Debt 101: Everything an Issuer Should Know

Transcription

1 Monday MAY 22, :40-3:55 PM Debt 101: Everything an Issuer Should Know MODERATOR SPEAKERS C. LaShea Lofton Director of Finance, City of Dayton, OH Jennifer Brown CFO, City of Sugar Land, TX Kristin Hanson Director, Public Financial Management (PFM) #GFOA2017

2 S2 Debt 101 Volume I It is our goal today to answer your questions about public debt. Questions such as: Why municipal bonds? What does it mean to issue debt? Why should I care? Who is on the financing team? Why do we need a lawyer? What does structuring mean? Do we have to go to market? How do bonds get sold? Ok, we issued! We re done, right? And more!!

3 S3 Why Municipal Bonds? Governmental entities have been using debt (most often in the form of municipal bonds ) for over 200 years What is the benefit of issuing bonds? Lower interest rates than taxable debt Part of your overall financial strategy They are well suited to fund public infrastructure such as government buildings, water distribution systems, schools, police stations and many other projects that require significant capital investment.

4 S4 Why Municipal Bonds? What are the risks of governmental debt, generally? Primary and continuing disclosure responsibilities Political risks of increasing leverage Intergenerational equity? o Pay for a project over its useful life or push the burden to future residents?

5 S5 What Does it Mean to Issue Debt? You re giving your team the ability to Receive an infusion of cash and in return repay the bond purchasers over time, plus interest. Complete a capital project with a repayment schedule that spreads the cost of that project over its useful life. The capital planning process will identify capital projects and the funding for the project

6 S6 Why Should I Care? Appropriate planning helps to provide the most favorable results to the Issuer Debt issuance requires working with a number of partners, each of whom has a specific role it is important to know all the parties involved Debt issuance results in a financing agreement that is legally binding, and it is critical that government officials understand the basic terms of the agreement and what the agreement commits them to do

7 S7 Who is on the Financing Team? Bond Counsel Works directly for the Issuer. An attorney (or team of attorneys), typically with specialized experience in municipal financings, that generally issues two legal opinions in the offering Municipal Advisor/ Financial Advisor Underwriter/ Investment Banker A professional consultant that works directly for the Issuer. Must give fiduciary care in advising the Issuer by putting the Issuer s interests above their own financial interests in a transaction. The key conduit between the Issuer and ultimate investor. In a financing, they are ultimately working for the investors. The Underwriter, via the bond sale, agrees to buy the bonds and resell them to investors. Other Participants Paying Agent/Trustee Rating Agency Bond Insurance Provider or Other Credit Enhancer

8 S8 Why Do We Need a Lawyer? Issuers must comply with Local, State and Federal laws, and enter into a number of legal agreements with various parties Critical to consult with specialized legal counsel (Bond Counsel) to determine: If they are authorized to issue debt What actions are required to authorize issuance Any constraints placed on debt issuance

9 S9 What Does Structuring Mean? The primary goal of an Issuer should be the proper administration of the bond issue at the least possible cost and interest rate Projects should be thoroughly reviewed: Scope Feasibility Cost Useful life of the asset Capacity to repay debt

10 S10 What Does Structuring Mean? Sufficient revenues should be available to meet ongoing debt payments and jurisdiction needs to understand what type of revenues are pledged to support (or secure ) the debt. Various Types of Debt: Tax Exempt Municipal Bonds Taxable Bonds Direct Loans Other alternatives

11 S11 Do We Have to Go to Market? Bank Loans can take on many forms and can typically be structured to provide the Issuer with flexibility regarding duration and repayment. may carry a fixed or variable interest rate are for a shorter duration than traditional bond sales and are usually in the five to ten year duration, While bank loans should be disclosed as part of a debt portfolio, they have no disclosure or continuing disclosure requirements. Inter-Fund Loans

12 S12 How do Bonds Get Sold? Most local governments do not have the inhouse expertise or resources to find investors for their proposed bond offerings, and will require the services of a specialized municipal securities dealer, underwriter or a syndicate of underwriters to sell the bonds for them. Competitive Bid Process Underwriters submit closed bids to the Issuer on the day and time designated in the official notice of sale. The bonds are awarded to the underwriter that has submitted the best price (i.e., the lowest true interest cost bid).

13 S13 How do Bonds Get Sold? Negotiated Sale Process After the underwriter is selected, the Issuer and the underwriter will begin the process of structuring the bond issue and completing the other origination tasks. Bond Rating Municipal bond credit ratings measure the Issuer s risk of paying all interest and principal back to investors. Credit Rating Agencies

14 S14 How do Bonds Get Sold? What are the Bond Ratings? Highest (AAA/Aaa) High (AA/Aa) Above Average (A) Medium (BBB/Baa) Anything below this is not considered Investment Grade ( Junk Bonds )

15 Ok, We Issued! We re Done, Right? S15 The Issuer is more than just a participant in the sale of the bonds. The agency is the owner of the transaction and the obligor of the debt until maturity when the debt is fully repaid - perhaps a period of 20 to 30 years. Once the deal closes, staff will need to book the transaction in the general ledger/balance sheet.

16 Ok, We Issued! We re Done, Right? Setting up a tickler file with key dates is helpful: When bond payments are due When continuing disclosure information needs to be filed During the period when there are unspent bond proceeds or reserve funds, staff will want to determine how these funds should be invested. Finally, the organization needs to keep detailed records as to how the bond proceeds were spent in order to comply with arbitrage law. S16

17 S17 Debt 101 Volume II What to do after a bond has been issued? What do I need to know about continuing disclosure? Should we have policies and procedures to ensure compliance? Are there specific requirements for tax compliance? How should I invest my bond proceeds? What do I need to do to ensure timely debt service payments? When is the right time to talk about refunding? Other Requirements

18 What to Do after a Bond Has Been S18 Issued? Bonds issued by State and local governments are generally subject to ongoing monitoring and reporting Federal disclosure requirements o SEC Rule 15c2-12 Compliance with federal tax requirements

19 What to Do after a Bond Has Been Issued? S19 Post issuance activities will generally fall into two categories: Qualified use of bond proceeds and bondfinanced property Arbitrage yield restriction and rebate Continuing Disclosure (CDA s)

20 What Do I Need to Know about Continuing Disclosure? S20 Governments that issue bonds generally have an obligation to meet specific continuing disclosure requirements that are identified specifically in a continuing disclosure agreement (CDA) Certain financial information identified in CDA and material events are required to be submitted via EMMA

21 Should We Have Policies and Procedures to Ensure Compliance? Issuer needs to ensure they comply with all the federal tax rules applicable to those bonds from the date of issuance through their final maturity Federal tax rules applicable to taxadvantaged bonds generally include the following major areas: Expenditure of proceeds Use of financial assets Investment of proceeds Recordkeeping S21

22 Are There Specific Requirements for Tax Compliance? S22 It is recommended that Issuers establish written policies and procedures to comply with post-issuance and ongoing requirements Identify single individual with primary responsibility for monitoring and compliance Create a checklist or inventory of requirements Document proof of intentional compliance

23 How Should I Invest My Bond Proceeds? Upon the issuance of bonds by a State or local government, the bond proceeds are usually deposited in various funds Considerations when making decisions to invest proceeds: Anticipated drawdown schedule of the proceeds Federal and State regulations governing the types of investments permitted Arbitrage yield State of local government s investment policy Requirements from rating agencies S23

24 How Should I Invest My Bond Proceeds? Those responsible for making investment decisions should coordinate closely with departments and staff that will be drawing down proceeds A written investment policy is the single most important element in a public funds investment program Issuers should become acquainted with federal tax law as it applies to arbitrage restrictions S24

25 How Should I Invest My Bond S25 Proceeds? 2014 SEC Municipal Advisor (MA) Rule BE FAMILIAR! Limits communications that Brokers may have with Issuers Brokers can be considered MA s if they provide advice on investment of bond proceeds Brokers ask Issuers to indicate if funds being invested are bond proceeds

26 What Do I Need to Do to Ensure Timely Debt Service Payments? Issuers of government debt have a fiduciary responsibility to manage their funds in a manner that assures timely and accurate payment of debt service principal and interest GFOA recommends that Issuers: Establish procedures and appropriate contractual terms for making debt payments Use electronic funds transfers to ensure timely payments S26

27 When Is the Right Time to Talk about Refunding? S27 Prior to maturity of the debt an Issuer will commonly have the opportunity to refinance the remaining debt at lower interest rates (called a refunding ) Typical Call 10 years Current Refunding Advance Refunding GFOA Best Practice

28 When Is the Right Time to Talk about Refunding? S28 Refunding of debt requires essentially the same process and effort as a new money issue Often there is only one opportunity to refund debt for significant interest savings Proceeds deposited in Escrow Account until Call Date Time Refunding to minimize Negative Arbitrage in Escrow

29 S29 Other Requirements Bond Indentures Bond Ordinance/Resolution Requirements Notice/Reporting Coverage Ratio Additional Bonds Test Debt Service/Reserve Requirements Required Accounts

30 S30 Other Requirements State/Local Law Requirements Public Notice Legal Debt Limits Debt/Investment/Other Policies Rating Agencies- BP Investor Relations- BP Financing Team Relationships

31 Questions?