School District of Pl Palm Beach hcounty: Market Update and Strategic Review of Debt Portfolio April 10, 2009
Topics Market Overview Debt Summary Existing Debt Overview Strategic Approach to Managing Debt Moving Forward Exhibit - Municipal Market Conditions 2
Market Update PFM s internal weekly Market Update is attached as Tab I. We use this data to back up recommendations to clients regarding market moves. The data includes: Taxable/Tax-exempt exempt relationships, Yield curve structure, Credit spreads, Municipal market supply, and Other new/evolving data. Evolution of the bond insurers is a good indicator of the status of the municipal market. BERKSHIRE HATHAWAY INC. - Formerly XL Capital Corp Illinois 'Baa1 / Negative Watch 'A' / Negative Ratings Withdrawn 'Aa2' / Stable Outlook 'AAA' / Stable Outlook 'AAA' / Stable Outlook 'Aa1' / Stable Outlook 'AAA' / Negative e Outlook NOT RATED 'Ba3' / Watch Developing 'BB' / Developing Watch Ratings Withdrawn Ratings Withdrawn 'CCC' / Negative Outlook Ratings Withdrawn 'Aa3' / Developing 'AAA' / Negative Watch 'AAA' / Negative Watch 'Ca' / Watch Developing 'CC / Negative Ratings Withdrawn 'B3' / Developing 'BBB+' / Negative Ratings Withdrawn 'Baa1' / Positive Watch AA-' / Developing Watch Not Rated MBIA Corp has migrated all municipal bond, reserve fund surety and swap policies to MBIA Insurance Illinois. 3
Debt Summary and Strategic Approach to Management The following section will: Summarize existing debt Highlight areas that are being actively monitored for current action Discuss areas for future consideration Introduce opportunities/action items Goals and Objective: Actively manage debt portfolio to reduce debt service in a prudent manner that will balance risk/reward Savings to date exceeds $60 million Market Summary Wall Street continues to suffer; Banks limited ability to offer LOCs; Berkshire downgraded; Moody s assigned Negative Outlook to entire public market Has the market hit the bottom? Key Global Questions Can the Federal government provide the resources required to keep the large banks viable and active in the market? What are the consequences of significant downgrades on the existing banks (LOCs and swaps)? 4
What is the District s Exposure to the Market/Banks This table summarizes the District s existing obligations. Most of the District s COPs are fixed rate (81%). The District s variable rate obligations and swaps have generated significant savings, but have an element of market/credit risk. Much of the market risk is offset with assets (i.e. CP program) Series Principal Outstanding as of 04/03/09 Summary of Outstanding Obligations As of 4/03/09 Final Maturity Fixed or Variable Insurer / Credit Enhancement CERTIFICATES OF PARTICIPATION Exposure to Market Changes 2001A 1,670,000 08/01/11 F Ambac None 2001B 165,640,000 08/01/25 F Ambac None 2002A 50,535,000 08/01/18 F FSA None 2002B 115,350,000 08/01/27 V FSA VRDO (liquidity). Swap (cancellable) 2002C 14,825,000 08/01/12 F FSA None 2002D 153,680,000 08/01/28 F FSA Basis and Constant Maturity Swap 2002E 76,540,000 08/01/16 F Ambac None 2002Q 542,857 06/11/16 F None None 2003A 46,805,000 08/01/21 F Ambac None 2003B 124,295,000 08/01/29 V Ambac Swap (knock out) 2004A 92,965,000 08/01/29 F FGIC None 2004Q 1,765,422 05/04/20 F None None 2005A 124,090,000 08/01/22 F FSA None 2005B 16,340,000 08/01/10 F FSA None 2005Q 1,291,540 12/15/20 F None None 2006A 211,335,000 08/01/31 F FSA None 2007A 259,010,000 08/01/31 F FGIC None 2007B 116,225,000 08/01/25 F FGIC Put bond; reprice in 2011 2007C 191,085,000 08/01/27 F Ambac None 2007D 30,485,000 08/01/15 F MBIA None 2007E 147,390,000 08/01/32 F MBIA None Total COPS 1,941,864,819 OTHER OBLIGATIONS TANs 85,000,000 09/23/09 F None None RANs 72,135,000 03/10/10 F None Rollover or take-out in September Commercial Paper 200,000,000 12/31/10 V LOC Interest rate risk Total Other Items 357,135,000 CAPITAL OUTLAY BOND ISSUES (ISSUE BY STATE OF FLORIDA) Total COBIs 35,805,000 Grand Total 2,334,804,819 5
Status Update for Financing with Market Exposure This table includes only the financings that have ongoing credit/market exposure. Most are stable or locked in for an extended period of time. Action is recommended for only the 2002B Financings with Credit and Interest Rate Exposure As of 4/03/09 Series 2002B Sr. Manager or Provider Solomon Smith Barney Principal Outstanding as Final Fixed or of 04/03/09 Maturity Variable 115,350,000 08/01/27 V Interest Rates 4.22% (swap rate) Insurer / Credit Enhance Call ment Provisions Credit/Market Exposure Status Current Action CERTIFICATES OF PARTICIPATION FSA Any time (1) Liquidity facility from Dexia is resulting in abnormally high interest rates. Expires in 2012. (2) Swap is with Citibank. Changes in process. (1) Switch remarketing to broker dealer than is more effective with Dexia liquidity. (2) Purchase cancellation option to facilitate conversion/termination of swap at a later date. 2002D 2003B Solomon 2.0% - 5.25% (1) Mismatches between (a) taxable and Smith 153,680,000 000 08/01/28 F (net of swap FSA 8/1/12 @ 100 tax-exempt rates and (b) shape of yield Barney payments) curve. (2) Swaps with Citi and UBS. UBS Paine Webber 124,295,000 08/01/29 V 3.91% (swap rate) 2007B Bear Stearns 116,225,000 08/01/25 F 5.00% FGIC Stable. Generating savings. Ambac Any time (1) Swap is with UBS. Stable. Put Bond matures 8/1/2011 OTHER OBLIGATIONS (1) Remarketing in 2011 introduces potential interest rate risk. RANs JP Morgan 72,135,000 03/10/10 F 0.85% None 9/1/09 @ 100 Rollover/take out at maturity Stable Commercial Paper Citigroup 200,000,000 12/31/10 V 3.64% - 3.78% Bank of America Any time (1) Interest rate exposure and (2) LOC credit rating. Stable. Stable. Generating savings. No action. Swaps are performing as expected by offsetting other cashflows. No action. Current financing is locked in at a spread to SIFMA to maturity. No action. Monitor market for potential conversion ahead of "put" date. Monitor market and determine e action in late summer. No action. LOC does not expire until maturity of the program and the District is enjoying significant interest earnings. Future Obligations - Forward Starting Refundings Solomon Smith 4.59% (swap 8/1/11 @ 101 These are mirror image transactions. They are forward refundings where terms None. Monitor for opportunities to narrow option 2001B Barney 160,465,000 08/01/25 F rate) Ambac 8/1/12 @ 100 were agreed to in 2005. The risk is that Stable period. Solomon IF the counterparty exercises its option, Smith 115,710,000 08/01/28 4.71% (swap 8/1/12 @ 100 the District may not be able to issue None. Monitor for opportunities to narrow option 2002D Barney F rate) FSA variable rate debt. Stable period. 6
Action Item: Series 2002B Purchase Cancellation Option from Citi Pricing set at $2.7 million on Wednesday (4/8) Replace remarketing agent Some firms have better performance working with weaker liquidity providers JP Morgan has remarketed other Florida COP deals with FSA/Dexia credit enhancement at narrower spreads to MMD. JP Morgan is the only firm willing to step in at this point in time 10.00% 9.00% 8.00% 7.00% PBSD 2002 - Citi 6.00% 5.00% 4.00% 3.00% BSD 2004 - Citi BSD 2006 - JP Morgan BSD 2005 - BoA SIFMA 67% 1-Month LIBOR 2.00% 1.00% Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 7
Swap Update Why are the Mark-to-Market Valuations so low? With treasury rates at historic lows, the mark-to-market values work against the District Only a financial factor if the District terminates the swaps Financial reporting requirement changes in 2010. Future action related to swaps Diversify counterparty exposure as market conditions allow Forward refundings (Swaptions) start in 2011; As market conditions evolve, the District will evaluate extending the initial exercise date. Two Logan Square Suite 1600 18th & Arch Streets Philadelphia, PA 19130 Phone: 215 567-6100 Fax: 215 567-4180 The School District of Palm Beach County Report as of 3/31/2009 Snapshot Accrued Interest Valuation Amount 3/31/2009 ($976,641.91) ($86,710,256.48) Client Snapshot Accrued Interest Valuation Amount The School District of Palm Beach County (6) 3/31/2009 ($976,641.91) ($86,710,256.48) Product Client Pays Client Receives Trade Date Effective Date Maturity Date Valuation Amount Option Value Initial Notional Bank Counterparty Moody's S&P Fitch Cancellable Swap 4.22000% 67% of USD-LIBOR; SIFMA Swap Index 3/6/2002 3/20/2002 8/1/2027 ($32,442,738.00) ($3,026,680) $115,350,000 Citigroup Financial ProductA3 A A+ Swap SIFMA Swap Index -.665% 67% of USD-LIBOR 1/10/2003 1/14/2003 6/30/2028 ($5,740,037.57) N/A $100,000,000 Citibank, N.A., New York A1 A+ A+ K-O Swap 3.91000% SIFMA Swap Index 6/24/2003 6/26/2003 8/1/2029 ($19,011,825.50) ($5,660,462) $124,295,000 UBS AG Aa2 A+ A+ Swaption 4.71000% SIFMA Swap Index 8/10/2005 8/10/2005 8/1/2014 ($14,739,456.73) 456 73) ($14,739,457) 457) $116,555,000 Citibank, N.A., New York A1 A+ A+ Swaption 4.59000% SIFMA Swap Index 8/16/2005 8/16/2005 8/1/2014 ($18,512,114.68) ($18,512,115) $162,980,000 Citibank, N.A., New York A1 A+ A+ Swap 67% of USD-LIBOR 59.93% of 10 Year LIBOR 9/13/2006 6/30/2007 6/30/2028 $3,735,916.00 N/A $100,000,000 UBS AG, Stamford Branch Aa2 A+ A+ Grey idicates future starting swap. Yellow indicates a basis swap. The valuations of derivatives transactions provided by PFM are indicative values based on mid-market levels as of the close of business on the date they are provided. These valuations are provided for information purposes only and are intended solely for internal use. These valuations do not represent the actual terms at which new transactions could be entered into or the actual terms at which existing transactions could be liquidated. The valuations provided are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Valuations based on other models or different assumptions may yield different results. PFM believes its valuation methodology to be consistent with accepted practice in the market for interest rate swaps. Additional information is available on request. Information herein is believed to be reliable, but PFM does not warrant its completeness or accuracy. PFM does not hold a position or act as a market maker in the financial instruments of any issuer discussed herein. Powered by SwapViewer Report Generated Date: 4/7/2009 8
Other Action/Monitoring Items Fuel Hedging Introduced concept at last meeting Staff and PFM reviewed proposals and experience with other issuers Review debt policy - may require changes It is time for the scheduled review of the debt policy What s next? Review and analyze historical data and programs Develop a strategic t risk management program Update current pricing and recommendations Execute the risk management program Follow-up monthly reporting and recommendations c Physical c Financial Instrument Consumer of Commodity Risk in Up Markets Producer of Commodity Risk in Down Markets Buyer of Financial (long) Gain in Up Markets Seller of Financial (short) Gain in Down Markets 9
Moving Forward What to Watch Market/Interest Rate Factors Optimize payoff of the Commercial Paper program. If interest earnings decrease and/or interest expense increases, the District may begin to pay down the CP ahead of the required payment dates Begin to focus on RAN Rollover or COP (fall) Credit Factors Look for opportunities to optimize swaps Monitor LOC market for pricing/performance changes Underwriter RFP Use Underwriter RFP to develop broader list of firms qualified to serve as LOC providers and swap counterparties in addition to underwriters? 10
Municipal Rates and Ratios & Taxable Ratios General Market Data Municipal Credit Spreads Taxable & Taxable Equivalent Spreads Summary of Sale Results 03/30/09 through 04/03/09 Note: Full Details of deals >$50mm pricing 03/30/09 04/03/09 included as a separate file. 1
MMD AAA G.O. Curve MMD AAA G.O. Yield Curve Change 6.5% 5.5% 10 5 Now vs One Week Ago Now vs One Month Ago Yield 4.5% 3.5% 2.5% 1.5% Cha ange in Basis Points 0 5 10 15 3/2/2009 20 3/26/2009 4/2/2009 25 o Ratio 0.5% 340% 320% 300% 280% 260% 240% 220% 200% 180% 160% 140% 120% 100% 80% 60% 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 Tax Exempt Treasury Ratios (past year) 2 Year 5 Year 10 Year 30 Year Current Ratios: 110% 118% 116% 134% 340% 320% 300% 280% 260% 240% 200% Ratio220% 180% 160% 140% 120% 100% 80% 60% 30 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Maturity Year Tax Exempt Treasury Ratios (past 5 years) 2 Year 5 Year 10 Year 30 Year Current Ratios: 110% 118% 116% 134% Source: Bloomberg & TM3 Date Date 2
5.50% 10 Year Spot Rates 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% Delphis 100 Yields MMD - G.O. AAA Yields Consensus Median Yields 6.00% 20 Year Spot Rates 5.50% 5.00% 4.50% 4.00% 3.50% Delphis 100 Yields MMD - G.O. AAA Yields Consensus Median Yields 3
30 Day Visible Municipal Supply VRD Market Average Dailies 25,000 20,000 10.0% 9.0% 8.0% VRD Market Average SIFMA 0.52 0.48 7.0% 15,000 6.0% (millions) 10,000 Yield 5.0% 4.0% 3.0% 5,000 0 30 Day Visible Supply Trendline 2.0% 1.0% 0.0% 5.0% US 3 Month Note Overnight LIBOR (US $) 10.0% 4.0% 9.0% 8.0% 3.0% 7.0% 6.0% Yield 2.0% 1.39% Yield 5.0% 4.0% 1.0% 0.0% 0.21% 3.0% 2.0% 1.0% 0.0% 0.29 1.0% Source: Bloomberg & TM3 Date 4
G.O. Spreads to AAA MMD* Revenue Spreads to AAA MMD* Basis Points 400 350 300 250 200 150 100 50 0 103 55 10 Aa/AA A/A Baa/BBB 353 151 22 Basis Points 400 350 300 250 200 150 100 50 0 109 61 16 Aa/AA A/A Baa/BBB 371 169 40 Basis Points BQ (G.O.) Spreads to AAA MMD* 400 350 Aa/AA 338 300 A/A Baa/BBB 250 200 150 136 95 100 47 50 0 2 7 50 0 Basis Points 500 450 400 350 300 250 200 150 100 50 169 121 76 AMT (Revenue) Spreads to AAA MMD* 471 Aa/AA A/A Baa/BBB 269 140 5 Source: TM3 *Ten Year Maturity
Corporate Spreads to Treasuries Taxable Equivalent Yield Spreads to Treasuries* Basis Points 600 800 573 500 Aa/AA 700 A/A 600 400 382 500 Baa/BBB 300 286 326 400 330 300 200 218 200 100 100 196 Basis Points Aa/AA A/A Baa/BBB 684 395 211 0 0 Taxable Equivalent Yield Spreads to Corporates* Basis Points 250 200 150 100 50 0 50 100 150 44 33 22 Aa/AA A/A Baa/BBB 111 14 115 200 250 Source: Bloomberg & TM3 * Ten year maturity assumes 30% Tax Rate 6
Summary of Sales > $50MM for the Week of March 30, 2009 (Full Pricing Details for current weeks sales included in accompanying file) Blue = Priced to Call Date 7
Summary of Sales > $50MM for the Week of March 30, 2009 (Full Pricing Details for current weeks sales included in accompanying file) Blue = Priced to Call Date 8
Summary of Sales > $50MM for the Week of March 30, 2009 (Full Pricing Details for current weeks sales included in accompanying file) Blue = Priced to Call Date 9
Summary of Sales > $50MM for the Week of March 30, 2009 (Full Pricing Details for current weeks sales included in accompanying file) Blue = Priced to Call Date 10
Summary of Sales > $50MM for the Week of March 30, 2009 (Full Pricing Details for current weeks sales included in accompanying file) Blue = Priced to Call Date 11
Summary of Sales > $50MM for the Week of March 30, 2009 (Full Pricing Details for current weeks sales included in accompanying file) Blue = Priced to Call Date 12