BANK LOANS AND PRIVATE PLACEMENTS

BANK LOANS AND PRIVATE PLACEMENTS Annual NAMA Conference October 7, 2016 Heidi Amspaugh, Umbaugh Alex Handlers, Bartle Wells Associates Jeff Sharp, Capital One Public Funding LLC

Topics for Discussion What are Private Placements (PPs)? Brief History of PPs from an MA Perspective Why Use PPs/Bank Loans? Pros and Cons Legal Concerns MA Firm Best Practices Good RFP Practices Issues for Consideration 2 Questions

What are Private Placements? 3 Debt issued via a private offering to limited number of lenders via a direct negotiation or limited competitive sale Not a public offering", not publicly issued or traded As such, reduced issuer disclosure requirements & often no rating required Exempt from registration with the SEC under federal securities law Meets specific exemptions enumerated in Securities Act of 1933 Generally no CUSIP number Not subject to some of the laws/requirements designed to protect investors U.S. Supreme Court Case Reves vs. Ernst & Young, Inc., 494 U.S. 56 (1990) Lenders generally include accredited investors such as banks, mutual funds, insurance companies, pension funds, individuals Non-standardized product, every lender has unique requirements

MA History of Private Placements/Bank Loans In use for many years, despite the recent hype Historically, PPs typically only made financial sense for small issues Interest rate differential over bonds has decreased in recent years Size of transactions has increased Increasing number of banks and issuers participating in market Some banks have reduced their max terms, others have increased terms Some banks using PPs to push other banking services Growing share of muni debt market Increased regulatory oversight Rise of the placement agent 4

Why use PPs/Bank Loans? MA recommendation Can provide lower-cost financing Shorter execution time Ability to negotiate flexible legal covenants Story bonds Only option (e.g. revolving line of credit) In client s best interest! Client preference Less burden on agency staff & minimal disclosure req ts & liabilities Underwriter recommendation 5 MA fiduciary responsibility to consider Private Placements

Pros & Cons of PPs/Bank Loans Pros Cons Shorter timetable Shorter repayment terms Simpler execution Often higher interest rates Lower issuance costs Less structuring flexibility Less burden on staff Less disclosure requirements & related legal liability Ratings typically not required Allows for explanation of story bonds Minimal interest rate variance due to differences in credit quality Legal flexibility & ability to negotiate terms Some lenders have limits on issue size Lack of market transparency Differing state legal requirements Differing lender requirements Unique covenants or triggers Lender can opt out due to credit concerns (if not pre-approved) Easy to get indicator rates or actual bids to determine best financing approach Evaluation of proposals is often not an apples to apples comparison Interest rate lock, reduced market risk 6

Legal Concerns Definition of broker/dealer activities include: Identification of investors Solicitation of investors No fiduciary responsibility to issuer, arms-length transaction MAs need to be careful not to act as unlicensed broker/dealers Are we using our own proprietary list of banks and lenders? Are we soliciting the potential banks and lenders? Is our fee contingent on closing? (MSRB Warning) Minimal SEC/MSRB Guidance No Safe Harbor 7 Lots of gray area Use of a Placement Agent minimizes/eliminates risk MA Activity? Broker/Dealer Activity

MA Firm Best Practices Consult with legal counsel regarding MA role helping agencies secure PPs Develop written policies/controls to ensure we are not acting as broker/dealers Process to evaluate & document if an issue meets an exemption from being a federal security (Supreme Court s Reves case test ) Clarify MA role in contracts with clients If not using a Placement Agent Use publicly available lists of lenders to extent possible Have issuer solicit RFPs MA assists issuer with development of RFP, follow up, & evaluation of proposals, & negotiation If contracting with a Placement Agent Clarify role of Placement Agent vs. MA;; can RFP for Placement Agent 8 Easy to get indicator rate or actual bids to determine if it makes sense to move forward with a PP or instead issue bonds

Good RFP Practices If developing RFP for client, be thorough Identify key terms and conditions Identify repayment security and key legal terms Identify credit strengths & provide supporting data (RFP is also a marketing document) Proactively address credit concerns Identify areas of potential flexibility or preferences Provide potential lenders with adequate info and time so they can conduct a preliminary credit analysis & get comfortable with the credit Consider calling potential lenders to explain the financing & address concerns Treat all potential bidders equally Reasonably wide distribution (limited competitive sale) Document process 9 Provide feedback to responders

RFP Evaluation & Documentation Summarize key terms in a matrix Can help identify info holes to follow up on Compare proposals on an all-in cost basis Different lenders require different fees Identify unique legal requirements Some lenders willing to negotiate terms Especially if the decision hinges upon their flexibility E.g. Can you match the other bank s 5-year call provision Determine best approach for legal documentation Disclosure Voluntary disclosure to EMMA (clarify if one-time disclosure) Make sure client discloses in financial statements 10

Issues for Consideration Rates & Terms Interest rates & day count Fixed or variable interest rates and put provisions Legal Security Legal provisions Coverage requirements Priority of payments Repayment term & structure Additional debt test All-in cost & debt service Reserve requirement Lender Ability & Requirements Prepayment provisions Purchaser s experience Purchaser s capabilities Other Exemption from SEC registration Other lender requirements Legal documentation Voluntary disclosure 11 11 MSRB Webinar on enhanced EMMA bank loan disclosure process Thursday, Oct-13 at 3:00-4:00 pm (Eastern)

Bank Perspective 12 PPs = great financing alternative Evolving market Willing to negotiate Internal changes over time Differing credit parameters PP provider capabilities Interest rates Feedback helpful

Thank you! Heidi Amspaugh, CIPMA, Umbaugh hamspaugh@umbaugh.com Alex Handlers, CIPMA, Bartle Wells Associates alex@bartlewells.com Jeff Sharp, Capital One Public Funding LLC Jeffrey.Sharp@capitalone.com 13