Presentation regarding Structured Bond Opportunities

Transcription

1 Presentation regarding Structured Bond Opportunities Jane Lah Vice President, Municipal Derivatives Group Goldman Sachs, & Co.

2 Overview of Case Studies Creative financing tools used by different issuers and tailored by Goldman Sachs: Case Study 1: City of Reno Re-leveraging of cashflows; restructuring of existing debt Utilizing both public and private markets Goldman Sachs principaling risk on subordinate bonds Case Study 2: Electric Municipality Locking in its bond yields (both interest rates and credit spreads) on a forward basis Accelerated Bond Purchase Agreement with Goldman Sachs Case Study 3: Minneapolis Airport Lock in savings today amidst negotiations with airline companies Private placement Bonds, placed with Goldman Sachs 1

3 Case Study 1: City of Reno

4 City of Reno ReTRAC Project Overview Project Description and Background 2.25-mile long, fully grade separated, two-track main line railroad corridor (or trench) through the central portion of the City and 11 at-grade street crossings Total cost of project approximately $273 million 1/8% County-wide sales tax and 1% downtown hotel tax imposed in 1999 to pay solely for the ReTRAC project In 2002, the City issued $114 million of tax-exempt revenue bonds and a $50 million deeply subordinated TIFIA loan (taxable) with the USDOT; other various funding sources obtained to complete funding package Project substantially completed and opened to train traffic in November 2005 Situation City wanted to raise additional proceeds from the sales tax and hotel tax revenue stream in order to replace $24 million of other project funding sources whose use is not limited to the ReTRAC project, freeing up these sources of funds for other City purposes. Sales tax revenues had increased on average 8.6% per annum since 2002 Interest rates still near historical lows Constraint TIFIA Loan prevented the City from issuing any new bonds. Replacing the TIFIA Loan required another lender to provide a deeply subordinated non-investment grade loan 3

5 City of Reno ReTRAC Project Overview (cont d) Plan of Finance Refinance and restructure existing capital structure Capitalize on the sales tax growth by re-leveraging the revenues, providing additional debt capacity and enabling the City to replace other funding sources. Develop new tax analysis, allowing significantly more tax-exempt bonds Reduce aggregate annual project-related debt service through lower overall capital structure Structure to obtain investment grade ratings and bond insurance on senior lien tranches Commitment by Goldman Sachs to purchase deeply subordinated non-investment grade tranche Structure Series 2006A Series 2006B Series 2006 Par Amount Security Underlying Ratings Insurance $137 Mn Senior lien sales tax Baa1/A- Yes $51 Mn Subordinate lien sales tax NR No $9 Mn Senior lien room tax Baa1/BBB+ Yes Bonds Maturity Synthetic fixed rate (auction rate bonds swapped to fixed with E-LIBOR) 2040 Fixed rate serials and term CABs 2046 Fixed rate 2036 Offering Public Goldman Sachs Initial Purchaser Public 4

6 The Plan: Maximum Leverage Needed 40 Year Revenue Streams Sales Tax Mostly Tax-Exempt Hotel Tax Some taxability issues Lease Income Taxable Income Stream 20 Year Revenue Stream Benefit Assessments Taxable Revenue Stream Tax-Exemption Tax Issues limited application to around 70% of obligations sold TIFIA Adds leverage and allows allocations of taxable revenues to Federal Loans 5

7 The Plan: Maximum Leverage Obtained Sales Tax? County-wide Hotel Tax 1% Downtown Properties Assessment District $18 million Downtown Lease Income on 77 Properties Transferred from Union Pacific RR Lease Payments Series A Senior Lien Tax-Exempt Sales & Hotel Tax Revenue Bonds Series C TIFIA Senior Lien Assessment Loan Series D Senior Lien Lease Revenue Bonds (Taxable) Series B Subordinate Lien TIFIA Obligations Series E US DOT Subordinate Lien Lease Revenue Loan 6

8 Utilizing a senior-subordinate structure, the City was able to leverage its County-wide sales tax and raise $188 million of bond proceeds, 2x the traditional amount of leverage. (a) Sales Tax Revenue Bonds (Mn) $30 $25 Series A Series B FY 2005 Sales Tax Revenues $8,260,700 $8,260,700 Maximum Debt Service $9,132,000 $18,100,000 MADS Coverage 0.91x 0.46x Breakeven Growth Rate (b) 0.21% 1.91% Ratings Baa1/A- NR Par Amount $137 Mn $51 Mn 3% Sales Tax Growth $20 $15 Series B CABs Series B CIB Interest Series B CIB Principal Series A Auction Fees Series A Interest Series A Principal 1.91% Sales Tax Growth $10 $5 $ (a) A traditional 30-year level debt service structure with x historical debt service coverage would have generated approximately $ million, compared to the $188 million raised with the Series 2006 sales tax bonds. (b) Does not take into account interest earnings and assumes 3% revenue growth in FY

9 Deal Structure Using Base Case Revenue Projections GS was able to: Purchase lowerrated bonds Purchase subordinate bonds Purchase long dated back-end cash flows Provide leverage to the financing program by taking the weaker cash flows while permitting the stronger cash flows to be sold to the market. Debt Service 20,000,000 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 Series C CAB: Compounded Interest Series C CAB: Principal Series C CIB: Interest Series C CIB: Par Series A: Interest Series A: Principal Base Case Revenues Debt Service Composition Purchased by GS 4,000,000 2,000,000 0 Sold to Market Year 8

10 Case Study 2: Electric Municipality

11 The Electric Municipality The Municipality s finance plan will address a combination of concerns: Funding a contract loss Relieving debt service pressure through 2013 The Municipality will issue the $90 million in two series of $45 million each in 2006 and The new issue principal will amortize after 2014, to avoid the rate pressure in early years. The Municipality entered into a $45 million Accelerated Bond Purchased Agreement on March

12 What is an Accelerated Bond Purchase Agreement (ABPA)? The Municipality has a financing need to finance in 4-7 months but wants to lock in the current flat yield curve / low rate environment. GS agreed to guarantee the Issuer s bond price and debt service schedule on the date of the ABPA agreement, locking in their bond s yield in 4 months at 4.80% with a 1.7 bp accrual/month feature until September 30, Typical Bond Issuance Process Price Bonds Today Prepare Bond Documents and POS Deliver POS Bond Sale Deliver Final OS Bond Closing Accelerated BPA Process Execute Accelerated BPA = Price Bonds Today Prepare Bond Documents and POS Deliver POS Bond Sale Window Deliver Final OS Bond Closing 11

13 Case Study Takeaways Hedges interest rate risk From March 31, 2006, the Municipality has benefited 21 bp from their hedge through an ABPA Hedges the Municipality s credit risk Diversifies Hedging Vehicles The Municipality s recent financing is predominantly synthetic fixed debt, while the ABPA will allow the Municipality to issue traditional fixed rate bonds. Eliminates Tax Risk Before the ABPA, the Municipality s tax risk profile: (52.5% Tax Risk/47.5% No Tax Risk) The Municipality capitalized on value of tax risk with the basis swap on the term bonds maturing serially from October 2004 through October GS agreement to purchase the bonds reduces the overall tax risk profile of the Municipality Offers Flexibility To accommodate the flexibility of the issuance date of the bonds, the agreement allows the issuer to lock in rates within a 3 month window with an accrual adjustment each month feature. 12

14 Case Study 3: Minneapolis Airport

15 Lower interest rates provided a refunding opportunity that MAC was not ready to pursue. The Minneapolis St. Paul Metropolitan Airports Commission (MAC) is currently negotiating changes to the rate methodology used to charge the airlines MAC wanted to take advantage of low interest rates and advance refund $640.1 million of senior and subordinate bonds 5.4% 5.2% 5.0% 4.8% 4.6% Taxable and Tax-exempt Rates 20-year MMD 25-year MMD 10-year Treasuries Negotiations with Northwest Airlines prevented MAC from drafting an appropriate disclosure document to access the market within the next few months A six-month Accelerated Bond Purchase Agreement (ABPA) was not a solution, since the SLGS subscription window is only 60 days. Open market securities would have been difficult to bid due to uncertain timing of offering 4.4% 4.2% 4.0% 3.8% 3.6% Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 14

16 Goldman Sachs reacted quickly with a solution that allowed the MAC to capture the market. Timeline 4.70% 4.60% 4.50% 4.40% 4.30% MAC decides to pursue traditional advance refunding; Goldman Sachs receives mandate MAC cannot draft disclosure document due to NWA negotiations; ABPA option explored MAC cannot enter into ABPA due to tax issues; Private placement option explored Goldman Sachs commits to purchase the bonds through a private placement 4.20% 4.10% 4.00% 3.90% 3.80% 25-Year MMD 20-Year MMD 3.70% 7/3/06 8/3/06 9/3/06 10/3/06 11/3/06 12/3/06 15

17 The private placement highlights Goldman Sachs ability to commit capital for the benefit of its clients. Goldman Sachs, through its Municipal Structured Products desk, offered to purchase the bonds in a private placement MAC sold the Senior Bonds through a negotiated private placement and the Subordinated Bonds through a competitive bid, won by Goldman Sachs To lock in MAC s arbitrage yield, Goldman Sachs agreed to a six-month minimum holding period, which allowed Goldman Sachs to be deemed as an investor (not an underwriter ) for tax law purposes Pricing of the issue included a liquidity premium that reflected the risks related to having a six-month holding period, the lack of a disclosure document and the uncertain future of Northwest Airlines Summary of Refunding Results Pricing Date December 20, 2006 Par Amount Senior Bonds, Series 2007A $440,985,000 Subordinate Bonds, Series 2007B $197,360,000 $638,345,000 Gross Savings $58,200,492 PV Savings $33,051,698 PV Savings as % of Refunded Bonds 5.16% MAC agreed to not to issue any debt, except for commercial paper, until delivery of a disclosure document The transaction surpassed MAC s minimum PV savings threshold of 3.5% per maturity 16

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