Borrowing from a Bank 101 WPTA Washington Public Treasurer s Association April 2017 Co-Presented by: Alice Ostdiek, Stradling Yocca Carlson & Rauth PC (Bond Counsel) Pete Sullivan, Washington Federal With Panelists: Larry Frueh, Clark County Scott James, City of Edmonds
Washington Federal Borrowing from a Bank 101 Disclosure Washington Federal (the Bank ) is providing the information contained in this document for discussion purposes only in connection with a proposed arm s-length commercial banking transaction between you and the Bank. In providing this information, the Bank: (i) is acting for its own financial and other interests that may differ from yours; (ii) is not acting as your municipal advisor or financial advisor and has no fiduciary duty to you in connection with these materials; and (iii) is not recommending any action with respect to the information contained in this document. Before acting on this information, it should be discussed with the financial and/or municipal, legal, accounting, tax and other advisors you deem appropriate. Stradling YoccaCarlson & Rauth( Stradling ) is providing certain information contained in this document for discussion and educational purposes only. It is not to be construed as legal advice and creates no attorney-client relationship as a result of receiving this information. 2
Washington Federal Borrowing from a Bank 101 Outline 1) Borrowing a) When is a Borrowing a Bond A Loan? b) Nuts and Bolts: Participants in a Financing : I. The Borrower s Team II. Other Parties III. Underwriter IV. Bank or Direct Purchaser V. Municipal Advisor c) Process Overview Publicly Offered Bonds & Direct Placement (Loan) 2) The RFP a) What are the major components needed for an RFP? b) Who are the players for the Bank Loan? c) Term Sheets ---what do they look like? ---what to keep an eye out for? d) Evaluating bids. e) Emergency issuance Sometimes quick access to funds is needed. 3) Benefits of a Bank Loan a) Is a Bank Placement? b) Other Developments: Bank Loan Disclosures and EMMA. 3
What s in a name? When is a borrowing. a Bond? Public Offering of Muni Bonds for offer to investors o Method of Sale Competitive Negotiated o Typical Features Disclosure Document (OS) Ratings Ongoing Disclosure 4 a Loan? Direct Purchase by investor Bond vs. Loan o For State law purposes o For Bank regulatory purposes o For purposes of SEC/MSRB regulations Other Lenders o State/Federal Agencies o Other Private Placements? Alice Ostdiek AOstdiek@sycr.com
Nuts and Bolts: Participants in a Financing 5 The Borrower s Team : City Participants: o Elected Officials o Executive/Mayor o Finance Officer o General Counsel o Division/Project Manager Outside Professionals: o Municipal(Financial) Advisor o Bond Counsel o Disclosure Counsel* Other Parties: Purchaser o Underwriter or Bank /Lender o Underwriter s/lender s Counsel Others: o Trustee / Paying Agent o Rating Agencies o Auditors
6 What to Expect: Role of a Bank vs. Underwriter Underwriter Arm s Length Relationship to Issuer o Purchases security with eye toward distribution Regulated by SEC/MSRB as Broker-Dealer o MSRB Rule G-17 Fair Dealing Must disclose role, compensation, and actual or potential material conflicts of interest Bank or Direct Purchaser Arm s Length Relationship to Issuer o Purchases (lends money) with no intent to distribute security o Big boy representations / Investor letter Subject to State and Federal banking regulations
7 What to Expect: Role of a Municipal Advisor Municipal Advisor Municipal Advisor Regulations http://www.msrb.org/maregistrants.aspx Fiduciary Duty to Issuer o MSRB Rule G-42 Standards of Conduct Duty of Care; Must put Issuer s interests ahead of its own Once engaged, may: Assist with RFP development Advise on method of sale Assist with selection of underwriters Develop financing plan Analyze financing of alternatives Debate: May an FA prepare Bank RFP and solicit bids from Banks? See MRSB Notice 2016-12
Publicly Offered Bonds Council Approves Issuance (Delegation) Ord/Reso Process Overview (Nonvoted Debt) 8 Direct Placement (Loan) Council Approves Issuance (Delegation) Ord/Reso Prepare to Sell Bonds Team selects method of sale, timing Disclosure preparation Rating Agency presentations Bond Sale Pricing Negotiate & Sign BPA Closing - Receive Funding Post-Issuance Federal Tax Compliance Ongoing Disclosure Obligations Select & Negotiate w/ Purchaser RFP to select purchaser? Purchaser s Due Diligence Negotiate and Sign BPA Closing - Receive Funding Post-Issuance Federal Tax Compliance Reporting requirements (to Bank) o (EMMA Filing?) Alice Ostdiek AOstdiek@sycr.com
Washington Federal The RFP What are the major components needed for an RFP? When is the RFP due? When would you like to close? Who s the contact for questions? Amount to borrow? Purpose? Maturity? Tax Exempt? Fixed rate or variable? Early redemption? Pledge? If revenue pledge, coverage and reserve requirement? Copy of Bond Ordinance (if passed) Financials OS Official Statement Ratings report 9
Washington Federal The RFP Who are the players for a Bank Loan? Financial Advisor o aka - Municipal Advisor or Placement Agent Community Banks o Umpqua Bank o Washington Federal o Banner Bank o Columbia Bank o Cashmere Valley Pretty Big Banks o US Bank o Key Bank Big Banks o JP Morgan Chase o Wells Fargo o Bank of America $23 billion in assets (Portland) $14 billion in assets (Seattle) $9 billion in assets (Walla Walla) $4 billion in assets (Tacoma) $1 billion in assets (Cashmere) $423 billion in assets $96 billion in assets $2.0 trillion in assets $1.6 trillion in assets $1.6 trillion in assets 10
Washington Federal The RFP Term Sheets? What do they look like? o Term sheets are a disclosure of the Bank s terms, which are sometimes identical and sometimes slightly different than the RFP o But the Term Sheets always include: Fees and Rates Covenants Reporting requirements Conditions, if default occurs Bank attorney contact info What do you keep an eye out for? o Clawbacks-Language allowing the bank to recover interest in excess of any max rate imposed by law o Increased Costs -If a change in laws or regulations occur that increase cost to the bank, the bank may increase the Credit Facility fee o Downgrade Pricing -If the Borrower s credit rating falls below a certain level, a default can be declared and pricing increased. 11
Washington Federal The RFP Evaluating Bids? Is it only about cost or do you need something more? Some Basic Evaluation Questions o Is there a Term Sheet Rate lock? o Are there call provisions? o Up front fees or origination fees? o Legal costs? o For lines of credit, the unused commitment fees? o What is the default rate? o Are there prepayment penalties? Deciphering the Code o Sometimes Bank Bids are not apples to apples. 12
Washington Federal The RFP Emergency Issuance? Although rare, sometimes quick access to funds is needed o The timing somehow doesn t allow for an RFP What do you do? o Call your bank! If you have: o Strong financials o Good coverage o Levy room o Debt capacity o And a good rapport with your bank... You could receive funding in about two weeks 13
Benefits of a Bank Loan Is a bank placement? Frequently Asked Questions & Answers o Quicker to receive funding? o Less time and work for the issuer? o Cheaper/Fewer Third-Party Fees? Yes, probably Yes, probably Yes, possibly Benefits o Pricing certainty with Term Sheet Rate Locks o Frequently, reduced cost of issuance o Frequently, ease of execution o Speed to funding o No ongoing public disclosure requirements (reporting directly to bank may still be required) o Typically, no ratings required o Often, more generous prepayment terms (e.g., no 10-year call, prepayment penalty) Considerations o Loan rate may be variable, may increase in the event of default o Maturity may be shorter than available for bonds o Covenants, Events of Default, and Remedies may differ from parity bonds o Other potential fee exposure ( increased costs, tax risk & clawback provisions, most favored nations clauses) o See discussion on next slide re: EMMA reporting 14
15 Other Developments: Bank Loan Disclosures and EMMA If you sometimes issue Bonds and sometimes do Bank loans 2012: MSRB notice re: voluntary disclosure of bank loans o The Municipal Securities Rulemaking Board (MSRB) believes that the availability of timely disclosure of additional debt in any form and debt-like obligations is beneficial to foster market transparency and to ensure a fair and efficient market. (April 2012) o Encourages voluntary disclosure of certain key terms Other Recent Developments o June 2015 NFMA, GFOA publish best practices white papers o March 2016 MSRB issues concept proposal to improve disclosure o April 2016 MSRBand FINRAoffer bank loan disclosure guidance (MSRB Notice 2016-12); MSRB issues letter to GASB o September 2016 MSRBimproves filing voluntary disclosures on EMMA, with specific checkboxes March 2017 SEC proposes amendments to Rule 15c2-12: o Would require posting information on EMMA (in 10 business days) Regarding entrance into other financial obligations (broadly defined), if material Regarding materialdefaults under other financial obligations
Washington Federal Borrowing from a Bank 101 Questions? 16