Credit Rating Strategies and Tips for Rating Presentations

Transcription

1 Credit Rating Strategies and Tips fr Rating Presentatins Presentatin t the Illinis Cmmunity Cllege Chief Financial Officers Spring Cnference April 17, 2008 Starved Rck State Park Janne Malinwski

2 Credit Rating Strategies and Tips fr Rating Presentatins Part 1 Current Market Cnditins Why yur credit rating matters s much nw Part 2 Advice t Cmmunity Clleges Even if yu aren t planning t issue debt nw Part 3 Tips fr Rating Presentatins 2

3 PART 1 Current Market Cnditins Why yur credit rating matters s much nw 3

4 Current Market Cnditins Rating Agencies Rating Agencies prvide independent, bjective and expert evaluatin f credit Insured Ratings Based n rating f bnd insurer Until January, 2008, were 7 AAA-rated insurers. Underlying Ratings Based n rating f issuer and surce f repayment f bnds; ften used in additin t AAA rating frm insurance Imprve efficiency f market Intermediary between issuer and purchaser Additinal surce f infrmatin fr investrs n suitability f investment 4

5 Current Market Cnditins Wh are investrs f municipal bnds? The underwriter will be marketing yur bnds t investrs acrss the cuntry Lng-Term Bnd Fund Prperty & Casulaty Cmpanies Investrs may nt knw wh yu are. Credit rating enables investrs t make investment decisin and cmpare yu t ther issuers in the market. Yield (%) Intermediate Bnd Fund Bank Cmmn Trust Invesment Advisr Nn-Finance Crpratins Crss-Over Buyers (Life Insurance, Pensin Funds) Derivative Dealers Yr 3 Yr 5 Yr 7 Yr 9 Yr 11 Yr 13 Yr 15 Yr 17 Yr 19 Yr 21 Yr 23 Yr 25 Yr 27 Yr 29 Yr Current "AAA" MMD 5

6 Current Market Cnditins Strng credit ratings matter nw mre than ever Only 33% f issues sld in the first quarter f 2008 were insured, cmpared t 49% last year. Why? Sub-prime mrtgage market impact n bnd insurance cmpanies Investrs are relying mre n underlying credit rating f issuers. Higher underlying credit ratings will help yu lwer yur brrwing csts. Lng-Term Municipal Issuance (March 2008 YTD, $bn) % Change Ttal Issuance $107.5 $ # f Issues 2,908 2, Bnd Insurance $55.2 $ # f issues 1, Insured As Percentage f: $ Amunt 51% 27% # f Issues 49% 33% Surce: The Bnd Buyer 6

7 Current Market Cnditins Impact n Municipal Bnd Insurers Credit strength f municipal bnd insurers has been impaired due t lsses in their business in asset-backed securities and cllateralized debt bligatins. Lss f the triple A rating by several insurers has resulted in the whlesale dumping f the affected municipal bnds in the secndary market, driving dwn prices and increasing brrwing csts fr issuers. The current ratings f all municipal bnd insurers as f April 14, 2008 is as fllws: Mdy's Rating S&P Rating Fitch Rating ACA NR CCC NR CreditWatch Develping Ambac Aaa AAA AA Outlk Negative Negative Outlk Negative Outlk Assured Guaranty Aaa AAA AAA Stable Stable Stable CIFG A1 A+ A- Stable Negative Outlk Negative Outlk FGIC Baa3 BB BBB Review fr Dwngrade Negative Outlk Negative Outlk FSA Aaa AAA AAA Stable Stable Stable MBIA Aaa AAA AA Negative Outlk Negative Outlk Negative Outlk Radian Aa3 AA A+ Negative Outlk Stable Rating Watch Evlving XLCA A3 A- BB Review fr Dwngrade CreditWatch Negative Negative Outlk 7

8 Current Market Cnditins Municipal Interest Rates Have Risen Recently 20 Bnd G.O. Index ( ) BBI GO and 10-Year Treasury (Since Jan 2007) 6.50% 5.50% 6.25% BBI GO Current Level 5.25% BBI GO 10-Year Treasury 6.00% 5.00% 5.75% 4.75% 5.50% 4.50% 5.25% 4.25% 5.00% 4.75% 4.00% 4.50% 3.75% 4.25% 3.50% 4.00% 01/98 01/99 01/00 01/01 01/02 01/03 01/04 01/05 01/06 01/07 01/ % 01/07 03/07 05/07 07/07 09/07 11/07 01/08 03/08 Surce: Bnd Buyer and Blmberg Lng-term interest rates have exhibited significant vlatility. Municipal interest rates have risen cmpared t U.S. Treasury securities. Since Fall 2007, there has been a discnnect between Municipal and Treasury rates. 8

9 PART 2 Advice t Cmmunity Clleges Even if yu aren t planning t issue debt nw 9

10 Advice t Cmmunity Clleges If yu re planning t issue debt Develp a rating strategy early in the financing prcess Cnsider the impact yur planned bnd issue will have n yur credit rating as yu develp yur plan f finance. Develping a rating presentatin is a gd pprtunity fr self-evaluatin. A gd credit rating presentatin: Can make the rating agency analyst s jb easier. This persn can be yur advcate with the credit cmmittee. Draws attentin t yur credit strengths Demnstrates the strength f yur rganizatin s management 10

11 Advice t Cmmunity Clleges Even if yu aren t planning t issue debt nw Dn t wait fr bnd issue t d things that are helpful t yur credit rating. Wrk the things that are within yur cntrl. Mnitring revenues/expenditures and making mid-year budget adjustments Maintaining financial flexibility Cst-saving measures Rainy day fund Written financial plicies - debt, fund balance gal, balanced budgets, tuitin, cash/liquidity, investments, inter-fund transfers Multi-year prjectins Master Plan 11

12 PART 3 Tips fr Rating Presentatins 12

13 Tips fr Rating Presentatins Making strng credit rating presentatins Review yur previus rating reprt. Develp an agenda cver all 4 key subjects see next slide. Tell yur stry g beynd the numbers. Prepare narrative/charts/graphs that explain yur debt issuance plans and/r highlight financial perfrmance and psitive credit qualities. Be prepared t discuss credit weaknesses, hard questins r warning signs. Yu dn t have t have all the answers. Prvide dcuments in advance (3 years f audits, budget, year-t-date results, capital imprvement plan, multi-year prjectins.) Describe written financial plicies. Cnsider an in-persn meeting and tur. 13

14 Rating Presentatin Basics What t cver in the rating presentatin Rating agencies are cncerned with 4 key subjects: 1) Ecnmic Factrs 2) Financial Infrmatin 3) Debt 4) Management As a cmmunity cllege, yu may nt have much cntrl ver #1. Hwever, What are yu ding abut the things that ARE under yur cntrl? Hw are yu respnding t the things that ARE NOT within yur cntrl? 14

15 Tips fr Rating Presentatins 4 Key Subjects 4. Management a qualitative rating factr Hw Management factrs int the rating prcess Cntent and substance f the presentatin Past perfrmance f the issuer (financial results, etc.) Administrative/Managerial structure Yur financial prfessinals (underwriter r financial advisr) can assist yu in preparing the presentatin But, rating agencies want t hear frm yu Yu want t demnstrate Prfessinal experience f management staff Impressins gained during the presentatin Prfessinalism and cmpetence Planning eye n the future Practive, nt reactive 15

16 Tips fr Rating Presentatins 4 Key Subjects 1. Ecnmic factrs Examples Histrical EAV trends Prperty tax cllectins Taxpayer cncentratin 10 largest taxpayers EAV as % f ttal Have yu bserved any changes due t current ecnmic cnditins? Lwer prperty tax cllectins due t mrtgage freclsures r financial stress n taxpayers Slw dwn in new develpment smaller increases in prperty tax base If the cllege is subject t tax caps, reduced ability t extend mre prperty taxes (less new prperty in tax extensin calculatins) 16

17 Tips fr Rating Presentatins 4 Key Subjects 2. Financial infrmatin Examples Histrical trends in General Fund balance Current year budget status mnitring revenues/expenditures and making mid-year budget adjustments? Hw des yur budget reflect yur educatinal/curriculum gals? Liquidity measure by General Fund cash and current investments as % f General Fund current liabilities Reserves have a rainy day fund? Tuitin tuitin plicy (e.g., % f ttal perating revenues), histrical rates, planned tuitin increases, cmparisns t ther cmmunity clleges Cst-saving measures Multi-year prjectins 17

18 Tips fr Rating Presentatins 4 Key Subjects 3. Debt Explain yur plan f finance demnstrate that yu have a thughtful plan fr issuing debt Hw will the planned bnd issue affect: Ttal debt and debt retirement (ver time) Ttal debt per capita and as % f EAV Operating budget Enrllment Tax levy and taxpayers Hw des yur debt plan f finance relate t yur cllege s Master Plan and yur educatinal/curriculum gals? Explain any creative financing appraches e.g., public-private and public-private partnerships 18

19 Final thughts Rating prcess is a dialgue Ask questins f the rating agency analysts. After the rating is determined, discuss it in detail with the rating agency analysts. Get a gd understanding f Psitive credit factrs Things that prevented yu frm being rated in a higher categry Things yu can address that may imprve yur rating in the future Keep in cntact with rating agencies e.g. prvide cpies f annual audits. 19

20 Final thughts cnt d Use yur credit reprt Internally t assist yu in setting plicies and prcedures With Cllege Bard f Trustees t discuss financial plicy issues and t determine future steps t imprve financial perfrmance. With stakehlders (taxpayers, students, faculty, cmmunity, media) t demnstrate strng management and gd stewardship f the public funds 20

21 Any questins r cmments? Janne Malinwski janne.malinwski@rbccm.cm 21

22 Disclsure The freging presentatin must be read tgether with the ral presentatin that accmpanied it. The presentatin is a preliminary discussin f a ptential transactin and is subject t the fllwing limitatins: Surces f Infrmatin: This presentatin is based n infrmatin we received frm yu and/r public r ther surces that we believe are reliable. We have nt tried, hwever, t verify the infrmatin independently and s d nt guarantee its accuracy r cmpleteness. We have nt tried t set frth a cmplete analysis f every material fact. Prjectins and Estimates: All statements as t what will r may happen under certain circumstances are based n assumptins, sme but nt all f which are nted in the presentatin. Assumptins may r may nt be prven crrect as actual events ccur, and results may depend upn events utside f yur r ur cntrl. Changes in assumptins may have a material impact n results. Estimates and prjectins represent ur judgment as f this date and are subject t change withut ntice. There can be n assurance that estimated returns and results will nt be materially different in the cntext f an actual transactin ver time. Past perfrmance des nt necessarily reflect and is nt a guarantee f future results. Terms f Hypthetical Transactin: The terms, structures and prices shwn in this presentatin are indicative nly and d nt represent an ffer t engage in a transactin. Prir t any transactin, (a) we and RBC will cnduct internal apprval prcesses, and (b) yu shuld satisfy yurselves that yu have dne a thrugh investigatin and received all the infrmatin yu require t make an independent decisin. Shuld yu decide t enter int a transactin f the kind presented here, the final terms wuld be set frth in legal dcumentatin and the terms, pricing and structure wuld be determined based n prevailing cnditins at the time. Rle f RBC Capital Markets: RBC Capital Markets is a trade name used by affiliates f Ryal Bank f Canada ( Ryal Bank ), including RBC Capital Markets Crpratin in the U.S. (member NYSE SIPC), RBC Dminin Securities Inc. in Canada (member CIPF), and Ryal Bank f Canada (Eurpe) Ltd.. RBC Capital Markets is nt a financial advisr r fiduciary t yu with respect t any derivative transactin in which Ryal Bank is r may be the cunterparty. Thus, RBC Capital Markets will nt prvide advice, and yu may nt rely n RBC Capital Markets fr advice, as t the ecnmic risks and merits f the transactin, its suitability, r the legal, tax, regulatry r accunting cnsideratins. Yu shuld cnsult yur wn advisrs, including yur tax r accunting advisrs as t requirements under GASB and FASB 133, and withut relying n us yu shuld be sure that the apprpriate senir authrities in yur rganizatin have a sufficient understanding f the risks assciated with any tax r accunting requirements. We and yu each will be free t disclse any infrmatin cncerning the tax treatment f the transactin, except where securities laws require therwise. General Disclaimer: RBC Capital Markets disclaims all liability relating t the infrmatin cntained in this presentatin. Opinins expressed in the presentatin are current pinins nly and subject t change withut ntice. 22