Deconstructing the Pricing Process: Dissecting the Details Workshop January 30, 2017 William Henderson, Managing Director Bervan Yeh, Managing Director Harper Watters, Associate Vice President and University Treasurer Janine Wilcox, Assistant Treasurer, Debt, Real Estate and Capital Programs Linda Fan, Managing Partner (Moderator) 0
1 Typical Pricing Timeline Fixed Rate Tax Exempt Bonds Thursday/Friday (after POS mailing) Investor outreach (net roadshow, investor calls, etc.) Couponing and bond structure, possible market call Monday Pre pricing call; price views Review draft pricing wire, including priority of orders and syndicate rules Tuesday 9am Pricing call 9 11am Order period 11:30am Verbal award 12 noon Final sizing and numbers verification if needed Afternoon Bond Purchase Agreement executed Bonds free to trade Workshop Topics 1. Investor outreach 2. Couponing YTC, YTM 3. Price Views 4. Syndicate and Priority of Orders 5. Order Periods Retail/Institutional 6. Post Pricing Secondary Market Trading
2 1. Investor Outreach The Preliminary Official Statement (POS) serves as the offering document for a public offering of debt; mailed after the following key milestones: University/Issuer approvals; adoption of documents TEFRA hearing Tax analysis Borrower disclosure complete Underwriter/counsel due diligence Auditor consent Ratings released (if printed on/in POS)
Market outreach can include net road show (webbased) and/or investor calls. Net roadshow options include: Live roadshow Recorded roadshow Slides only Underwriter can also arrange investor calls; counsel may advise that investor materials and discussions be limited to public information (POS) Existing bondholders may also be targeted 1. Investor Outreach Excerpt from $582.875 million DASNY NYU Series 2016A pricing wire (tax exempt) Link to $1 billion Harvard Series 2016B Net Roadshow (taxable) 3
4 2. Couponing and Yields Coupon: The stated interest rate the buyer receives on the bonds. Coupon x Par/2 = semi annual interest payment Price: A bond may be sold at par (100%), with a premium (>100%) or a discount (<100%). In today s market, most tax exempt bonds are sold at a premium. The price of a premium bond is calculated based on the Yield to Call. The arbitrage yield for tax purposes is based on Yield to Worst, which is the YTC for a premium bond. The true interest cost (TIC) is based on YTM. 4% 3% 2% 1% 0% Yield to Maturity vs Yield to Call AAA MMD 5% coupon Yield to Maturity: cost of funding to the borrower assuming bonds remain outstanding to maturity Yield to Call: rate of return to the investor assuming bond are redeemed on the call date 2018 2023 2028 2033 2038 2043 Difference between YTC and YTM = "kick"
5 2. Couponing and Yields Noncallable serial bonds: Yield = Yield to Maturity Callable premium bonds: Yield = Yield to Call Price based on Yield to Call 4% coupon @ 2.49% YTC, 3.03% YTM (113.434 price) due 2034 vs 5% coupon @ 2.30% YTC, 3.28% YTM (124.255 price) due 2035
6 2. What is MMD? The Municipal Market Data (MMD) "AAA" curve is published by Thomson Reuters every afternoon at 3pm EST with earlier indications throughout the day. Yields are intended to represent the benchmark valuation for AAA rated bonds in the market that day, in the primary and secondary markets. Actual indexing does not occur; levels reflect the opinion of the MMD analyst team, based on a group of bonds selected from the following categories AAA rated General Obligation bonds $2Mill block trade size Yield to Call Bonds with 5% coupon and 10yr par call States with a variety of tax rates Used as the baseline for ALL tax exempt bond pricings (industry standard).
7 Borrowers should focus on the MMD curve that most closely aligns with their maturity dates. Early = January Mid = June Late = December 2. More on MMD MMD Yield Curves are further specified by Early, Mid and Late to illustrate the relative steepness of the yield curve within the first 12 months. The first few maturities of a bond issue may be better described as 6 months to 18 months from the date of issuance and these short bonds will be priced to those relevant benchmarks. Early/Mid/Late Dated Yields 1/10/2017 MMD EARLY Spread MID Spread LATE Spread Yr. Maturity To To To AAA (Jan.) (June) (Dec.) AAA AAA AAA 1 2018 0.95 0.95 0 1.02 7 1.12 17 2 2019 1.15 1.15 0 1.24 9 1.33 18 3 2020 1.36 1.36 0 1.42 6 1.49 13 4 2021 1.51 1.51 0 1.58 7 1.65 14 5 2022 1.67 1.67 0 1.73 6 1.77 10 6 2023 1.79 1.79 0 1.84 5 1.9 11 7 2024 1.92 1.92 0 1.97 5 2.02 10 8 2025 2.02 2.02 0 2.06 4 2.12 10 9 2026 2.13 2.13 0 2.17 4 2.21 8 10 2027 2.22 2.22 0 2.25 3 2.29 7 11 2028 2.31 2.31 0 2.33 2 2.37 6 12 2029 2.38 2.38 0 2.41 3 2.43 5 13 2030 2.46 2.46 0 2.47 1 2.48 2
8 3. Factors Affecting Pricing The senior manager will typically query the co managers for price views and consider current market activity (comparable new issues, secondary market trades, existing bondholder activities, subject to similarities/differences in comps such as Credit ratings Sector Location State exemptions can vary widely Size Security Other considerations include spreads to MMD on the borrower s most recent transaction/s, recent coupon and call preferences expressed by buyers and the relative value between taxable and taxable markets and across the curves In the municipal market, technical factors can influence rates. Forward calendar negotiated and competitive supply Bond fund flows Coupon and principal dates Quarter and year end dates Economic indicator releases
9 3. Sample Comps Issuer New York University University of Cincinnati Southern Methodist University University of Colorado Sale Date 6/1/2016 6/1/2016 5/12/2016 5/4/2016 Par Amount $582,875,000 $37,980,000 $116,705,000 $156,810,000 Ratings * Aa3/AA-/NR Aa3/-/AA- Aa3/AA-/- Aa2/-/AA+ Maturity MMD Coupon Yield Spread ** MMD Coupon Yield Spread ** MMD Coupon Yield Spread ** MMD Coupon Yield Spread ** 2017 0.57% 2.00% 0.62% 0.05% 2018 0.65% 2.00% 0.73% 0.08% 2019 0.75% 3.00% 0.85% 0.10% 2020 0.87% 5.00% 1.05% 0.18% 0.85% 4.00% 0.96% 0.11% 2021 1.10% 4.00% 1.17% 0.07% 0.98% 5.00% 1.18% 0.20% 0.97% 5.00% 1.10% 0.13% 2022 1.22% 2.00/5.00% 1.30% 0.08% 1.09% 5.00% 1.32% 0.23% 1.09% 5.00% 1.24% 0.15% 2023 1.33% 3.00/5.00% 1.47% 0.14% 1.19% 5.00% 1.44% 0.25% 1.20% 5.00% 1.35% 0.15% 2024 1.43% 2.00/5.00% 1.61% 0.18% 1.31% 5.00% 1.59% 0.28% 1.32% 5.00% 1.50% 0.18% 2025 1.55% 3.00/5.00% 1.77% 0.22% 1.43% 5.00% 1.73% 0.30% 1.45% 5.00% 1.64% 0.19% 2026 1.67% 4.00/5.00% 1.91% 0.24% 1.57% 5.00% 1.90% 0.33% 1.58% 5.00% 1.78% 0.20% 2027 1.79% 5.00% 2.03% 0.24% 1.68% 5.00% 2.03% 0.35% 1.71% 2.25% 2.15% 0.44% 2028 1.85% 5.00% 2.11% 0.26% 1.76% 5.00% 2.11% 0.35% 1.80% 2.50% 2.38% 0.58% 2029 1.90% 5.00% 2.17% 0.27% 1.82% 5.00% 2.17% 0.35% 1.88% 2.75% 2.55% 0.67% 2030 1.95% 5.00% 2.22% 0.27% 1.86% 2.50% 2.66% 0.80% 1.94% 2.75% 2.71% 0.77% 2031 2.00% 5.00% 2.27% 0.27% 1.92% 3.00% 2.67% 0.75% 2.00% 3.00% 2.79% 0.79% 2032 2.05% 5.00% 2.33% 0.28% 1.98% 3.00% 2.73% 0.75% 2.06% 4.00% 2.57% 0.51% 2033 2.10% 5.00% 2.38% 0.28% 2.04% 3.00% 2.79% 0.75% 2.12% 4.00% 2.65% 0.53% 2034 2.15% 5.00% 2.43% 0.28% 2.10% 4.00% 2.75% 0.65% 2.18% 4.00% 2.72% 0.54% 2035 2.20% 5.00% 2.47% 0.27% 2.16% 4.00% 2.81% 0.65% 2.24% 4.00% 2.76% 0.52% 2036 2.25% 5.00% 2.51% 0.26% 2.30% 4.00% 2.82% 0.52% 2037 2038 2.39% 4.00% 2.89% 0.50% 2039 2.36% 4.00/5.00% 2.88/2.57% 0.52/0.21% 2040 2.36% 5.00% 2.69% 0.33% 2041 2.40% 4.00% 2.900% 0.500% 2.40% 5.000% 2.750% 0.35% 2.48% 3.00% 3.14% 0.66% 2042 2043 2% 4.00% 2.910% 0.490% 2044 2045 2.44% 5.00% 2.79% 0.35% 2046 2.45% 5.000% 2.800% 0.35% * Ratings shown as Moodys/S&P/Fitch ** Spread to MMD as of Sale Date
10 4. Syndicate Use of Multiple Underwriters Sole Manager: Only one underwriter is used. Senior Manager/Lead Underwriter/Book runner: The underwriter that handles the process of negotiating pricing and allocating the bonds among the other members of the syndicate. Typically receives the largest share of the underwriting takedown. Co Manager: Any other member of the underwriting syndicate that would share any liability for any unsold balance of a bond issue. Selling Group: An underwriter that assists in the distribution of the bonds but do not receive the benefit of syndicate profits nor share in the liability for any unsold bonds. Selling Group members are only paid on their orders that were filled.
11 4. Factors that Can Affect Syndicate Selection Size, complexity of transaction Type of issue (taxable, tax exempt, maturity structure) Commercial banking and other relationships Desire to reward coverage or other services Qualifications (RFQ, RFP) and ideas Distribution capabilities Desire for greater transparency, diverse perspectives and focus
12 4. Syndicate Structure With more than two underwriters, borrowers can utilize either a Group Net or Net Designated Policy. Group Net = predetermined split of underwriting discount (takedown) determined by borrower Net Designated = takedown is allocated among underwriters by buyer, consistent with Priority (Designation) Policy
13 Underwriting fee proposals may be dependent on lead manager receiving a minimum percentage of the takedown. The compensation of the underwriters will also be influenced by the priority of orders. The MSRB requires syndicates to adopt priority provisions in writing. 4. Priority of Orders Excerpt from $125.85 million DASNY Cornell Series 2016A pricing wire Excerpt from $582.875 million DASNY NYU Series 2016A pricing wire (tax exempt)
14 4. Definition of Retail Excerpt from $582.875 million DASNY NYU Series 2016A pricing wire (tax exempt)
15 5. Order Period The order period is the time established by the lead underwriter during which the bonds are offered for sale to investors at specified rates and prices, communicated to the market in the pricing wire. An order period typically lasts two hours 9 11am eastern, but depending on the transaction size, could be held over a couple of days. On certain transactions, there may be a separate and distinct order period for retail orders, followed by an institutional order period. Institutional orders are typically submitted through the senior manager, subject to designation policies. The underwriters typically receive the full takedown associated with any retail orders they are allocated. Certain maturities may be excluded from the retail order period. Traditional mom and pop investors and high net worth individuals have been surpassed by professional retail separately managed accounts (SMAs) such as bank trust departments, asset managers and investment advisors.
16 5. Price Adjustments During the order period, all bonds with the same maturity and coupon must be sold at the same price/yield (initial offering pricing). Based on the actual orders, there are three possible outcomes: 1. Oversubscribed there are orders in excess of available principal, the underwriter may reduce the yield (increase the price). 2. Undersubscribed there are fewer orders than bonds, the underwriter may underwrite the balance or adjust the rates upward (reduce price) [1]. 3. If there are about the same amount of orders and bonds, the underwriter may leave the rate/price unchanged. [1] Underwriting liability among syndicate is based on participation outlined in Agreement Among Underwriters
17 5. Pricing Trajectory 125.85 million DASNY Cornell Series 2016A Cornell University Series 2016A Refunding Retail Order Period Institutional Order Final Pricing Maturity Coupon Interpolated AAA GO MMD Initial Spreads @ 9:00am Reprice @ 12:30pm Initial Spreads @ 12:30pm Reprice @2:30pm Spread to MMD Stated Yield 7/1/2017 2.00% 0.59% 3 bps 0.56% 7/1/2018 5.00% 0.68% +2 bps 2 bps +0 bps 0 bps 0 bps 0.68% 7/1/2019 4.00% 0.77% +3 bps 3 bps +0 bps 0 bps 0 bps 0.77% 7/1/2020 3.00% 0.88% +4 bps 3 bps +1 bps 0 bps +1 bps 0.89% 7/1/2021 5.00% 1.03% +5 bps 5 bps +0 bps 0 bps 0 bps 1.03% 7/1/2022 4.00% 1.16% +6 bps 4 bps +2 bps 1 bps +1 bps 1.17% 7/1/2023 5.00% 1.28% +7 bps 8 bps 1 bps 1 bps 2 bps 1.26% 7/1/2024 5.00% 1.40% +8 bps 5 bps +3 bps 1 bps +2 bps 1.42% 7/1/2025 4.00% 1.52% +9 bps 4 bps +5 bps 1 bps +4 bps 1.56% 7/1/2026 5.00% 1.63% +10 bps 4 bps +6 bps 1 bps +5 bps 1.68% 7/1/2027 5.00% 1.73% +18 bps 3 bps +15 bps 1 bps +14 bps 1.87% 7/1/2028 5.00% 1.80% +14 bps 2 bps +12 bps 1 bps +11 bps 1.91% 7/1/2029 5.00% 1.87% +14 bps 3 bps +11 bps 0 bps +11 bps 1.98% 7/1/2030 5.00% 1.93% +12 bps 3 bps +9 bps 1 bps +8 bps 2.01% 7/1/2031 5.00% 2.00% +12 bps 3 bps +9 bps 2 bps +7 bps 2.07% 7/1/2032 5.00% 2.06% +12 bps 2 bps +10 bps 2 bps +8 bps 2.14% 7/1/2033 5.00% 2.12% +10 bps 3 bps +7 bps 2.19% 7/1/2034 4.00% 2.18% +40 bps 9 bps +31 bps 2.49% 7/1/2035 5.00% 2.24% +10 bps 3 bps +7bps 1 bp +6 bps 2.30%
18 5. Order Flow Borrowers can view the order flow through an electronic order book system
19 5. Post Order Period At the conclusion of the order period, the underwriter will offer to buy the bond issue at the original or adjusted original rates/prices/coupons. The underwriter may offer to underwrite any remaining balances for which there are no orders. When the borrower agrees to the repricing, this is the verbal award or handshake, after which the bankers will finalize the numbers with the final amounts of each maturity, subject to the review of counsel and verification agent, if necessary. The final amounts, rates and prices are inserted into the Bond Purchase Agreement (BPA) which is signed by the issuer, borrower and lead underwriter. After the BPA is signed, the bonds are free to trade, and the syndicate disbanded. Bonds can trade at different prices/yields than the initial offering levels. In a volatile market with unsold balances, underwriters will want the BPA signed soon after the verbal award. The final Official Statement with the final maturities, coupons, yields, call features and amounts must be printed within seven days after the bond sale, or when the BPA is signed.
20 6. Post Pricing: Secondary Market Trading After the bonds are awarded, the underwriters will allot the bonds to specific investors. The buyers will designate the underwriters according to the Net Designated rules, and the underwriter will settle and close the account. Following the bond sale, borrowers can review orders and allotments, as well as designations, in order to evaluate the results of the underwriter compensation strategy. The borrower can also compare spreads to the MMD index versus other recently issued highly rated and higher ed transactions. Secondary market activity, especially for maturities that were taken down or with significant member orders that were filled, can also be reviewed in order to assess how well the bonds have traded.
21 6. Post Pricing Analysis CUSIP 64990BE25 64990BE33 64990BE41 64990BE58 64990BE66 64990BE74 64990BE82 64990BE90 64990BF24 64990BF32 64990BF40 64990BF57 64990BF65 64990BF73 64990BF81 64990BF99 64990BG23 64990BG31 64990BG49 Total Immediate Secondary Market Activity (Business Week Post Pricing) Total Volume ($000s) Trade Volume as % of Par Avg Spread to MMD Difference to Pricing Spread (bps) Maturity Par ($000s) (bps) 7/1/2017 3,930 7/1/2018 4,715 7/1/2019 4,945 545 11% +3 +3 7/1/2020 5,155 25 0% +2 +1 7/1/2021 5,305 7/1/2022 5,575 7/1/2023 5,795 7/1/2024 6,085 50 1% +6 +4 7/1/2025 6,385 7/1/2026 6,190 7/1/2027 6,500 420 6% +11 3 7/1/2028 6,820 1,000 15% +10 1 7/1/2029 7,165 230 3% +10 1 7/1/2030 7,525 7/1/2031 7,895 50 1% +5 2 7/1/2032 8,290 50 1% +6 2 7/1/2033 8,715 7/1/2034 9,145 5,305 58% +25 6 7/1/2035 9,715 200 2% +5 1 125,850 7,875 PV Value of Trade Difference ($000s) 0.5 0.0 0.1 (1.4) (1.0) (0.2) (0.1) (0.1) (43.3) (0.3) (45.9)
22 Other Types of Financings Public Competitive Sales Taxable Bonds Direct/Private Bank Loans/Direct Placement (fixed or variable) Reverse Inquiry
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24 Background Private university and the federal land grant institution of the State of New York (four colleges are units of State of New York) Comprised of colleges and schools in Ithaca, New York City (includes Weill Medical College), and Doha, Qatar Cornell Tech in New York City offers graduate programs in applied sciences, including programs offered jointly with Technion Isreal Institute of Technology Background Degree granting campuses in New York, Shanghai and Abu Dhabi Global Sites in Accra, Berlin, Buenos Aires, Florence, London, Madrid, Paris, Prague, Sydney, Tel Aviv and Washington, D.C. Academic Medical Center (NYU Langone) Tandon School of Engineering located in downtown Brooklyn Financial Highlights, FY16 Total Operating Revenues: $3.8B Investments: $6.6B Total Net Assets: $9.0B Total Bonds/Notes Outstanding: $1.5B 76% fixed rate and 24% variable rate Quick Facts: Fall 2016 14,566 full time undergraduates, 8,822 full time graduate/professional/medical college students (23,388 FTE) 3,202 total faculty and 77% tenured 44,965 undergrad applications; 3,342 enrolled Financial Highlights, FY16 (Consolidated with Health System) Total Operating Revenues: $8.5B Endowment: $3.6B Total Net Assets: $7.3B Total Bonds/Notes Outstanding: $5.3B 100% fixed rate debt (long term bonds); no swaps Quick Facts: Fall 2016 27,022 full time undergraduates, 16,486 full time graduate/professional students (48,628 FTE) 9,715 total faculty and 16% tenured 63,802 undergrad applicants; 6,674 enrolled