to Client. These other clients may, from time to time and depending on the specific circumstances, have competing interests, such as accessing the new issue market with the most advantageous timing and with limited competition at the time of the offering. In acting in the interests of its various clients, the Firm could potentially face a conflict of interest arising from these competing client interests. In other cases, as a broker-dealer that engages in underwritings of new issuances of municipal securities by other municipal entities, the interests of the Firm to achieve a successful and profitable underwriting for its municipal entity underwriting clients could potentially constitute a conflict of interest if, as in the example above, the municipal entities that the Firm serves as underwriter or municipal advisor have competing interests in seeking to access the new issue market with the most advantageous timing and with limited competition at the time of the offering. None of these other engagements or relationships would impair the Firm s ability to fulfill its regulatory duties to Client. Secondary Market Transactions in Client s Securities. The Firm, in connection with its sales and trading activities, may take a principal position in securities, including securities of Client, and therefore the Firm could have interests in conflict with those of Client with respect to the value of Client s securities while held in inventory and the levels of mark-up or mark-down that may be available in connection with purchases and sales thereof. In particular, the Firm or its affiliates may submit orders for and acquire Client s securities issued in an Issue under the Agreement from members of the underwriting syndicate, either for its own account or for the accounts of its customers. This activity may result in a conflict of interest with Client in that it could create the incentive for the Firm to make recommendations to Client that could result in more advantageous pricing of Client s bond in the marketplace. Any such conflict is mitigated by means of such activities being engaged in on customary terms through units of the Firm that operate independently from the Firm s municipal advisory business, thereby reducing the likelihood that such investment activities would have an impact on the services provided by the Firm to Client under this Agreement. IV. Broker-Dealer and Investment Advisory Business. The Firm is dually registered as a broker-dealer and an investment advisor that engages in a broad range of securities-related activities to service its clients, in addition to serving as a municipal advisor or underwriter. Such securities-related activities, which may include but are not limited to the buying and selling of new issue and outstanding securities and investment advice in connection with such securities, including securities of Client, may be undertaken on behalf of, or as counterparty to, Client, personnel of Client, and current or potential investors in the securities of Client. These other clients may, from time to time and depending on the specific circumstances, have interests in conflict with those of Client, such as when their buying or selling of Client s 37

39 Municipal Advisor Disclosure Statement securities may have an adverse effect on the market for Client s securities, and the interests of such other clients could create the incentive for the Firm to make recommendations to Client that could result in more advantageous pricing for the other clients. Furthermore, any potential conflict arising from the firm effecting or otherwise assisting such other clients in connection with such transactions is mitigated by means of such activities being engaged in on customary terms through units of the Firm that operate independently from the Firm s municipal advisory business, thereby reducing the likelihood that the interests of such other clients would have an impact on the services provided by the Firm to Client. V. Compensation-Based Conflicts. Fees that are based on the size of the issue are contingent upon the delivery of the Issue. While this form of compensation is customary in the municipal securities market, this may present a conflict because it could create an incentive for the Firm to recommend unnecessary financings or financings that are disadvantageous to Client, or to advise Client to increase the size of the issue. This conflict of interest is mitigated by the general mitigations described above. Fees based on a fixed amount are usually based upon an analysis by Client and the Firm of, among other things, the expected duration and complexity of the transaction and the Scope of Services to be performed by the Firm. This form of compensation presents a potential conflict of interest because, if the transaction requires more work than originally contemplated, the Firm may suffer a loss. Thus, the Firm may recommend less time-consuming alternatives, or fail to do a thorough analysis of alternatives. This conflict of interest is mitigated by the general mitigations described above. Hourly fees are calculated with, the aggregate amount equaling the number of hours worked by Firm personnel times an agreed-upon hourly billing rate. This form of compensation presents a potential conflict of interest if Client and the Firm do not agree on a reasonable maximum amount at the outset of the engagement, because the Firm does not have a financial incentive to recommend alternatives that would result in fewer hours worked. This conflict of interest is mitigated by the general mitigations described above. PART B Disclosures of Information Regarding Legal Events and Disciplinary History MSRB Rule G-42 requires that municipal advisors provide to their clients certain disclosures of legal or disciplinary events material to its client s evaluation of the municipal advisor or the integrity of the municipal advisor s management or advisory personnel. Accordingly, the Firm sets out below required disclosures and related information in connection with such disclosures. 38

40 Municipal Advisor Disclosure Statement I. Material Legal or Disciplinary Event. The Firm discloses the following legal or disciplinary events that may be material to Client s evaluation of the Firm or the integrity of the Firm s management or advisory personnel: For related disciplinary actions please refer to the Firm s BrokerCheck webpage. The Firm self-reported violations of SEC Rule 15c2-12: Continuing Disclosure. The Firm settled with the SEC on February 2, The firm agreed to retain independent consultant and adopt the consultant s finding. Firm paid a fine of $360,000. The Firm settled with the SEC in matters related to violations of MSRB Rules G-23(c), G-17 and SEC rule 15B(c) (1). The Firm disgorged fees of $120,000 received as financial advisor on the deal, paid prejudgment interest of $22, and a penalty of $50, The Firm entered into a Settlement Agreement with Rhode Island Commerce Corporation. Under the Settlement Agreement, the firm agreed to pay $16.0 million to settle any and all claims in connection with The Rhode Island Economic Development Corporation Job Creation Guaranty Program Taxable Revenue Bond (38 Studios, LLC Project) Series 2010, including the litigation thereto. The case, filed in 2012, arose out of a failed loan by Rhode Island Economic Development Corporation. The firm s predecessor company, First Southwest Company, LLC, was one of 14 defendants. FirstSouthwest s engagement was limited to advising on the structure, terms, and rating of the underlying bonds. Hilltop settled with no admission of liability or wrongdoing. II. How to Access Form MA and Form MA-I Filings The Firm s most recent Form MA and each most recent Form MA-I filed with the SEC are available on the SEC s EDGAR system at Forms MA and MA-I. The SEC permits certain items of information required on Form MA or MA-I to be provided by reference to such required information already filed by the Firms in its capacity as a broker-dealer on Form BD or Form U4 or as an investment adviser on Form ADV, as applicable. Information provided by the Firm on Form BD or Form U4 is publicly accessible through reports generated by BrokerCheck at and the Firm s most recent Form ADV is publicly accessible at the Investment Adviser Public Disclosure website at For purposes of accessing such BrokerCheck reports or Form ADV, click previous hyperlinks. PART C Future Supplemental Disclosures As required by MSRB Rule G-42, this Municipal Advisor Disclosure Statement may be supplemented or amended, from time to time as needed, to reflect changed circumstances resulting in new conflicts of interest or changes in the conflicts of interest described above, or to provide updated information with regard to any legal or disciplinary events of the Firm. The Firm will provide Client with any such supplement or amendment as it becomes available throughout the term of the Agreement. 39