Future of Infrastructure Finance

Size: px

Start display at page:

Download "Future of Infrastructure Finance"

Harry Piers Perry
5 years ago
Views:

1 SASHTO 2009 Future of Infrastructure Finance August 31, 2009

2 Funding Options for a State DOT/Toll Road Stimulus package provides attractive financing alternatives to traditional tax-exempt bonds Structural Elements Advantages Disadvantages Tax-Exempt Bonds Traditional bonds issued in the tax-exempt market Coupon and principal paid by the issuer Established market Familiar funding vehicle Significantly higher interest costs compared to BABs on the long end Build America Bonds (BABs) Principal and Interest paid by issuer Issuer receives 35% rebate of interest from the Treasury Achieves a lower funding cost than traditional tax-exempt debt Allows issuers to reach a new investor base for their bonds Less economic in short maturities Amortization Combination of Serials / Terms Can be issued at any maturity Easily wrapped around existing Debt Service Term Bonds, although some serialization is possible Generally 5Y, 10Y, or 30Y Can achieve smooth bullet maturity with sinking fund Callable Yes Make whole call with 10-yr par call currently Tax Status Tax-Exempt Taxable costing approximately bps 2

3 Sample Comparison of Funding Costs with BABs Given the steeper municipal curve, Build America taxable debt is more cost effective on the long end The recent steepening of the taxable yield curve, combined with tighter taxable spreads to US Treasuries, has increased the benefit of BABs for shorter maturities Build America Bonds may afford an issuer significant interest savings for its upcoming financings Optional call provisions are becoming more common, at a price of approximately basis points Indicative State DOT Build America Bond Yield vs. Tax-Exempt Equivalent (1) Market Conditions as of August 21, 2009 TERM TREASURY YIELD SPREAD BOND YIELD COST TO THE ISSUER (NET OF 35% REBATE) COMPARABLE TAX- EXEMPT YIELD (10-Year Call / Non- Call) SAVINGS TE (Non-Call) TX Basis Points yr Tsy / 2.57 (26) bps yr Tsy / bps 20 (2) yr Tsy / bps yr Tsy / bps (1) Preliminary, subject to change (2) 20-year maturity will price off 30-year Treasury Indicative Tax-Exempt vs. Taxable Build America Bonds Yield Curves Estimated based on market conditions as of August 21, 2009 (%) Tax-Exempt Yields (Non-Call) Taxable Yields 3

4 Build America Bonds Issuance To date, more than $26 billion of Build America Bonds have been issued Major transportation BABs issuers include Mississippi DOT, Michigan DOT, TexDOT, the New Jersey Turnpike Authority, the Pennsylvania Turnpike, and the Illinois Tollway Authority, among others Transportation BABs have been issued with and without a ten-year par call The size of the transactions have ranged from $30 million to more than $1 billion Spreads to Treasury bonds for BABs have declined substantially since program introduction in April as taxable buyers become more familiar with municipal credits 4

5 GARVEE s Continue to Offer Financing Benefits Structured to achieve investment grade credit ratings, GARVEEs continue to offer taxexempt financing on a costeffective basis Priority capital projects can be accelerated because the issuer will not have to wait for federal reimbursements in future years Rating agencies and investors continue to have confidence in the GARVEE structure despite Federal Trust Fund shortfalls and the ongoing reauthorization debate Risk Reauthorization Risk that Federal transportation funding could be reduced by successor authorizing legislation Mitigant Federal government has historically provided a strong commitment to transportation funding Delay in reauthorization would also result in delay of payment Risk mitigated by ability to draw on Unobligated Balance in Trust Fund Limited term of debt reduces reauthorization risk Cashflow Risk that there are not enough federally-eligible projects to generate sufficient reimbursements or that funds are reallocated to a different program Uncertainty as to the amount of funds actually appropriated and obligated by Congress each FFY Align timing of reimbursements for federally-eligible projects from FHWA with indirect GARVEE debt service payments to ensure availability of necessary funds Conservative coverage assumptions 5

6 Current Market Conditions Place an Emphasis on Credit Many transportation credits have specific concerns/risks: Weak economy driving down traffic growth / demand Volatile gas prices Global Scale migration on hold by Moody s and Fitch In today s market, efficient access requires special emphasis on underlying credit ratings and investor outreach With the collapse of the bond insurers, investors are looking to underlying ratings Rating agency analysts are under significant pressure due to additional focus on underlying ratings; this often requires more upfront time in scheduling Investors are under more pressure both from shareholders and regulators to increase their independent analysis Increased and more transparent disclosure is a significant focus of both rating agencies and investors 6

7 Evolving Investor Base Changing Buyers of Fixed-Rate Municipal Bonds Total return buyers have severely reduced their holdings in the municipal market as they have been forced to de-lever Retail has significantly increased their participation as interest rates have risen and investors have turned to more conservative credits Importantly for any financings contemplated in the near future, new crossover buyers have now become active on a non-levered basis In 2007 investors perceived municipals as interest rate products for leveraged arbitrage In 2009, investors perceive municipals with regards to credit and investment Tax-Exempt Distribution 1-Year Ago Tax-Exempt Distribution Today Build America Distribution Today Total Return 35% Bond Funds 25% Retail 10% Investment Advisors 10% Trust Departments 10% Insurance Companies 10% Trust Departments 15% Investment Advisors 15% Retail 20% Total Return 5% Bond Funds 30% Insurance Companies 15% Insurance Companies 30% Pension Funds 2% Total Return 5% Retail 1% Money Managers 62% 7

8 Retail Marketing Strategy In Today s Market Retail Is A Driving Force Objective: Maximize retail demand and use the retail order period to generate momentum prior to the institutional order period Retail is the driving force in the market today for most high grade transactions Retail Strategy Retail includes bond trust funds, investment advisors and traditional retail Early announcement of the offering date allows brokers to reserve space in customers portfolios Internet road show presentation for the syndicate s retail brokers Targeted newspaper and radio advertising to complement a website dedicated to the transaction Implementation of a one-day retail order period Use of retail friendly structures such as split coupons Targeted Trust Departments Lord Abbett Bank of New York Cap Re Franklin Bank of America Trust Northern Trust T. Rowe Price U.S. Price Wells Fargo Trust Retail = Bank Trusts Investment Advisors Individuals 8

Institutional Marketing Strategy Objective: Target price-makers, build positive momentum, and use price-takers to reduce cost Institutional Distribution Strategy I.

critical, particularly for the longer maturities Specific institutional marketing strategies are listed to the right in order to ensure the widest distribution of investors and provide the lowest

com The road show presentation will provide an overview of the issuer, the credit structure, and other important features of the financing Organize one-on-one phone or in-person meetings with

9 Institutional Marketing Strategy Objective: Target price-makers, build positive momentum, and use price-takers to reduce cost Institutional Distribution Strategy I. Develop Investor Relations Strategy Action Steps Establish an investor relations link on the issuer s website Website should include a dedicated link for each issue Institutional investor demand is critical, particularly for the longer maturities Specific institutional marketing strategies are listed to the right in order to ensure the widest distribution of investors and provide the lowest cost of capital II. Conduct an Electronic Road Show III. Conduct One-On-One Meetings Organize a 30-minute road show presentation with a question and answer session on NetRoadShow.com The road show presentation will provide an overview of the issuer, the credit structure, and other important features of the financing Organize one-on-one phone or in-person meetings with specific investors to ensure they understand the details of the credit Targeted Price-Makers * Leveraged Price-Takers Lord Abbett T. Rowe Price Capital Reserve Putnam W.R. Berkley Northern Trust Gannett Welsh Fidelity Strong First Union Wells Fargo Allstate 9

10 NJ Turnpike Authority $1.75Bn Bond Offering First Benchmark Build America Bond Transaction On April 20, 2009 Morgan Stanley served as sole bookrunning senior manager for the New Jersey Turnpike Authority s $1.75 billion long-term revenue bond sale which included $1.375 billion of taxable Build America Bonds Savings generated by Build America Bonds for the Turnpike were 53 bps (7.414% taxable rate less 35% issuer subsidy less 5.35% tax-exempt rate) The Turnpike s weighted average effective yield was 4.92% for the combined taxexempt and taxable bonds, net of the U.S. Treasury cash rebate Summary of Transaction Issuer Ratings New Jersey Turnpike Authority A3/A+/A (Moody s/s&p/fitch) Series 2009E (Tax-Exempt) 2009F (Taxable BABs) Par Amount $375,000,000 (1) $1,375,000,000 Final Maturity January 1, 2040 January 1, 2040 Sinking Funds 1/1/37: $69,375,000 1/1/38: $72,995,000 1/1/39: $76,810,000 1/1/40: $80,820,000 Benchmark Yield 1/1/37: $307,770,000 1/1/38: $330,605,000 1/1/39: $355,135,000 1/1/40: $381,490, year MMD (4.43%) 30-year UST (3.714%) Spread +92 bps +370 bps Coupon 5.50% 7.414% Yield 5.35% 7.414% Effective Yield 5.299% (2) 4.819% Bookrunner Morgan Stanley (Sole Senior) Notes 1. Includes $75mm serial bond maturing 1/1/ Arbitrage Yield; Includes $75MM 2028 Retail maturity (5.03% yield) Investor Distribution Build America Bonds By Total Allocation Pension Funds and Banks 2% Other 6% Life Insurance Companies 30% Transaction Highlights The Turnpike upsized the authorized amount in the Bond Resolution from $1 billion to $1.75 billion based on tremendous response from both traditional tax-exempt and taxable investors following a five-city investor roadshow The Series 2009F Bonds order book was nearly $4 billion, with a number of high quality accounts represented, led by insurance companies and money managers Initial price talk on the Series 2009F taxable bonds of Treasury bps was revised 30 bps tighter to bps Savings generated by Build America Bonds for the Turnpike were 53 bps (7.414% taxable rate less 35% issuer subsidy less 5.35% tax-exempt rate) The Series 2009E tax-exempt bonds had substantial demand as well, with an order book of $1.5 billion for $300 million of 30-year bonds Morgan Stanley conducted a one-on-one investor roadshow (San Francisco, Chicago, Boston, New York and Philadelphia), and Internet roadshow from April 9-20, producing significant positive feedback in the pre-sale marketing period Money Managers 62% 10

11 The Illinois State Toll Highway Authority, 2009 Series A $500,000,000 Taxable Build America Bonds and the use of a 10-year par call On May 12, 2009 Morgan Stanley served as joint bookrunning senior manager on the Illinois State Toll Highway Authority s $500 million sale of taxable Build America Bonds The financing was structured with two amortizing term bonds in 2024 and 2034 The 2024 term bond was sold with a 10-year par call option Savings generated by Build America Bonds were: 2024 Term - 51 bps 2034 Term bps The Authority s all-in TIC was 4.00%, net of the U.S. Treasury 35% cash rebate Summary of Transaction Issuer Ratings The Illinois State Toll Highway Authority Aa3/AA-/AA- (Moody s/s&p/fitch) Term Bond Par Amount $100,000,000 $400,000,000 Final Maturity January 1, 2024 January 1, 2034 Benchmark Yield 10-year UST (3.193%) 30-year UST (4.184%) Spread +210 bps +200 bps Yield 5.293% 6.184% Effective Yield Bookrunners 3.440% 4.020% Morgan Stanley and Goldman Sachs Investor Distribution Build America Bonds By Total Allocation Bank/ Broker 16% Hedge Funds 10% Money Managers 34% Other 1% Insurance Companies 39% Transaction Highlights The Authority originally anticipated issuing $100 million of tax-exempt bonds ( ) and $400 million of taxable Build America Bonds ( ) Based on favorable price guidance, the Authority decided to issue the 2024 term bond as Build America Bonds with a 10-year par call option The 2009 Series A Bonds order book was over $3 billion with a number of high quality investors represented, led by insurance companies and money managers Spreads on the 2009 Series A Bonds were tightened significantly given the overwhelming investor demand 2024 Term initial price guidance of Treasury +250 bps with final pricing at Treasury +210 bps 2034 Term initial price guidance of Treasury bps with final pricing at Treasury +200 bps Morgan Stanley conducted a internet roadshow from May 7-11, producing significant positive feedback in the pre-sale marketing period 11

12 Arizona Transportation Board The Arizona Department of Transportation s use of a Excise Tax Security Structure Arizona Transportation Board Transaction Details $440,000,000 Arizona Transportation Board Transportation Excise Tax Revenue Bonds, 2009 Series Ratings: Aa2/AA+ (Moody s/s&p) Sale Date: 06/02/2009 Senior Manager: Morgan Stanley On June 2, 2009, Morgan Stanley senior managed $440,000,000 Arizona Transportation Board Transportation Excise Tax Revenue Bonds, 2009 Series The Board issued the Bonds in order to pay the costs of design, right-of-way purchase, and construction of certain freeways and other routes within Maricopa County The Bonds are secured primarily by a Transportation Excise Tax which is levied throughout the County The retail order period for these bonds occurred on the day General Motors declared bankruptcy and treasury yields increased over 20 basis points While many investors moved to the sidelines, the Board was able to secure over $100 million in retail orders This provided the Board with the leverage necessary to have a successful institutional order period the next day In maturities which had limited demand, Morgan Stanley committed to underwriting over $47 million of bonds to ensure the Board secured attractive pricing terms The Board was able to capture a very attractive all-in cost of funds of 3.75% for this financing with a final maturity in

13 State of Ohio GARVEEs Major New State Infrastructure Revenue Bonds, With approximately $240 million of retail participation, the transaction generated the single largest amount of retail participation ever for a State of Ohio borrowing Building on the $240 million of retail orders, institutional accounts came in across the maturity range, enabling Morgan Stanley to lower yields from 2015 to final maturity by 5-6 bps As a result of this structure, the State achieved a low-4.99% allin TIC for the financing in a very volatile market State of Ohio $375,000,000 Major New State Infrastructure Project Revenue Bonds Series Transaction Highlights On October 20-21, 2008, the State of Ohio priced $375 million of Grant Anticipation Revenue (GARVEE) Bonds issued to finance highway infrastructure improvements as part of its annual capital borrowing The transaction represents the largest GARVEE financing by the State of Ohio and the largest amount of Ohio retail participation in any transaction Morgan Stanley worked with the State to structure a plan of finance, including the State s desire to maintain level principal in each maturity and partially fund its first interest payment The transaction priced during an increasingly volatile market environment where negotiated new issuance volume decreased significantly. The federal government continued to aggressively pursue its effort to promote liquidity in the market, citing recessionary concerns and recent instability in the financial system During this time timeframe, the syndicate, led by Morgan Stanley, began pre-marketing the bonds approximately two weeks in advance of pricing and gradually added enough investors in order for the State to enter the market During the course of the two-day pricing, the size of the transaction was increased from $160 million to $375 million so that the State could take advantage of current demand and fully meet its financing goal 13

Finance Committee Presentation Financing of the Courthouse and Jail Expansion. October 7 th, 2009

Finance Committee Presentation Financing of the Courthouse and Jail Expansion October 7 th, 2009 Table of Contents!! Introducing Scott Balice Strategies!! Financial Strategy Considerations "! Timeline