9/13/2016. Introduction and topics covered. Deal Team* The Roles and Responsibilities of Debt Participants. September 22, :00-4:50

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1 The Roles and Responsibilities of Debt Participants September 22, :00-4:50 Introduction and topics covered Issuing debt Legal Regulatory Financial Fiscal 2 Deal Team* Bond Counsel Issuer Deal Table Underwriter Underwriter s Counsel Underwriting Syndicate Member Trustee Paying Agent Bond Registrar Selling Group Members Bondholders/ Investors Bank Bond Insurer Municipal Advisor Bank Counsel Rating Agencies *Adapted from MSRB Professionals Involved in a Negotiated Municipal Bond Transaction 3 1

2 Role of the Issuer Capital Planning Determine capital and maintenance needs Revenue projections Consideration of financial policies Evaluate and prioritize of capital projects given resources available Pay as you go vs. Borrowing Determine if the projects are able to be financed Consideration of overall benefit to the community Source of repayment 4 Role of the Issuer Debt Policy 25% of income tax revenue is dedicated to Capital Improvement Tax Fund 40% is allocated to cash fund projects 60% is allocated to pay debt service on projects Cash Reserve Policy City will maintain a General Fund balance no less than 50% of the General Fund expenditures 25% of the amount in excess of 75% will be transferred to the Capital Improvement Tax Fund at the end of each fiscal year. Other important financial policies 5 Role of the Issuer Determines available resources for payment of debt service of new issue Selects and manages the financing team Prepares offering documents in consultation with the financing team Determines the compensation of financing team Negotiates with the underwriter the final purchase price of the bonds Adopts bond legislation and other financing documents Complies with tax and continuing disclosure requirements included in the bond financing documents 6 2

3 Issuer Engaging with rating agencies Interaction with rating agencies can occur When requesting a rating on a new issuance During a rating surveillance/update call with agencies Preparation for meetings is key Information Requirements Historical financial statements and current year s budget Proposed future budget Capital Improvement Plan Summary of outstanding obligations including debt service schedules Description of the proposed borrowing Economic and demographic information Description of the municipality s management structure Authorizing legislation 7 Role of Bond Counsel Bond Counsel Primary role of bond counsel is to deliver the legal opinion The legal opinion is relied upon by the purchasers of the bonds and therefore facilitates the sale of the bonds Bond counsel s opinion addresses the following subjects: Bonds are valid and binding obligations of the issuer Source of payment and/or security for the bonds Whether and to what extent interest on the bonds is exempt from federal income taxes and from other taxes, if any, imposed by the state of issue The opinion of bond counsel does not constitute or imply a recommendation concerning the marketability or financial value of the bonds nor is it a guarantee of results indicated by opinion Usually contains a statement that assumes compliance with tax covenants Qualified vs. Unqualified opinions 8 Role of Bond Counsel Bond Counsel Prepare resolutions, ordinances and other authorizing documents related to issuance Prepares trust indenture, loan agreement, bond purchase agreement, tax documents and other documents as applicable Preparation of the security (note or bond) Assists issuer with preparation of offering document (Preliminary Official Statement, Official Statement) Bond Terms Issuer information (geographic, demographic, financial, etc.) Audited Financial Statements and other financial information related to issuer 9 3

4 Role of Bond Counsel Bond Counsel Advises on state law issues and federal tax and securities law issues Participates in meetings with rating agencies Provides legal opinion on validity of issue, security of bonds/notes and tax-exempt status (if applicable) Calculates debt limits Advises on post-issuance compliance tax matters Assists with continuing disclosure filings 10 Has a fiduciary duty to municipal entity clients MSRB G-42 Duty of care and duty of loyalty Must put municipal entity s interests of ahead of its own Has a duty of care to clients May assist with: Developing requests for proposals Selection of underwriters Developing the plan of finance Analyzing financing alternatives Advising on the method of sale 11 Often the MA will be involved early on in the process Assist with debt planning and capital planning Look out 3-5 years and build debt profiles to determine future cash flows Consider specialized debt structures to suit project or issuers need Advise on financial policies that can improve operations and financial management Implementation of economic development activities including Tax Increment Finance, New Community Authorities and tax abatements Can help structure incentive offers or respond to proposals from developers 12 4

Making recommendations related to a plan of finance Recommend distribution process or selection of underwriting team and market participants Underwriting vs.

5 Making recommendations related to a plan of finance Recommend distribution process or selection of underwriting team and market participants Underwriting vs. Private Placement (non-public offering) Develop rating strategy with issuer and prepare for rating meeting Advise on pricing levels and deal execution Facilitate investment of bond proceeds and funding 13 Various Purpose Refunding Bonds, Series 2016 Final Pricing Statistics Par Amount: $2,685,000 TIC: 2.179% AIC: 2.384% Gross Savings ($): $371,759 NPV Savings ($): $320,880 NPV Savings (%): % Pre-Pricing Statistics Gross Savings ($): $357,412 NPV Savings ($): $301,171 NPV Savings (%): % 14 Role of Underwriter Has an arm s-length relationship with issuers Purchases securities with a view to distribution MSRB G-17 For a negotiated offering, may assist with: Designing the plan of finance Developing the bond structure Determining timing to sell bonds Developing bond documents Managing the pricing process Executing pre-sale marketing Providing proceeds at closing May need to engage separate counsel, Underwriter s Counsel 15 5

6 Role of Underwriter Underwriter may provide additional quantitative analysis of financing structure Pre-sale marketing done by sales force Solicits price views and provides preliminary pricing indications among underwriters and customers about the offering range of a new issue Submits bid in a competitive sale Executes the bond purchase agreement with the issuer Purchases bonds and delivers sale proceeds at closing Distributes bonds to investors 16 Other participants Credit enhancement Rating agencies Provides an analysis and corresponding rating of the issuer s credit quality. May assign a rating to a new issuance or review outstanding rating Bond Insurers A legal commitment by an insurance company to make principal and interest payments on debt in the event that the Issuer fails to make those payments on time. Issuer pays premium, bonds receive credit rating of insurer 17 Other participants Trustee, Paying Agent, Bond Registrar Trustee acts in a fiduciary role for the benefit of bondholders in enforcing the terms of the trust indenture Paying Agent transmits principal and interest payments from an issuer of municipal securities to the bondholders Bond Registrar maintains records on behalf of the issuer that identify the registered owners of the bonds and related matters Escrow Agent Serves as custodian of funds and holds securities to pay debt service on refunded bonds Moneys held in trust for bondholders Verification Agent Verifies cash flow sufficiency to the call date of the escrow securities to pay principal and interest and redemption amount on refunded bonds CPA firm 18 6

7 Bondholders/Purchasers Retail Investors Includes both mom and pop retail as well as professional retail Professional retail includes In State and National Money Managers, Trust Departments, Investment Advisors and Separately Managed Accounts Institutional Investors Main groups include Arbitrage Accounts, Bank Trusts, Insurance Companies and Bonds Funds Arbitrage firms profit from small differences in bond prices and typically will work the bonds off their books fairly quickly Benefit from tax exemption at the federal level, as Other firms typically invest in muni bonds with well as at the state level if purchased and issued in the goal of holding them over an extended period the same state of time Provides predictable stream of cash especially important for investors approaching or at retirement age Benefit from federal tax exemption and a highly predictable stream of cash flows Typically prefer discount or par bonds Prefer premium bonds Typically bought and held to maturity Typically very little trade activity beyond several weeks after pricing Individual investors can choose between investing in bonds directly or in muni bond ETFs investing directly protects your principal better, however, requires more sophisticated investment practices 19 Bondholders/Purchasers Professional Retail Northern Trust JP Morgan Asset Mgmt Gannett Goldman Sachs Asset Mgmt Edward D. Jones BNY Mellon GenTrust Standish Mellon Asset Mgmt PNC Advisors Money Managers MacKay Shields GE Asset Mgmt Sanford Bernstein CW Henderson First New York Pine River Capital Mgmt Jaffray Investment Mgmt Sterling Capital Mgmt Lightsurge Opus Investment Mgmt Insurance Companies State Farm Travelers AIG WR Berkley Chubb Principal Financial Hartford Investment Mgmt St. Paul Fire & Marine Gen Re Aetna Bond/Mutual Funds BlackRock Eaton Vance Thornburg Wells Capital Mgmt WAMCO Vanguard Nuveen Asset Mgmt Wellington Fidelity TIAA CREF Arbitrage Accounts Deutsche Bank Arb MerrillTOB 16thAmendment RBC Prop 1861 Capital Mgmt Trustco Citibank Arb Raymond James Arb Southwest Securities Mitsubishi 20 Questions and Discussion Angel Mumma amumma@dublin.oh.us Allison Binkley allison.binkley@squirepb.com Brian Cooper cooper@umbaugh.com 21 7

MSRB Rule G-17: Interpretive Notice on Duties of Underwriters to Issuers

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