Topics for Discussion

Transcription

1 Topics for Discussion 2014 Government Finance Officers Association of Pennsylvania 2014 Bond Market Update Glen Williard Managing Director Public Financial Management, Inc. State College, Pennsylvania April 28, 2014 Presented by: Tim Frenz Director Janney Montgomery Scott David Unkovic, Esq. Of Counsel McNees Wallace & Nurick LLC 1. Municipal Market Update Market Topics 3. Issuer Responsibilities in the Current and Future Regulatory Environment 4. Municipal Fiscal Distress and the Bond Market 5. Stormwater Authorities 6. The SEC s Municipal Advisor Rules Municipal Market Update 2 1

2 Municipal Market Update Municipal Bond Funds: Inflows (Outflows) Visible Supply: February Present Municipal bond yields rose significantly throughout the late spring and summer of 2013 due to news from the Fed suggesting it would begin to consider tapering its Quantitative Easing policies. On July 18, Detroit filed for Chapter 9 bankruptcy, making it the largest US city to ever do so. The Fed announced it would begin to taper its QE bond buying program beginning in January, More recently, a number of factors including municipal bond inflows, January redemptions, and relatively low supply have combined for a strong start to 2014 for municipal issuers. On February 4, S&P downgraded Puerto Rico to junk status, affecting $70 billion of tax-exempt debt. $15 $10 $5 Monthly Mutual Fund Inflows (Outflows) 30-Day Visible Municipal Supply Year MMD (AAA Fixed Rate Bond Rates) 1/1/2013 3/7/2014 Thoughts of Tapering QE announced by QE Tapering Begins... Billion ns $0 ($5) ($10) ($15) Detroit files for Chapter 9 Bankruptcy Russia invades Ukraine ($20) Date

3 Bank Loans Credit Rating Scales Banks have a positive view of municipal credits related to other loan classes 2014 Market Topics Amortization period usually 5-20 years (sometimes 30 years attainable) Rate usually fixed for 5-10 years, then rate resets with a cap (pre-determined index or formula) Lower up-front financing costs than Bonds; sometimes higher interest rates than Bonds No Underwriter s Discount No credit rating agency needed Fewer legal documents required as compared to a bond issue No Official Statement needed } } DESCRIPTION MOODY'S S&P/FITCH Strongest Aaa AAA Very Strong Aa1/Aa2/Aa3 AA+/AA/AA- Above-Average A1/A2/A3 A+/A/A- Average Baa1/Baa2/Baa3 BBB+/BBB/BBB- Below-Average Ba1/Ba2/Ba3 BB+/BB/BB- Weak B1/B2/B3 B+/B/B- Very Weak Caa1/Caa2/Caa3 CCC+/CCC/CCC- Extremely Weak Ca CC Default C D Investment Grade Junk Bonds Usually able to structure loan as a draw down of proceeds for first months Pay interest only on amount drawn Varying levels of prepayment ability 8 9 3

4 S&P s Rating Criteria Local GOs Institutional Framework 10% Economy 30% Management 20% Financial Measures 30% Liquidity 10% Budgetary Performance 10% Budgetary Flexibility 10% Debt Contingent Liabilities 10% 10 S&P s Rating Criteria Management Assesses the impact of management conditions on likelihood of repayment & includes managerial decisions, policies, & practices. Factors that affect rating: Management s ability to plan, monitor, and manage the government s finances Concern of the government s overall financial position Unwillingness to support a debt, capital lease, or moral obligation pledge Active consideration of filing for bankruptcy in the near-term Absence of debt-management policies 11 Refundings & Negative Arbitrage Refund 4% coupon bonds today with 3% coupons Callable 5/1/2015 No Negative Arbitrage: Invest proceeds at the yield of the new bonds, 3.00%, and no negative arbitrage until the call date Negative Arbitrage: Invest proceeds at 0.10% and the negative arbitrage is the difference, or 2.90%, until the call date Negative arbitrage is the cost of investing refunding proceeds at a lower rate than the new borrowing rate until the call date of the old bonds No Negative Arbitrage Negative Arbitrage Savings $1,000,000 $1,000,000 Negative Arbitrage $0 ($200,000) Net Savings $1,000,000 $800,

5 Bond Insurance Overview Past The lasting effects of the financial crisis: Assured Guaranty & MBIA were the only insurers to survive the crisis 2007: $ billion of debt insured 2013: $ billion of debt insured The lowest amount on record Present: New monoline insurers have begun to enter the market: Build America Mutual Municipal Assurance Corp Created by Assured National Public Finance Guarantee Corp Created by MBIA In 2013, Assured remained at the top with 61.1% market share of insured bonds, BAM held 36.8%, and MAC controlled 1.3% Ratings of Bond Insurers Moody's S&P Rating Rating Assured Guaranty Assured Guaranty Corp. ("AGC") Assured Guaranty Municipal ("AGM") A2 / Stable AA- / Stable Municipal Assurance Corp. ("MAC") MBIA MBIA Insurance Corp. B3 / Positive B / Stable National Public Finance Guarantee Corp. Baa1 / Stable A / Stable Build America Mutual ("BAM") - AA / Stable CIFG Assurance WD WD Ambac WD WD FGIC WD WD Syncora Guarantee Inc/XL Capital Assurance WD WD ACA Financial GuarantyCorp - WD 2006 Present: Amount of PA Debt Insured Annually Radian Asset Assurance Ba1 / Negative B+ / Stable

6 MMD GO Yield Curves Bond Insurance Benefits: Lower rated credits with bond insurance are more attractive to investors and trade at a smaller spread to MMD Generally of value for A & BBB rated entities Improves spreads, however, underlying rating still has an impact on final pricing to MMD Costs: Quoted as a % of debt service which varies with the type of deal and underlying rating Issuer Responsibilities in the Current and Future Regulatory Environment The issuance of bond insurance declined year over year from , and beginning with the increased percentage in 2013, we may see that the issuance amount will increase in the upcoming years

7 Rule 15(c)2-12 Disclosures Rule 15(c)2-12 rule requires that for most new offerings of municipal securities, the following types of information be provided to the MSRB s EMMA system: Financial or Operational Information Annual financial information concerning issuers, or other financial information and operating data provided by issuers Audited financial statements for issuers Material Event Notices Principal and interest payment delinquencies Non-payment related defaults, if material Unscheduled draws on debt service reserves reflecting financial difficulties Unscheduled draws on credit enhancements reflecting financial difficulties Substitution of credit or liquidity providers, or their failure to perform Adverse tax opinions, Internal Revenue Service (IRS) notices or events affecting the tax status of the security Modifications to rights of security holders, if material Bond calls, if material, Tender offers, and Defeasances; Release, substitution, or sale of property securing repayment of the securities, if material Rating changes Bankruptcy, insolvency, receivership or similar event Merger, consolidation, or acquisition, if material; Appointment of a successor or additional trustee, or the change of name of a trustee, if material Notices of failures to provide annual financial information on or before the date specified in the written agreement Rule 15(c)2-12 Disclosures Make Sure You Are Compliant: No More Limited Disclosure for Small Issuers Prior to 7/1/09, issuers with outstanding debt under $10 MM were subject only to Limited Disclosure. Material Event notices needed to be filed, but financial audits only needed to be provided if requested by an investor. Beginning 7/1/09, there is no more Small Issuer exception all issuers must file fully and on a timely basis New Issuer Requirements Issuers with no prior outstanding debt who have not been filing are required to begin regular filing within a certain number of days (usually 180 or 270) following the receipt of their next audited financial statements. Rule 15(c)2-12 Disclosures Make Sure You Are Compliant: SEC Rule 15c2-12 prohibits municipal securities dealers from purchasing or selling municipal securities unless they reasonably believe that the state or local government issuing the securities has agreed to disclose such things as annual financial statements and notices of certain events, such as payment defaults, rating changes and prepayments. Additionally, the SEC has set forth interpretations of federal securities laws to require underwriters to have a reasonable basis for recommending any municipal securities. To have a reasonable basis to recommend a security, an underwriter must carefully evaluate the likelihood that a municipality will make the ongoing disclosure called for by the rule, and that it is doubtful an underwriter could form a reasonable basis to recommend a security if the municipality had a history of persistent and material non-disclosure. Source:

8 Rule 15(c)2-12 Disclosures What is EMMA? Stay Out of the Headlines Make Sure You Are Compliant: Electronic Municipal Market Access System The process for registering with EMMA and to make submissions of continuing disclosure documents to EMMA is set forth in the EMMA Dataport Manual for Continuing Disclosure Submissions, available at Issuers can register with EMMA at There are also several online training videos about submitting Continuing Disclosure Documents at Tutorials.asp?section=1&video=0. A comprehensive, centralized online source for free access to municipal disclosures, market transparency data and educational materials about the municipal securities market. In order to comply with the provisions of the Rule, you must compile the following documentation and information in word-searchable PDF format and submit to EMMA: (1) Audited Financial Statements for the most recently ended fiscal year; (2) Budget Report for the current / upcoming fiscal year; (3) An indication if any MATERIAL EVENTS have occurred. Note, that if you fail to provide the Annual Information and audited financial statements on or before the date specified in your Continuing Disclosure Certificate, you must submit, in a timely manner, not in excess of ten (10) business days, to the MSRB via EMMA, notice of this failure. The EMMA website was established by the Municipal Securities Rulemaking Board ( MSRB ) to increase the broad comprehensive access to vital disclosure and transparency information in the municipal securities market. EMMA provides investors with key information about municipal securities, free of charge. The information on EMMA is presented in a manner specifically tailored for retail, non-professional investors who may not be experts in financial or investing matters. Source: The Bond Buyer

9 Stay Out of the Headlines ALERT: Potentially Significant Changes in Pennsylvania Municipal Regulations Legislation (Senate Bills No. 901, 902, 903 and 904) has been introduced in the PA General Assembly that, if passed, would significantly affect the process by which local governments and municipal authorities borrow for their capital projects. Changes would include Prior to the enactment of a debt ordinance, the municipality must make an initial filing with DCED and obtain a preliminary approval from DCED (except for refundings). The information supplied spp in this filing gwould include, d, among other things, evidence vd satisfactory s to DCED that the debt is self-liquidating, if applicable. Before a municipality issues a guaranty of debt of an authority or another municipality, it must conduct its own due diligence review of the risks of the transaction and must hold a public hearing. Once the preliminary approval is received, the municipality has one year to incur the debt. Each lawyer and financial advisor representing the issuer has a fiduciary duty to the issuer, the violation of which can be a misdemeanor. Additional restrictions added for entering into swaps (but not an outright prohibition). Municipal Fiscal Distress &the Bond Market Source: The Bond Buyer

10 Effect on Bond Market of Municipal Fiscal Distress Effect on Bond Market of Municipal Fiscal Distress Effect on Bond Market of Municipal Fiscal Distress State receiver for City of Detroit proposes to treat general obligation bondholders as unsecured creditors. Raises question of exactly what general obligation debt means. Will there be a pricing effect on general obligation debt for all issuers? State receiver for City of Detroit has filed suit to have $1.44 billion of Certificates of Participation (COPs) issued by special purpose corporations declared void. The COPs were issued to fund pension liabilities. Will this affect how the market views bond counsel opinions? If the debt is declared void, how will this affect other bond issues that are structured to get around statutory debt limits? Puerto Rico s rating has been lowered to below investment grade by the rating agencies. Puerto Rico s bonds are triple tax-exempt in all 50 states (exempt from federal, state, and local income taxes). If Puerto Rico defaults, how will this affect bond funds across the country? If bond funds suffer losses, how will this affect the general demand for tax-exempt debt?

11 Stormwater Authorities STORMWATER AUTHORITIES Act 68 of 2013 amends Municipality Authorities Act to permit municipal authorities to undertake stormwater planning, management and implementation. Create new stormwater authority, or expand purposes of existing authority, if necessary, through amendment of articles of incorporation. STORMWATER AUTHORITIES Charge fees to property owners (including to nonprofits) based on the amount of stormwater the owner's property generates. For residential properties, Philadelphia charges based on a Citywide average of lot size and impervious characteristics - $13.48 per month. For non-residential properties, Philadelphia charges using a rate schedule based on 500 square foot units of lot size and of impervious surfaces. Monthly charges: $0.50 per unit of lot size and $4.00 per unit of impervious surface

12 STORMWATER AUTHORITIES Can stormwater fees of an independent regional authority generate sufficient revenues to fund operations, capital improvements and debt service? Would regional authority own all the stormwater facilities? How would an authority decide which stormwater projects to undertake in what priority in its constituent municipalities? How would the authority's operations relate to its municipalities' permit obligations under Municipal Separate Storm Sewer Systems (MS4s)? How much control should municipalities maintain over the stormwater authority? Are stormwater authorities viable issuers of municipal debt? The SEC s Municipal Advisor Rules NEW MUNICIPAL ADVISOR RULE Municipalities suffered losses under bond and swap structures in the Great Recession. Congress reacted by enacting Section 975 of the Dodd- Frank Wall Street Reform and Consumer Protection Act

13 NEW MUNICIPAL ADVISOR RULE NEW MUNICIPAL ADVISOR RULE NEW MUNICIPAL ADVISOR RULE Congress created a new concept: Municipal Advisor A person who: is NOT a municipal entity or municipal employee ee provides "advice" to or on behalf of a municipal entity or obligated person with respect to "municipal financial products" (swaps, etc.) or the issuance of "municipal securities" (bonds, etc.) In the "old days" you had: Financial Advisors unregulated. Serve as advisor to issuer. E.g. Public Financial Management; Concord Public Financial Advisors; Financial S&Lutions. Investment Bankers (underwriters) regulated. Underwrite bonds. E.g. Janney Montgomery Scott; PNC Capital Markets; RBC Capital Markets. In the "old days", both Financial Advisors and Investment Bankers provided detailed and specific advice to issuers. When it came to providing advice, there was little functional difference e between Financial a Advisors s and Investment Bankers

14 NEW MUNICIPAL ADVISOR RULE In September 2013, the SEC adopted final rules (Release No ) which will become effective July 1, The rules focus on "functions" not "titles". General rule: a person who provides "advice" to a municipal entity must register as a municipal advisor. Such a person has a "fiduciary duty" to the municipal entity. NEW MUNICIPAL ADVISOR RULE What is "advice"? Advice is a recommendation that is particularized to the specific needs of a municipal entity with respect to bonds or swaps. Only a municipal advisor may provide advice, with certain important exemptions. NEW MUNICIPAL ADVISOR RULE Exemptions to the Rule Underwriter Exemption: If an underwriter is engaged by the issuer (via a letter of engagement), an underwriter can then provide advice and recommendations that are tailored to the specific underwriting. IRMA Exemption: If an issuer hires an independent registered municipal advisor, underwriters are free to provide advice and recommendations to the issuer. In order for underwriters to be exempt under this rule, the issuer must provide notice that it has retained a municipal advisor prior to the underwriter giving them any advice or recommendations. Posting notice on its website of having retained a municipal advisor may be considered sufficient issuer notice. RFP Exemption: This exemption requires issuers to issue a Request for Proposals ( RFP ) prior to seeking or receiving advice and recommendations from underwriters about a particular underwriting

15 Glen Williard, Managing Director Public Financial Management, Inc. (717) One Keystone Plaza Harrisburg, PA Tim Frenz, Director Janney Montgomery Scott LLC (412) One PPG Place, Pittsburgh, PA David Unkovic, Of Counsel McNees Wallace & Nurick, LLC (717) Lausch Lane, Suite 200 Lancaster, PA Glen Williard joined Public Financial Management, Tim Frenz joined Janney Montgomery Scott as a David Unkovic has been a municipal bond lawyer in Inc., in He has had a wide variety of experience Director of Public Finance in 2006 after having spent Pennsylvania for over 30 years. He has served as with different issuers including the Commonwealth of the previous fourteen years in the public finance bond counsel to all sizes of governmental entities, Pennsylvania, several state agencies, thousands of department of a regional investment bank. Mr. Frenz including state agencies, townships, boroughs, cities, has provided investment banking and financial school district projects, as well as other local advisory services to scores of Pennsylvania-based school districts, counties and authorities. He has also government financings, including sewer and water governmental borrowers, including school districts, represented various financial entities and nonprofit authorities, boroughs, counties and townships, state-level authorities, housing authorities, cities, corporations in tax-exempt financings. Mr. Unkovic hospitals, airports and stadiums with an aggregate counties, townships and boroughs, water and sewer has experience in the areas of distressed principal amount of over $40 billion. He is PFM s authorities, and economic development agencies and municipalities, bank lending and investment leader of the North East region. authorities. regulations. For most of his career he has worked at Mr. Frenz has extensive experience with a host of private law firms, but he has also served as chief For the past 10 years he has worked on some of the public finance debt structures and products, including compliance officer at PFM Asset Management, as largest competitive sales in the country. Build America Bonds, Qualified Energy Conservation chief counsel of the PA Department of Community and Bonds, tax increment financings, annual note funding Economic Development and as the state appointed Mr. Williard also assisted in the creation of the programs, investment products, letters of credit, and receiver for the City of Harrisburg. Pennsylvania Infrastructure Investment Authority derivative products, including swaps and swaptions. (Pennvest), revolving loan Program. He also serves as Mr. Frenz has lectured on topics including negotiated Mr. Unkovic joined McNees Wallace & Nurick in June, the program administrator for the Emmaus General sale versus competitive bid, Act 1, economic 2013 and practices in the Lancaster office as part of Authority s /PLGIT, Bond Pool Programs totaling $675 development financing, tax increment financing, and the Financial Services and Public Finance, and million. Mr. Williard has worked with both competitive regional asset district financing to groups including: Municipal Recovery Groups. and negotiated bond issues, first time issuers, many PA Association of School Business Officials, Council types of refundings, restructurings, and defeasance of Development Finance Authorities (National Mr. Unkovic was born in Pittsburgh, and he received escrows, presentations at public hearings, credit rating Conference), Pennsylvania Bar Institute, the his B.A. in political science, summa cum laude, from Government Finance Officers Association, the agencies and municipal bond insurance companies. Pennsylvania Capital Region Economic Development the University of Pennsylvania, and his J.D. from Council, the PA Institute of Certified Public Harvard Law School. He is a former president of the Mr. Williard has a Bachelor's Degree in business Accountants, and the Pennsylvania Regional Asset Pennsylvania Association of Bond Lawyers, and is a finance from the University of Nevada at Las Vegas. District Task Force. fellow of the American College of Bond Counsel. Mr. Frenz graduated magna cum laude with a B.S. in Finance from Lehigh University