UPDATE ON THE MUNICIPAL BOND MARKET: LANDSCAPE, TRENDS & OPPORTUNITIES FGFOA Annual Conference June 27, 2017 FLORIDA PUBLIC FINANCE
INTRODUCTIONS Head of Florida Public Finance 17 years in Public Finance $10 billion of senior managed underwriting experience Focus on local governments in the Southeast and Florida 12 years in Public Finance $4 billion of senior managed underwriting experience Dedicated Florida underwriter 15 years as municipal underwriter Underwritten more than 1,200 transactions with a par value exceeding $30 billion 2
TODAY S DISCUSSION TOPICS SECTION I Historical Market Perspectives SECTION II Current Trends, Investor Perceptions and Rating Considerations SECTION III Future Challenges and Opportunities in the Post-Election Market 3
SECTION I Historical Market Perspectives 4
HISTORICAL TRENDS: TAX-EXEMPT INTEREST RATES 6.0 5.5 5.0 4.5 10-Year, 20-Year and 30-Year AAA MMD January 2007 to January 2017 Maximum (10/15/08) 10-yr: 4.86% 20-yr: 5.74% 30-yr: 5.94% Average 10-yr: 2.61% 20-yr: 3.47% 30-yr: 3.75% 4.0 Yield (%) 3.5 3.0 2.5 2.0 10-yr MMD Minimum (7/6/16) 1.5 20-yr MMD 10-yr: 1.29% 30-yr MMD 20-yr: 1.80% 30-yr: 1.93% 1.0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Thomson Reuters 5
HISTORICAL PERSPECTIVES: TAX-EXEMPT INTEREST RATES 6 5 4 Yield (%) 3 2 1 0 Record Highs and Lows since 1/1/07 Average since 1/1/07 5/24/2017 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Maturity 1 5 10 15 20 25 30 Record Low since 1/1/07 0.11 0.62 1.29 1.57 1.80 1.88 1.93 Record High since 1/1/07 3.73 3.97 4.86 5.47 5.74 5.88 5.94 Average since 1/1/07 0.75 1.65 2.61 3.14 3.47 3.68 3.75 Current (5/24/17) 0.83 1.27 1.97 2.42 2.68 2.76 2.82 Source: Thomson Reuters 6
HISTORICAL PERSPECTIVES: MUNICIPAL BOND FUND FLOWS Monthly Municipal Bond Fund Flows January 2007 to January 2017 Source: Investment Company Institute 7
HISTORICAL PERSPECTIVES: MARKET SUPPLY $465,000 National Municipal Issuance 2007-2017 YTD $30,000 Florida Municipal Issuance 2007-2017 YTD $415,000 $365,000 $25,000 Volume ($mm) $315,000 $265,000 $215,000 $165,000 Volume ($mm) $20,000 $15,000 $10,000 $115,000 $65,000 $5,000 $15,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD $0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD $300,000 National Refunding vs. New Money Issuance 2007-2017 YTD $20,000 Florida Refunding vs. New Money Issuance 2007-2017 YTD $250,000 New Money Refunding Combined $18,000 $16,000 New Money Refunding Combined $200,000 $14,000 Volume ($mm) $150,000 $100,000 Volume ($mm) $12,000 $10,000 $8,000 $6,000 $50,000 $4,000 $2,000 $0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD $0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD Source: Thomson Reuters 8
HISTORICAL PERSPECTIVES: CREDIT RATINGS National Ratings Summary, 2007-2017 YTD Florida Ratings Summary, 2007-2017 YTD 1% 20% 4% 25% 26% 18% 51% 55% AAA AA A BBB AAA AA A BBB National Ratings Revisions, 2007-1Q 2017 Florida Ratings Revisions, 2007-1Q 2017 900 40 800 35 700 600 500 400 300 200 100 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1Q 2017 Upgrades Downgrades 30 25 20 15 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1Q 2017 Upgrades Downgrades Source: Moody s Quarterly Ratings Revision Reports, Thomson Reuters 9
HISTORICAL PERSPECTIVES: RATING IMPACTS ON BOND PRICING 10-Year Maturity Spreads to AAA MMD Source: Thomson Reuters 10
HISTORICAL PERSPECTIVES: CREDIT ENHANCEMENT The use of bond insurance declined dramatically in the years following the financial crisis, but this trend began to reverse since 2012. $450,000 $400,000 $350,000 $300,000 $250,000 Bond Insurance Uninsured Insured vs. Uninsured Issuance Market penetration of insured bonds in the new issue market was around 50% pre-financial crisis and has remained around 6% for the past several years. Low interest rates and tight credit spreads act as a constraint on the use of bond insurance. $200,000 $150,000 $100,000 $50,000 $- 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD Insured and Uninsured Trends Insured Uninsured 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 11
SECTION II Current Trends, Investor Perceptions and Rating Considerations 12
MARKET SUPPLY: ISSUANCE TRENDS 2017 YTD National Issuance by Type 2017 YTD Florida Issuance by Type Transportation 13% Transportation 15% Housing 5% Health Care 8% Public Improvement 28% Utilities 9% Education 35% Electric Power 2% Combined 26% Refunding 26% New Money 48% Housing 4% Health Care 9% Public Improvement 35% Utilities 14% Education 19% Electric Power 4% Combined 15% Refunding 54% New Money 31% 2015 vs. 2016 vs. 2017 YTD Municipal Issuance 2015 vs. 2016 vs. 2017 YTD Municipal Issuance $50,000 $45,000 $40,000 2015 2016 2017 $2,500 $2,000 2015 2016 2017 $35,000 Volume ($mm) $30,000 $25,000 $20,000 $15,000 Volume ($mm) $1,500 $1,000 $10,000 $500 $5,000 $0 January February March April $0 January February March April Source: Thomson Reuters 13
MARKET DEMAND: INVESTOR TYPES Households Largest holders of municipal bonds Decreasing over the past several years Holds 43% of municipal debt Mutual Funds Second largest holder of municipal bonds Increased their share of municipal debt in most years since 2007 U.S. Chartered Depository Institutions Third largest holders of municipal bonds Increased share of municipal bonds held over the last 10 years Property & Casualty Insurance and Life Insurance Companies Property & Casualty Insurance Companies are the fourth largest holder of municipal bonds Life Insurance Companies overtook Money Market Funds as the fifth largest holder in 2016 Source: The Federal Reserve, Financial Accounts of the United States, 4 th Quarter 2016 14
MARKET DEMAND: INVESTOR PREFERENCES 1 st Tier Accounts Investor Preference by Maturity Typically buy blocks of $5 million and more; 20 years and longer Includes bond mutual funds, asset managers and insurance companies Prefers premium coupon structure Major purchasing consideration is liquidity The number of accounts has decreased as tender option bond programs and arbitrage accounts have exited the market Investment Advisors Retail Insurance Companies Intermediate Bond Funds Bank Trust Depts High Yield Bond Funds Long Term Bond Funds 2 nd Tier Accounts 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 Typically buy in blocks of $500,000 to $5 million throughout the entire yield curve Includes bank trust departments, investment advisors and small insurance companies More varied coupon preferences Less price sensitive/ more coupon sensitive 3 rd Tier Accounts Typically buy blocks of $100,000 to $250,000 throughout the entire yield curve Similar to 2 nd tier accounts, but on a smaller scale Major concern is structure (buyer looks for specific underlying rating, maturity and coupon) Investor Preference by Rating Investment Advisors Long Term Bond Funds Retail Insurance Companies Intermediate Bond Funds Bank Trust Depts High Net Worth Retail High Yield Bond Funds AAA AA A BBB NR 15
CREDIT RATINGS: INVESTOR PERCEPTIONS The world related to credit ratings and credit enhancement has changed dramatically. Downgrade of bond insurers led to less market participants and shifts in perception of credit enhancement. Municipal Bond Investor Considerations Underlying Rating 70% Due Diligence 15% Market Factors 10% Other 5% Underlying credit ratings are the key decision point for reviewing investment alternatives. Investors are digging in and doing their own due diligence. Tighter credit requirements and need for long-term plan. 16
CREDIT ENHANCEMENT: BOND INSURERS Rating agencies downgraded municipal bond insurers due to ongoing concerns about their exposure to subprime mortgages, collateralized debt obligations, and other financial instruments. Assured Guaranty represented the only major player in the new issue bond insurance market since 2009 until Build America Mutual (BAM) entered the market in 2012. In 2016, Assured accounted for 55%+ of insured par and BAM followed with 40%+ of insured par. National Public Finance Guarantee (NPFG) re-engaged with the new issue market in recent years with market share of about 3% in 2016. Bond Insurer Ratings Grid As of 05/30/2017 RATING ISSUED BY Assured Guaranty (acquired Radian, CIFG) AGM (formerly FSA) MAC BAM NPFG (formerly MBIA) (FGIC novation) Moodys A3 A2 - - A3 S&P AA AA AA AA AA- Fitch WD WD - - WD Kroll AA AA+ AA+ - AA+ Moodys STABLE STABLE - - NEG S&P STABLE STABLE STABLE STABLE STABLE Fitch - - - - - Kroll STABLE STABLE STABLE - STABLE 17
CREDIT ENHANCEMENT: INVESTOR PERCEPTIONS Today, bond insurance typically provides the most benefit to issuers in the mid-a category and below. The insurance benefit represents the estimated yield reduction that investors are willing to accept in today s market relative to purchasing an uninsured bond of the same credit rating. Insurance Benefit by Rating Category Credit Rating Aa2/ AA Aa3/ AA- Insurance Benefit No Benefit 0-3 bps A1/ A+ 5-10 bps A2/ A 7-12 bps A3/ A- 10-15 bps Baa/ BBB Category 15-30 bps 18
SECTION III Future Challenges and Opportunities in the Post-Election Market 19
POST-ELECTION MARKET: EQUITY AND DEBT MARKETS 2.8% 2.6% Stock and Bond Price Relationship November 1, 2016 to Present Current 10-yr MMD: 2.11% 10-yr Treasury: 2.34% Dow Jones Index: 20,982 21,500 21,000 20,500 2.4% 20,000 2.2% 19,500 2.0% 19,000 1.8% Pre-Election 10-yr MMD: 1.69% 10-yr Treasury: 1.79% Dow Jones Index: 17,888 10-yr MMD 10-yr Treasury Dow Jones Index 1.6% Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 18,500 18,000 17,500 Source: Thomson Reuters, Federal Reserve Bank of St. Louis Economic Data 20
POST-ELECTION MARKET: KEY MARKET DRIVERS Credit Ratings Global & Domestic Headlines Municipal Headlines Municipal Demand Municipal Supply Key Market Drivers Political Landscape Economic Releases & Statistics Federal Reserve Policy and Actions Legal & Regulatory Factors Treasury Market Activity 21
POST-ELECTION MARKET: CHALLENGES Challenges Volatility - Market participants are highly sensitive and reactive to economic releases, political uncertainty and global headlines, leading to market volatility Limited Refunding Opportunities - the vast majority of municipal bonds issued between 2005-2007 were refunded in the last few years Legal/ Regulatory Requirements - New or enhanced legal and regulatory requirements related to bond underwritings may lead to additional risks, costs and/or time Trump Policies - Final provisions and timing of new policies and tax reform under the Trump administration may impact state and local government budgets and/or the reduce the value of tax-exemption for investors 22
POST-ELECTION MARKET: OPPORTUNITIES Opportunities Traditional Refundings Look for refunding opportunities as interest rates remain near historical lows a flatter yield curve allows for a more efficient refunding escrow Taxable Refundings Consider a taxable refunding of certain bonds not eligible for a traditional tax-exempt refunding to lock-in savings and avoid future interest rate risk New Money - Supply/ demand imbalance and economic recovery represents a favorable environment to fund new capital projects that may have been deferred Trump Policies - Final provisions and timing of new policies under the Trump administration may allow for beneficial programs and funding options for state and local government projects 23
FUTURE EXPECTATIONS: FED FUNDS TARGET RATE PROJECTIONS FOMC Target Rate Projections Rate Increase Current Rate + 25bps + 50bps + 75bps + 100bps + 125bps + 150bps Target Rate 0.75-1.00% 1.00-1.25% 1.25-1.50% 1.50-1.75% 1.75-2.00% 2.00-2.25% 2.25-2.50% 6/14/2017 0.0% 13.7% 86.3% 0.0% 0.0% 0.0% 0.0% 7/26/2017 0.0% 13.5% 85.1% 1.5% 0.0% 0.0% 0.0% 9/20/2017 0.0% 8.9% 60.6% 30.0% 0.5% 0.0% 0.0% 11/1/2017 0.0% 8.8% 60.2% 30.2% 0.7% 0.0% 0.0% 12/13/2017 0.0% 6.9% 49.1% 36.7% 7.1% 0.2% 0.0% 1/31/2018 0.0% 6.9% 48.8% 36.8% 7.3% 0.2% 0.0% 3/21/2018 0.0% 5.1% 37.8% 39.9% 15.0% 2.1% 0.1% 5/2/2018 0.0% 5.0% 37.6% 39.9% 15.2% 2.2% 0.1% 6/13/2018 0.0% 3.4% 27.1% 39.2% 23.1% 6.4% 0.7% 8/1/2018 0.0% 3.3% 26.5% 38.8% 23.6% 6.8% 0.9% Fed Funds Rate (2015-Present) Source: Bloomberg as of May 25, 2017 24
FUTURE EXPECTATIONS: INTEREST RATES AND ECONOMIC INDICATORS Bloomberg Consensus US Treasury Current Rate 2017 2018 Q2 Q3 Q4 Q1 Q2 Q3 2 Year 1.28% 1.39% 1.58% 1.74% 1.92% 2.09% 2.30% 1.02% Economists Surveyed 52 52 52 51 48 43 10 Year 2.25% 2.44% 2.64% 2.77% 2.87% 2.96% 3.09% 0.84% Economists Surveyed 58 58 58 57 53 48 30 Year 2.91% 3.09% 3.21% 3.32% 3.41% 3.52% 3.67% 0.76% Economists Surveyed 43 43 43 43 41 38 Change from Current Rate to 2018 Q3 Economic Indicators Current Rate 2017 2018 Q2 Q3 Q4 Q1 Q2 Q3 Change from Current Rate to 2018 Q3 Real GDP 0.70% 3.00% 2.40% 2.30% 2.20% 2.40% 2.20% 1.50% Consumer Price Index 2.53% 2.30% 2.40% 2.30% 2.20% 2.40% 2.40% -0.13% Unemployment 4.67% 4.50% 4.40% 4.40% 4.40% 4.30% 4.30% -0.37% Fed Funds Target 1.00% 1.20% 1.40% 1.50% 1.70% 1.85% 2.05% 1.05% 3-month LIBOR 1.19% 1.31% 1.52% 1.65% 1.82% 2.04% 2.21% 1.02% Source: Bloomberg as of May 22, 2017 25
DISCLAIMER The information contained herein is solely intended to facilitate discussion of potentially applicable financing applications and is not intended to be a specific buy/sell recommendation, nor is it an official confirmation of terms. Any terms discussed herein are preliminary until confirmed in a definitive written agreement. While we believe that the outlined financial structure or marketing strategy is the best approach under the current market conditions, the market conditions at the time any proposed transaction is structured or sold may be different, which may require a different approach. The analysis or information presented herein is based upon hypothetical projections and/or past performance that have certain limitations. No representation is made that it is accurate or complete or that any results indicated will be achieved. In no way is past performance indicative of future results. Changes to any prices, levels, or assumptions contained herein may have a material impact on results. Any estimates or assumptions contained herein represent our best judgment as of the date indicated and are subject to change without notice. Examples are merely representative and are not meant to be all-inclusive. Raymond James shall have no liability, contingent or otherwise, to the recipient hereof or to any third party, or any responsibility whatsoever, for the accuracy, correctness, timeliness, reliability or completeness of the data or formulae provided herein or for the performance of or any other aspect of the materials, structures and strategies presented herein. Raymond James is neither acting as your financial advisor nor Municipal Advisor (as defined in Section 15B of the Exchange Act of 1934, as amended), and expressly disclaims any fiduciary duty to you in connection with the subject matter of this Presentation. Municipal Securities Rulemaking Board ( MSRB ) Rule G-17 requires that we make the following disclosure to you at the earliest stages of our relationship, as underwriter, with respect to an issue of municipal securities: the underwriter s primary role is to purchase securities with a view to distribution in an arm s-length commercial transaction with the issuer and it has financial and other interests that differ from those of the issuer. Raymond James does not provide accounting, tax or legal advice; however, you should be aware that any proposed transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and/or legal counsel. Raymond James and affiliates, and officers, directors and employees thereof, including individuals who may be involved in the preparation or presentation of this material, may from time to time have positions in, and buy or sell, the securities, derivatives (including options) or other financial products of entities mentioned herein. In addition, Raymond James or affiliates thereof may have served as an underwriter or placement agent with respect to a public or private offering of securities by one or more of the entities referenced herein. This Presentation is not a binding commitment, obligation, or undertaking of Raymond James. No obligation or liability with respect to any issuance or purchase of any Bonds or other securities described herein shall exist, nor shall any representations be deemed made, nor any reliance on any communications regarding the subject matter hereof be reasonable or justified unless and until (1) all necessary Raymond James, rating agency or other third party approvals, as applicable, shall have been obtained, including, without limitation, any required Raymond James senior management and credit committee approvals, (2) all of the terms and conditions of the documents pertaining to the subject transaction are agreed to by the parties thereto as evidenced by the execution and delivery of all such documents by all such parties, and (3) all conditions hereafter established by Raymond James for closing of the transaction have been satisfied in our sole discretion. Until execution and delivery of all such definitive agreements, all parties shall have the absolute right to amend this Presentation and/or terminate all negotiations for any reason without liability therefor. 26