School District of. Preliminary 2011 Financing Program

Transcription

1 School District of Palm Beach County, Florida Preliminary 2011 Financing Program presented by Public Financial Management 300 S. Orange Avenue Suite 1170 Orlando, FL fax

2 Table of Contents I. Market Update II. Summary of Outstanding Debt III Financing Program I. Series 2007B (Put Bonds) II. Series 2001B Swaption Structures

3 MARKET UPDATE

4 Market Update: Current Municipal Market Rates in Perspective 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% MMD AAA G.O. Curve AAA GO 4/2/2007 AAA GO 4/1/2008 AAA GO 4/1/2009 AAA GO 4/1/2010 AAA GO 4/1/2011 While interest rates spiked late in 2010 and early 2011, rates remain near levels seen over the past five years 0.00% % Bond Buyer 20-Year GO Index In a broader historical context, rates are still attractive Inflation will always be the biggest determinant of absolute levels 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Source: Bloomberg & TM3 4

5 Market Update: What s In Store for 2011? Expiration of ARRA Programs Regulation The Year of the Restructure Part II A significant number of VRDOs, put bonds and forward starting swaps need to be addressed in 2011 Even Fewer Bond Insurance Options Headline Risk Discussion in the press of local government bankruptcy (60 Minutes) Increased disclosure of pension challenges Interest Rate trends Most economists predict rising rates but when! 5

6 Market Update: ARRA Programs Expiration of ARRA programs BQ back to $10 million BABs gone Recovery Zone expired Qualified School Construction Bonds Some unused allocation can be used in 2011 Issuer Type Recovery Zone Economic Qualified School Clean Qualified Energy Refund AMT Repeal of AMT on New Money Build America Development Recovery Zone Construction Renewable Conservation Bonds with Non- Private Activity Bonds Bonds Facility Bonds Bonds Energy Bonds Bonds AMT Bonds Bonds Acronym BABs RZEDBs RZFBs QSCBs CREBs QECBs N/A N/A N/A Expansion of Bank Qualified Bonds Tax-Exempt Bonds, Non- AMT Tax Credit Tax Credit Tax Credit N/A N/A N/A Type Direct Subsidy Direct Subsidy % of Tax Credit / Subsidy 35% 45% N/A 100% 70% 70% N/A N/A N/A Time Period No Change No Change Program Limit No Limit $10 Billion $15 Billion $22 Billion $1.6 Billion $3.2 Billion No Limit No Limit No Limit Government x x - x x x x x x 501(c ) x x - x Energy x x x - x x x x x Corporate - - x - x x x x x Structural Limit Traditional Traditional Traditional Section 54A Section 54A Section 54A Private Activity Bonds Private Activity Bonds Traditional In some instances, residual allocations carry forward to

7 Market Update: No More BABs AMT 1% BABs Era Municipal Bond Issuance % of Total Par by Tax Status 2010 Year End Taxable 35% Tax-Exempt 64% Taxable issuance will most likely drop to pre-babs era levels Expiration of BABs will increase long-dated tax-exempt supply Taxable issuance grew from approximately 7% of the market to 35% through h the BABs program BABs issuance primarily concentrated on the long end Pre-BABs Era Municipal Bond Issuance % of Total Par by Tax Status Tax-Exempt 84.5% 2007 Year End AMT 8.8% Taxable 6.7% 7

8 Market Update: Investor Demand Is Weaker Tax-Exempt mutual funds have experienced significant outflows since November 2010 Combination of increased supply and weaker demand does not bode well for Tax-Exempt rates $10 Demand $5 Billions $0 ($5) Inflows (Outflows) ($10) ($15) 8/1/10 9/1/10 10/1/10 11/1/10 12/1/10 1/1/11 2/1/11 3/1/11 8

9 Market Update: Limited Bond Insurance There is one functional bond insurer. Typically used for A rated credits and lower 'Caa2' / Developing Ratings Withdrawn Ratings Withdrawn 'Aa3' / Negative 'AA+' / Stable Ratings Withdrawn BERKSHIRE HATHAWAY INC. 'Aa1' / Stable Outlook 'AA+' / Stable Not Rated Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn 'Ca' / Developing Regulatory Supervision Ratings Withdrawn - Formerly XL Capital Corp 'B3' / Negative 'B' / Negative Ratings Withdrawn Illinois 'Baa1' / Developing 'BBB' / Developing NotRated MBIA Corp has migrated all municipal bond, reserve fund surety and swap policies to MBIA Insurance Illinois. Ratings as of 12/23/10 9

10 Market Update: What s the Bottom Line? Interest rates are appealing by historic standards, but credit spreads and market factors drive up the cost of permanent, long-term fixed rates for Florida school districts 6.0% 20-Year MMD Rate Comparison 5.0% 0.40% 0.05% 1.40% 4.0% 0.80% 3.0% 4.35% 2.0% 3.30% 4.21% 1.0% 0.0% Spring 2008 Rates Summer 2010 Rates Current Rates 20-Year AAA MMD Bond Insurance Credit Spread 10

11 SUMMARY OF OUTSTANDING DEBT

12 Approach to Debt Management: Asset Liability Management (ALM) Traditional Debt Management focuses on optimizing liabilities can lead to hidden risk Asset Liability Management considers debt AND financial assets and measures relationships to reduce net debt service and mitigate risk Results for the District Over $60 million in savings to date Asset Management Asset Allocation Cash Management Performance Measurement Manager Selection ALM The continuous process of actively managing assets, liabilities and financial risks together in an effort to maximize net cash flow and limit risk in support of the District s mission Debt Management Fixed vs. variable Diversification of variable rate debt Taxable vs. taxexempt Debt service profile Bank loans & leases Risk Management Risk Quantification Risk Tolerance Assessment Financial Products Insurance Graphic courtesy of Citigroup, December

13 Core Tenant to ALM: Variable Rate Debt Can Provide Natural Hedge Volatile cash flows from financial activities Risk of poor margins 8% impacting service, ability to 7% invest in future capacity / service Difficulty in budgeting and BEFORE 6% 5% 4% 3% 2% meeting ggoals 1% 0% Unnecessarily high interest expense, low investment income More stable and predictable cash flows 8% 7% Source of stability for the 6% 5% organization 4% Ease of budgeting Source of competitive advantage Helps maintain or improve credit ratings Volatile net cash flow Dec-91 Apr-94 Sep-96 Jan-99 May-01 Sep-03 Feb-06 AFTER Investment Income Stable net cash flow Interest Expense 3% 2% 1% 0% Dec-91 Apr-94 Sep-96 Jan-99 May-01 Sep-03 Feb-06 Investment Income Graphic courtesy of Citigroup, December 2006 Interest Expense 13

14 Current Outstanding Debt The District has approximately $1.9 Billion in COPs outstanding: s Millions Approximately $500 Million has been retired since issuance Annual payments of approximately $140 million Current Outstanding Debt Structure DS Excluding 2001B, 2007B & 2010QSCB 2001B 2007B 2010 QSCB Principal Series Outstanding 2001A $495, B 164,315, A 37,045, B 115,350, C 7,835, D 145,850, E 58,000, Q 407, A 40,480, B 124,295, A 87,300, Q 1,471, A 123,705, Q 1,183, A 199,595, A 238,855, B 116,225, C 190,605, D 22,725, E 147,390, QSCB 67,665,000 Total $1,890,792,240 14

15 Components of Capital Structure Almost 65% of the District s obligations have fixed interest rates with no ongoing market exposure The remaining is constructed as fixed interest rate, but uses swaps and/or puts that must be managed over time: Swaps were used to lower targeted interest rate Put structure t was used to manage variable rate obligations during credit crisis Current PBSD Capital Structure Type of Debt Dollars % Fixed Rate COPs $1,224,649,611,, 64.77% 2003B Synthetic Fixed 124,295, % Fixed Rate (2007B Put) 116,225, % Synthetic Fixed Rate (2002B) 115,350, % 2001B & 2002D Swaption 310,165, % Total $1,890,684, % 6% 6% 7% 16% 65% Fixed Rate COPs 2003B Synthetic Fixed Fixed Rate (2007B Put) Synthetic Fixed Rate (2002B) 2001B & 2002D Swaption 15

16 COP Profile: On-Going Debt Management The District has generated over $60 million in savings through active debt management Requires ongoing management for a portion of the debt SUMMARY OF OUTSTANDING OBLIGATIONS AS OF 012/31/10 Series Principal Outstanding as of 12/31/10 Final Maturity Fixed or Variable Insurer / Credit Enhancement Exposure to Market Changes CERTIFICATES OF PARTICIPATION 2001A 495,000 08/01/11 F Ambac None 2001B 164,315,000 08/01/25 F Ambac Pending Swaption (8/1/2011) 2002A 37,045,000 08/01/18 F FSA None 2002B 115,350,000 08/01/27 V FSA VRDO (liquidity)/swap (3/12/2012) 2002C 7,835,000 08/01/12 F FSA None 2002D 145,850,000 08/01/28 F FSA Basic Swap/Swaption (8/1/2012) 2002E 58,000,000 08/01/16 F Ambac None 2002Q 407,143 06/11/16 F None None 2003A 40,480,000 08/01/21 F Ambac None 2003B 124,295,000 08/01/29 V Ambac SIFMA plus 65 bps/swap 2004A 87,300,000 08/01/29 F FGIC None 2004Q 1,471,185 04/30/20 F None None 2005A 123,705,000 08/01/22 F FSA None 2005Q 1,183,912 12/15/20 F None None 2006A 199,595,000 08/01/31 F FSA None 2007A 238,855,000 08/01/31 F FGIC None 2007B 116,225,000 08/01/25 F FGIC Put due 8/1/ C 190,605,000 08/01/27 F Ambac None 2007D 22,725,000 08/01/15 F MBIA None 2007E 147,390,000 08/01/32 F MBIA None 2010A QSCB 67,665,000 08/01/25 F None None Total COPS 1,890,792,240 OTHER OBLIGATIONS RANS 56,000,000 02/22/11 F None Total Other Items 56,000,000 CAPITAL OUTLAY BOND ISSUES (ISSUE BY STATE OF FLORIDA) Total COBIs 29,555,000 Grand Total 1,976,347,240 16

17 PROPOSED PLAN OF FINANCE

18 2011 Debt Management Calendar The 2011 debt calendar includes: Typical/traditional activity TANs Debt management opportunities $8 Million Termination Payment to District Forward Delivery Agreement 2007B Put Bond roll over, 2001B Swaption exercise, etc School Board of Palm Beach County, Florida 1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7 5/21 6/4 6/18 7/2 7/16 7/30 8/13 8/27 9/10 9/24 10/8 10/ /5 11/19 12/3 12/17 12/ QSCB Swaps CMS Term Series 2001B Series 2002D 8/2012 Exercise Date Put Put Rollover Bond Series 2007B TAN 2011 TAN Planning Executed Period of Execution 18

19 2007B (Put Bond) Plan of Finance 2007B COPs were originally issued as variable rate COPs (Auction Rate) Market turmoil in 2008 led to temporary fix using Put Bond structure Locked in Yield at 5% Put Bond matures in August 2011 As part of the plan of finance for the 2010 QSCB financing, the Finance Committee discussed d and approved amortizing i a portion of the 2007B in Current Outstanding Debt Structure Outstanding Debt After Restructure of 2007B ons Millio ons Milli DS Excluding 2001B, 2007B & 2010QSCB 2001B 2007B 2010 QSCB DS Excluding 2001B, 2007B & 2010QSCB 2001B 2007B 2010 QSCB 19

20 2007B (Put Bond) Plan of Finance Shape of the current yield curves suggests that three structures should be considered for the 2007B Put COP roll over Traditional Fixed Rate Fixed Rate/Put Blend Fixed Rate/FRN Blend Par Amount of Fixed Rate $115,250,000 $44,235,000 $44,235,000 Par Amount of Put/FRN $0 $68,915,000 $72,935,000 Total Par Amount $115,250,000 $113,150,000 $117,170,000 Total Debt Service $226,874,125 $208,023, $179,922, All-In TIC 5.57% 4.71% % 2 1) 5% Roll 2016 PUT 2) SIFMA 10-Year Average + 80 bps Current Interest Rates 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% MMD - 3/22/2011 FL COP (AA- rated) 20

21 Historical Perspective Year Municipal Rates Yield (%) Year AAA MMD + AA 12-Year AAA MMD Revenue Credit Spread % below 5% % 68.59% Maximum 6.45% 6.50% Minimum 2.17% 2.33% Mean % 4.46% Median 4.29% 4.39% Standard Deviation 0.90% 0.88% 0.0 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Maturity 12-Year AAA MMD 12-Year AAA MMD + AA Revenue Credit Spreads" 5% Roll-Over Assumption 21

22 2001B Swaption Background 2001B COPs refinanced the Series 2000A COPs In 2005, interest rates were low enough to refinance the 2001B COPs for savings, but tax law does not allow a second advance refunding The first refunding date permitted is August 1, 2011 So, The District entered into a swaption to trigger the refunding in August of 2011 and received $6,250,000 in 2005 Assumptions: Total Costs of Issuance including insurance - $909, Liquidity 15bps & Remarketing 8bps Current Situation Current Costs of Issuance - $700, (no insurance - AMBAC) Liquidity 70 bps & Remarketing 10 bps Net increase in ongoing cost of 57bps (0.57%) per year 22

23 2001B Swaption: Approach to Managing the Exercise this Fall The swap counter-party has the option to start the swap on August 1, 2011 $30.00 Swap Mark to Market Over Time Given the change in market factors (higher liquidity costs), the District is developing options to minimize the cost or enhance the expected savings Can the District i t make the Swaption go away? Yes, the District has the option to terminate the swap at any time. But the District would have to pay the market price Millions $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 8/16/2005 8/16/2006 8/16/2007 8/16/2008 8/16/2009 8/16/ B Mark to Market SIFMA Swap RatesSince 2005 Swaps have a market price referred to as the Mark to Market value. As interest rates move over time, the MTM changes (%) Swap Rate ( Current MTM - $23,245, The relationship between swap rates and the MTM is inverse 1.5 8/16/2005 8/16/2006 8/16/2007 8/16/2008 8/16/2009 8/16/ Y SIFMA Swap Rate 23

24 2001B Swaption: Summary of Financing Alternatives The plan of finance must be flexible enough to respond to market changes between now and execution The decision tree below outlines the primary options and decision points that have been considered Cash Termination of Swaps + Consider Conventional Fixed Rate Refunding Series 2001B Swaption Evaluate MTMs Acceptable Termination/Fixed Rate Costs Finance Termination of Swaps + Fixed Rate Refunding or Medium Term Notes Allow Exercise of Swaps + Variable Rate Refunding 24

25 2001B Swaption: Summary of Financing Alternatives The chart below shows the historic MTM and the most likely financing strategy in each market condition Swap Mark kto Market Over Time $30.00 $25.00 Leave swap in place and issue variable rate COPS Low long-term interest rates Millio ons $20.00 $15.00 Terminate swap, issue fixed rate (potentially Put) $10.00 $5.00 $0.00 Terminate swap and refund later 8/16/2005 8/16/2006 8/16/2007 8/16/2008 8/16/2009 8/16/2010 High long-term interest rates 2001B Mark to Market 25

26 2001B Swaption: Structuring Options Financing Structure Utilized Series 2001B Bonds - Base Case Comparison of Financing Results - Series 2001B 1 Exercise Swap Alternatives Variable Rate Demand Bonds Floating Rate Notes Terminate Swap Alternatives Medium Term Note Fixed Rate Refunding Traditional Fixed Rate Refunding Par Amount Issued N/A 162,980, ,980, ,580, ,950,000 Par Amount Refunded N/A 160,465, ,465, ,465, ,465,000 Swap Termination N/A N/A N/A (23,245,000) (23,245,000) Interest Rates Existing Rates SIFMA SIFMA + 70 bps MMD bps MMD bps LOC Fee N/A 0.70% N/A N/A N/A Remarketing Fee N/A 0.10% N/A N/A N/A Remarketing Term N/A 3 yrs (ongoing) 3 yrs (ongoing) 7 yrs (1 time) N/A All-in Rate w/termination 5.20% 5.47% 5.39% 610% 6.10% 6.22% Average Annual Debt Service 17,518,384 17,930,708 17,695,122 18,721,776 19,031,520 Total Net Debt Service 245,306, ,029, ,206, ,665, ,027,240 PV of Total Debt Service 161,902, ,752, ,388, ,761, ,502,421 Estimated PV Benefit (Cost) N/A (7,743,810) (6,726,583) (15,880,282) (17,687,647) Upfront Swaption Premium N/A 6,250, ,250, ,250, ,250, Net Benefit (Cost) N/A (1,493,810) (476,583) (9,630,282) (11,437,647) Reduces Debt Service Eliminates Swaps Eliminated Basis Risk Eliminates LOC Risk Eliminates Remarketing Risk 1. Based on current market conditions as of March 18, 2011 Comparison of Financing Risks No No No No No No Yes Yes No No Yes Yes No Yes Yes Yes No No Minimizes Yes 26

27 Recommended Course of Action Series 2007B COPs (PUT) Issue as soon as practical Amortize principal as previously approved Levelize principal p in areas impacted by QSCB and amortize the remaining portion prior to 2032 Series 2001B COPs (Swaption) Terminate if economically practical less than $10 million, or Terminate swaps and issue fixed rate COPs using blended fixed rate and Put structure If swap terminations are large, let swaps be exercised and issue variable obligations 27