Debt Financing Options and Processes: Overview and Updates

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1 Debt Financing Options and Processes: Overview and Updates David Cheatwood Vice President Public Finance Investment Banking Wells Fargo Securities Rebecca Joyner Attorney Parker Poe Adams & Bernstein LLP UNC School of Government March 6, 2012

2 Overview Financing Options for Utilities Revenue Bonds GO Bonds Installment Financing Bond Anticipation Notes ( BANs ) & USDA The Financing Team Members and Roles LGC Approval Process Market Considerations

3 Financing Options for Utilities Source: Debt data as of June 2009 collected by NC LGC and Analyzed by UNC EFC

4 Revenue Bonds Security Net Revenues Legal Authority No voter approval required Covenants Rate Covenant Additional Bonds Test Debt Service Reserve Fund Structure Typically 25-year term Rating Factors Publicly-offered or privately placed depending on size; can be negotiated

5 General Obligation Bonds Security General taxing power Legal Authority Voter approval required Exception: Two-Thirds No Special Covenants Structure Typical 20-year term Rating Factors Publicly-offered; Generally competitively bid, can also be negotiated

6 Installment Financing Security Pledge to appropriate for Debt Service Lien on financed asset Legal Authority No voter approval required No Special Covenants Consideration of putting lien on utility assets Structure Typically year term (amortizations have fluctuated) Rating Factors Public or Private offerings (COPs vs. IPCs)

7 BANs/USDA Financing Two-Step Process Governed by USDA Interim BAN to be taken out with USDA Loan at maturity Structure - Typical month term Authorized and Issued like a GO or Revenue Bond Must abide by USDA requirements for bidding, project funding, documentation Long-term Note provided by USDA Structure Typical 40-year term Usually unrated Limited availability Privately offered to USDA

8 Example Repayment Loan - $1,200,000 for a 10 year term for W&S improvements, Rate is 3.50% Bank Qualified, payments made annually Level Principal Year 1: $120,000 principal $42,000 interest $162,000 total payment To reach 1.2X coverage, need revenues of $194,400 Level P&I Year 1: $102,290 principal $42,000 interest $144,290 total payment To reach 1.2X coverage, need revenues of $173,148 Higher debt service in early years of level principal structure (+12.3% in year 1), but less interest over the life of the loan (5.1% = $11,896).

9 Members of a Financing Team Issuer Finance Director, Utility Manager, Attorney Local Government Commission Underwriter More than one if over $20 million Attorneys Bond Counsel, Underwriter s Counsel Feasibility Consultant (Revenue Bonds) Bond Insurer Rating Analyst Financial Advisor (if desired) Trustee (Revenue Bonds, COPs)

10 Role of Financing Team Members Issuer Finance Director and Utility Manager to develop project plan, cost estimates, financing plan Attorney to review documents, coordinate approvals, provide opinion as to proper authorization Local Government Commission Oversight of financing process Underwriter Work with Issuer to develop financing plan Quarterback the deal - coordinating schedule, meetings, contact with bond insurer/rating agencies, development of financing team Responsible for sale of bonds

11 Role of Financing Team Members Bond Counsel Work with Issuer to develop financing plan and identify best financing structure Draft bond documents and necessary approvals Conduct tax due diligence and assure compliance with tax laws Coordinate closing Underwriter s Counsel Draft disclosure documentation and bond purchase agreement Assure underwriter complies with securities regulations Feasibility Consultant Prepare feasibility study for inclusion in disclosure document Develop rate model for future rate adjustments

12 Role of Financing Team Members Bond Insurer Provide municipal bond insurance policy for DS payments Provide surety policy for DSR Often have consent rights in bond documents Rating Analyst Review transaction and provide credit rating Financial Advisor Work with Issuer to develop financing plan Often coordinates with rating agencies and bond insurers Trustee Serve as depository and paying agent under bond documents Require documentation for disbursement from bond funds

13 Role of the LGC Created after The Great Depression to promote sound financial management by North Carolina local governments Approves almost all debt for local government units Prepares offering material and competitively sells GO Bonds

14 LGC Approval Process Meets first Tuesday of each month Application deadline at most one month prior to each meeting (varies by security) Bond documents drafted by attorneys and reviewed by working group prior to LGC approval Regular contact with LGC re: upcoming bond projects always a good idea

15 LGC Document Session Discussion of size and scope of project Review of Exhibit A to the LGC Application (project overview) Review of Feasibility Study (system description, system financials, coverage ratios) Review of Bond Documents

16 General LGC Guidelines Typically need over 70% of project to have been bid to get approved All major permitting must be in-hand Looking for all project funding sources to be identified (SRF, grant funds, contractual payments in-hand or expected by closing)

17 Market Considerations Stimulus programs expiration on 12/31/10 Will there be a second stimulus plan with BAB and BQ continuations? Pro-forma forecasting in this economy: What is conservative forecasting? What investment returns should I expect? How do I manage W&S rates to meet DSC requirements? Can I issue debt without bond insurance? What does the tight credit market mean for my capital raise?

18 Questions? Rebecca Joyner Parker Poe Adams & Bernstein LLP 150 Fayetteville Street, Suite 1400 Raleigh, NC David Cheatwood Wells Fargo Securities D S. College Street Charlotte, NC

19 This message is a product of the Government and Institutional Banking Group, and is not a product of the Wells Fargo Securities, LLC Global Research Department. The views of the Market Strategist may differ from that of the Global Research Department. Publications of Wells Fargo Securities, LLC s Global Research Department may be viewed at This communication is for informational purposes only, is not an offer, solicitation, recommendation or commitment for any transaction or to buy or sell any security or other financial product; and is not intended as investment advice or as a confirmation of any transaction. The information contained herein is (i) derived from sources that Wells Fargo Securities ("WFS") in good faith considers reliable, however WFS does not guarantee the accuracy, reliability or completeness of this information and makes no warranty, express or implied, with respect thereto; and (ii) subject to change without notice, and WFS accepts no liability for its use or to update or keep it current. Products shown are subject to change and availability. WFS and/or one or more of its affiliates may provide advice or may from time to time have proprietary positions in, or trade as principal in, securities that may be mentioned herein or other securities issued by issuers reflected herein; or in derivatives related thereto. WFS is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Securities, LLC, member NYSE, FINRA and SIPC, and Wells Fargo Bank, National Association. Municipal Derivatives solutions are provided by Wells Fargo Bank, N.A. This communication is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations and does not constitute advice within the meaning of Section 15B of the Securities Exchange Act of You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment, and other aspects of this communication. Neither WFS nor any person providing this communication is acting as a municipal advisor or fiduciary with respect to any transaction described or contemplated therein unless expressly agreed to in a written financial advisory or similar agreement.