Structuring the Financing

Structuring the Financing Financing The Mechanics of a Bond Sale Sale California Debt and Investment Advisory Commission David Johnson Banc of America Securities LLC (213) 229-3431 March 13, 2008 2008 0 Cheryl Hines Merrill Lynch (415) 676-3211 676-3211 Introduction Introduction At this point, the Issuer has made several decisions: ‹ Identified a need to borrow money. Identified a revenue stream to pay debt service. Assembled a finance team. „ „ „ ‹ ‹ Bond counsel Investment banker Financial advisor Its now time to STRUCTURE THE FINANCING! 1 Topics Topics ‹ Types of Debt Obligations Sizing the Bond Issue Debt Service Structure Refunding Bonds Ratings Variable Rate Debt ‹ ‹ ‹ ‹ ‹ 2 Types of Debt Obligations There are many types of debt that California governments issue: ‹ ‹ ‹ ‹ ‹ General Obligation Bonds TRANs Lease Revenue Bonds Certificates of Participation Revenue Bonds ‹ ‹ ‹ ‹ ‹ Sales Tax Bonds Pension Bonds Special Tax Bonds Tax Allocation Bonds Assessment Bonds 3 Types of Debt Obligations Obligations Structuring a bond issue is directly affected by the type of debt being issued. ‹ Reserve Fund Requirement Additional Bonds Test Debt Service Coverage Requirements Term Tax Treatment Call Features Leased Assets 4 ‹ ‹ ‹ ‹ ‹ ‹ Sizing the Bond Issue Project or Construction Fund Capitalized Interest Fund Debt Service Reserve Fund Costs of Issuance Underwriting Discount 5 The Project Fund Fund Funds acquisition of the asset or construction of the project. ‹ Based on actual costs or reliable estimates. Net Funded or Gross Funded? „ ‹ Gross Funded – Deposit exact amount required to pay for asset or project. Net Funded – Amount deposited plus interest earnings sufficient to fund project. „ 6 The Capitalized Interest Fund Fund Bond proceeds used to pay interest for a finite period of time. ‹ Interest is capitalized for a number of reasons: „ „ Until a project/asset can produce revenue. Until the government has beneficial use (COPs, Lease Revenue Bonds) Until revenue is projected to be sufficient to pay debt service. „ 7 The Debt Service Reserve Fund Fund Provides additional security for investors. ‹ Found in most credits with the exception of GO Bonds. Sizing limited to the lesser of: „ „ „ ‹ ‹ ‹ Maximum Annual Debt Service 125% of Average Annual Debt Service 10% of Par Amount Fund is invested with earnings usually going as an offset to debt service. Can often be satisfied by purchasing a Debt Service Reserve Fund Surety Policy. 8 Costs of Issuance Issuance Bond proceeds may be used to pay certain eligible costs. Professional Services „ „ „ „ „ „ Bond Counsel and/or Disclosure Counsel Financial Advisor and Trustee/Paying Agent Rating Agencies Appraisal, Feasibility Study, Engineer’s Report Special Tax Consultant Title Insurance Bond Insurance and/or Surety Bond Premium Letter of Credit fees 9 Credit Enhancement „ „ Underwriting Discount Discount Underwriter’s compensation and expenses. „ Components „ „ Average Takedown Management Fee Expenses At closing, Underwriter pays for bonds an amount less the underwriting discount. $100,000,000 (650,000) $ 99,350,000 Par Less discount of 6.50/$1,000 Purchase Price Funding Method „ Other Considerations „ Expressed as dollars per thousand dollars of bonds (e.g., $6.50/$1,000) 10 Sizing Example Net Funded Construction Fund Capitalized Interest Fund Debt Service Reserve Fund Costs of Issuance Underwriting Discount 11 Sizing Assumptions – Uranium Springs Water District Project Cost and Draw Schedule 4/1/2007 10/1/2007 4/1/2008 10/1/2008 $ 10,000,000 $ 10,000,000 $ 10,000,000 $ 10,000,000 $ 40,000,000 Total Project Cost Bonds Dated: 1/1/2007 Final Maturity: 1/1/2039 12 Sizing Assumptions – Uranium Springs Water District Costs of Issuance $200,000 Legal, FA, Trustee Ratings, Printing, Misc. Bond Insurance 40 bps Bond Insurance Premium (Total Debt Service x .40%) Underwriting Discount $6.50/bond Takedown, Management Fee, Expenses 13 Sizing Assumptions – Uranium Springs Water District Debt Service Reserve Fund Lesser of: Maximum Annual Debt Service 125% of Average Annual Debt Service 10% of Par Amount Capitalized Interest Through 1/1/09 2-year Construction Period 14 Sizing Assumptions – Uranium Springs Water District Reinvestment Assumptions Earnings Go To: Capitalized Interest Fund: Construction Fund: Debt Service Reserve Fund: 2.50% Construction Fund 2.50% Construction Fund Construction Fund 5.0% (Bond Yield) 15 Sizing Example – Net Funded Project Fund Fund Sources of Funds: Par Amount: $ 46,390,000 1/1/07 Initial Deposit: $ 38,723,636 Total Sources of Funds: $ 46,390,000 Project Fund Earnings Uses of Funds: Project Fund Cap Interest Fund: Debt Service Reserve Fund: Bond Insurance: COI: Underwriter’s Discount: Rounding: Total Uses of Funds: $ 38,723,636 $ 4,008,591 $ Debt Service Reserve Fund Earnings Total Project Cost $ 195,051 $ 968,704 Cap Interest Fund Earnings: $ 112,609 2,795,850 $ 357,550 $ $ $ 301,535 2,838 $ 46,390,000 16 200,000 $ 40,000,000 Sizing Example – Capitalized Interest Fund Fund Sources of Funds: Par Amount: $ 46,390,000 1/1/07 Initial Deposit: $ 4,008,591 Total Sources of Funds: $ 46,390,000 7/1/07 Interest Payment: Uses of Funds: Project Fund Cap Interest Fund: Debt Service Reserve Fund: Bond Insurance: COI: Underwriter’s Discount: Rounding: Total Uses of Funds: $ 38,723,636 $ 4,008,591 7/1/08 Interest Payment: 2,795,850 $ 357,550 $ $ $ 301,535 2,838 $ 46,390,000 17 ($ 1,005,697) 1/1/08 Interest Payment: ($ 1,005,697) ($ 998,599) $ 1/1/09 Interest Payment: Fund Balance on 1/1/09: ($ 998,599) 200,000 $ 0 Sizing Example – Debt Service Reserve Fund Sources of Funds: Par Amount: $ 46,390,000 Lesser of: Maximum Annual Debt Service 125% of Average Annual Debt Service 10% of Par Amount $ 2,795,850 $ 357,550 $ $ $ 301,535 2,838 $ 46,390,000 18 Total Sources of Funds: $ 46,390,000 Uses of Funds: Project Fund Cap Interest Fund: Debt Service Reserve Fund: Bond Insurance: COI: Underwriter’s Discount: Rounding: Total Uses of Funds: $ 2,795,850 $ 38,723,636 $ 4,008,591 $ 3,491,698 $ 4,639,000 200,000 Sizing Example – Bond Insurance Premium Premium Sources of Funds: Par Amount: $ 46,390,000 Total Principal & Interest: Uses of Funds: Project Fund Cap Interest Fund: Debt Service Reserve Fund: Bond Insurance: COI: Underwriter’s Discount: Rounding: Total Uses of Funds: $ 38,723,636 $ 4,008,591 $ Bond Insurance Premium $ 357,550 2,795,850 $ 357,550 $ $ $ 301,535 2,838 $ 46,390,000 19 Total Sources of Funds: $ 46,390,000 $ 89,387,448 x.40% 200,000 Sizing Example – Costs of Issuance Issuance Sources of Funds: Par Amount: $ 46,390,000 Costs of Issuance: Bond Counsel: Financial Advisor: $ 38,723,636 $ 4,008,591 $ Trustee: Rating Agencies: Printing: 2,795,850 $ 357,550 $ $ $ 301,535 2,838 $ 46,390,000 20 $ 100,000 Total Sources of Funds: $ 46,390,000 Uses of Funds: Project Fund Cap Interest Fund: Debt Service Reserve Fund: Bond Insurance: COI: Underwriter’s Discount: Rounding: Total Uses of Funds: $ $ $ $ $ $ 50,000 5,000 30,000 7,500 7,500 200,000 Miscellaneous: Total COI: 200,000 Sizing Example – Underwriting Discount Discount Sources of Funds: Par Amount: $ 46,390,000 Underwriting Discount: Takedown ($3.50/bond): Management Fee ($1.00/bond): $ 38,723,636 $ 4,008,591 $ 2,795,850 $ 357,550 $ $ $ 301,535 2,838 $ 46,390,000 21 Total Sources of Funds: $ 46,390,000 Uses of Funds: Project Fund Cap Interest Fund: Debt Service Reserve Fund: $ 162,365 $ 46,390 Expenses ($2.00/bond): Underwriter’s Discount ($6.50/bond): $ 92,780 Bond Insurance: COI: Underwriter’s Discount: Rounding: Total Uses of Funds: $ 301,535 200,000 Debt Service Structure Sample Structures Current Interest vs. Deferred Interest Optional Redemption Refunding Considerations 22 Level Debt Service Service $46,390,000 Uranium Springs Water District Revenue Bonds 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 07 20 09 20 11 20 13 20 15 20 17 20 19 20 21 20 23 20 25 20 27 20 29 20 31 20 33 20 35 20 37 20 DSRF Implications Lesser of: Maximum Annual Debt Service 125% of Average Annual Debt Service 10% of Par Amount $ $ $ 2,795,850 3,491,698 4,630,000 23 Bond Insurance Implications Total Principal & Interest $ 89,387,448 x.40% Insurance Premium $ 357,550 “Wrapped” Debt Service Service $48,255,000 000 UraniumS prings WaterD istrict S D ct Revenue Bonds nds 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 20 20 10 10 20 20 18 18 20 20 26 26 20 20 34 34 20 20 12 12 20 20 08 08 20 20 14 14 20 20 20 20 20 20 22 22 20 20 28 28 20 20 30 30 20 20 36 36 20 20 16 16 20 20 24 24 20 20 32 32 20 20 38 38 DSRF Implications Lesser of: Maximum Annual Debt Service 125% of Average Annual Debt Service 10% of Par Amount $ $ 4,469,658 4,144,838 Bond Insurance Implications Total Principal & Interest $ 106,107,854 x.40% $ 4,825,500 24 Insurance Premium $ 424,431 Short Maturity Maturity $46,630,000 000 UraniumS prings WaterD istrict S D ct Revenue Bonds nds 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 20 20 08 08 20 20 10 10 20 20 12 12 20 20 14 14 20 20 16 16 20 20 22 22 20 20 18 18 20 20 20 20 20 20 24 24 20 20 26 26 20 20 28 28 20 20 30 30 20 20 32 32 20 20 34 34 20 20 36 36 20 20 38 38 DSRF Implications Lesser of: Maximum Annual Debt Service 125% of Average Annual Debt Service 10% of Par Amount $ $ 6,041,629 7,549,914 Bond Insurance Implications Total Principal & Interest $ 54,359,382 x.40% $ 4,663,000 25 Insurance Premium $ 217,438 Structuring the Bonds Bonds στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα Serial Bonds „ „ $46,390,000 Uranium Springs Water District Water Revenue Bonds Dated: January 1, 2007 Due: January 1, 2039 στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα Mature “serially” by year. Take advantage of positively sloped yield curve. Maturity Schedule Maturity (January 1) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Principal Amount 780,000 795,000 815,000 830,000 855,000 880,000 910,000 940,000 970,000 1,005,000 1,045,000 1,085,000 1,130,000 1,175,000 1,220,000 1,275,000 1,325,000 Interest Rate 1.820% 2.070% 2.370% 2.670% 3.020% 3.220% 3.370% 3.520% 3.630% 3.740% 3.840% 3.940% 4.030% 4.110% 4.180% 4.270% 4.350% Yield 1.820% 2.070% 2.370% 2.670% 3.020% 3.220% 3.370% 3.520% 3.630% 3.740% 3.840% 3.940% 4.030% 4.110% 4.180% 4.270% 4.350% Term Bonds „ „ Single coupon covering multiple years. Retired with annual Sinking Fund Payments. $ 7,610,000 4.72% Term Bonds maturing January 1, 2029 $ 9,600,000 4.81% Term Bonds maturing January 1, 2034 $ 12,145,000 4.84% Term Bonds maturing January 1, 2039 26 Current or Deferred Interest Bonds Bonds Current Interest Bonds „ „ „ „ Pay interest at stated coupon. Interest typically paid every 6 months. May be sold at par, at a premium or at a discount. Investor’s yield determined by price paid for the Bond. 900,000 800,000 700,000 600,000 500,000 400,000 300,000 Interest Principal 200,000 100,000 - 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 27 Current or Deferred Interest Bonds Bonds Capital Appreciation Bonds „ „ „ „ “Zero” coupon or deferred interest bonds. Interest accretes to maturity. Sold at a deep discount. Investor’s yield determined by price paid for the Bond. 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 28 Other Considerations Considerations ‹ Optional Redemption „ „ Standard optional redemption period is 10 years. Callable bonds generally have a higher yield than non-callable higher yie bonds generally have bonds. ‹ Par Bonds, Original Issue Discount Bonds, and Original Issue Premium Bonds Coupon „ „ „ Yield 5.00% 5.10% 4.90% Price 100% 98% (est) 100.9% (est) Par Bond Discount Bond Premium Bond 5.00% 5.00% 5.00% 29 Refunding Considerations Considerations Advance Refunding „ „ Old Bonds are not currently subject to optional redemption. New Bond proceeds are used to fund an escrow that defeases old bonds to call date. Escrow invested in Treasury (SLGs)with maximum permitted yield with maximum permitted equal to bond arbitrage yield. Can only advance refund one time. „ „ Current Refunding „ „ Old bonds are currently subject to optional redemption. New bond proceeds used to redeem old bonds. 30 Ratings and Credit Enhancement The Rating Agencies Rating Agency Packages Obtaining a Rating Credit Enhancement – Bond Insurance Credit Enhancement – Letters of Credit 31 The Rating Agencies Agencies Moody’s S&P Fitch Long-Term Aaa Aa1, Aa2, Aa3 A1, A2, A3 Baa1, Baa2, Baa3 Ba1, Ba2, Ba3 AAA AA+, AA, AAA+, A, ABBB+, BBB, BBBBB+, BB, BB- AAA AA+, AA, AAA+, A, ABBB+, BBB, BBBBB+, BB, BB- Short-Term MIG-1, MIG-2, MIG-3 (Notes) VMIG-1, VMIG-2, VMIG-3 (Commercial Paper and VRDBs) SP-1+, SP-1, SP-2, SP-3 (Notes) A-1, A-2, A-3 (Commercial Paper and VRDBs) 32 F-1+, F-1, F-2, F-3 (Notes) LOC (Commercial Paper and VRDBs) Obtaining a Rating Rating ‹ A typical rating agency package might include: „ „ „ 3 years of audited financial statements Current and proposed budget Bond Documents, including: ¾ ¾ ¾ ¾ Trust Indentures Lease Agreements Installment Sale Agreements Redevelopment Loan Agreements „ „ „ „ „ Preliminary Official Statement Special Reports Sizing and Debt Service Schedules Timing and Responsibility Schedule Distribution List 33 Obtaining a Rating Rating ‹ It is often useful to meet with the rating analysts to: „ „ „ „ „ Describe the project Get feedback on the structure Describe salient aspects of security Review demographics and economicsof service a rea of service a On-site or at rating agency offices 34 Variable Rate Bonds Historical Interest Rates Structuring Options Pros and Cons of Alternative Structures The Dutch Auction Process ARS vs. VRDBs 35 Variable Rate vs. Fixed Rate Rate Securities Industry and Financial Markets Association (SIFMA) Index (formerly BMA) vs. Bond Buyer Revenue Bond Index (RBI) A Ten Year History 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2/ 19 /1 99 8 8/ 19 /1 99 8 2/ 19 /1 99 9 8/ 19 /1 99 9 2/ 19 /2 00 0 8/ 19 /2 00 0 2/ 19 /2 00 1 8/ 19 /2 00 1 2/ 19 /2 00 2 8/ 19 /2 00 2 2/ 19 /2 00 3 8/ 19 /2 00 3 2/ 19 /2 00 4 8/ 19 /2 00 4 2/ 19 /2 00 5 8/ 19 /2 00 5 2/ 19 /2 00 6 8/ 19 /2 00 6 2/ 19 /2 00 7 8/ 19 /2 00 7 2/ 19 /2 00 8 SIFMA 10 Year Avg = 2.65% RBI 10 Year Avg = 5.25% BMA SIFMA 36 Introduction to Variable Rate Structures Structures ‹ There are three primary variable rate structures used in the municipal market: „ „ „ Commercial Paper Variable Rate Demand Bonds Auction Rate Securities 37 Variable Rate Structuring Options Options Commercial Paper „ „ „ „ Can be drawn down and paid back as needed. Outstanding CP is remarketed for a maximum of 270 days. Bank credit facility required for liquidity. Money Market Funds are the primary investor. 38 Variable Rate Structuring Options Options Variable Rate Demand Bonds „ Long-term bond with rate that resets periodically (daily, weekly, monthly, etc.). Investor can “put” bonds on short notice (allows bond to trade at par). Bank credit facility required to support put. „ „ 39 Variable Rate Structuring Options Options Auction Rate Securities „ Long-term bond with rate that resets periodically (weekly, monthly, etc.). No “put” feature and thus, no bank facility. Rate reset via Dutch Auction process. „ „ 40 Pros vs. Cons of Alternative Structures Structures PROS CONS ƒDebt Service certainty Fixed Rate ƒLess flexibility to refinance if rates go down. Variable Rate ƒLower rates ƒMore flexibility to restructure/refinance. ƒInterest rates may rise. ƒTakes more time to manage. 41 VRDB Process Process Remarketing Agent Sets Interest Rate Remarketing Agent „ Establishes interest rate at periodic intervals (i.e., daily, weekly, monthly) Existing Holders Hold or Put Existing Holders „ May hold bonds or “put” bonds back to Remarketing Agent. New Purchasers Submit Orders New Purchasers „ Submit orders for any bonds that have been “put” back to the Remarketing Agent. DTC Clears Trade Next Day 42 Dutch Auction Process Process Purchaser/Seller Submits Orders Broker/Dealer Relays Orders Broker-Dealer „ Passes orders to Auction Agent Auction Agent Auction Results Auction Agent „ „ Assembles bids in ascending order. Determines highest bid to clear auction, which is interest rate applied to issue until next auction. DTC Clears Trade Next Day 43 Dutch Auction Orders Orders Bid Order „ „ Hold ARS provided that the reset interest rate is not less than that specified by the bid of the current ARS holder. If the rate is below, the ARS are sold. Hold at Market „ Hold ARS regardless of reset interest rate. Potential Bid „ Minimum rate acceptable to buy additional ARS. Sell Order „ Sell ARS without regard to the reset interest rate. Potential investors can submit bid orders to buy ARS at a specified rate. 44 ARS vs. VRDBs At-A-Glance At-A-Glance ARS Short End of Yield Curve Flexible Reset Intervals Ability to Enter into Swaps Callable Anytime Investor Tender Option Requires LOC or Liquidity Facility Requires Bond Insurance Interest Rate determined by Dutch Auction 45 VRDBs 9 9 9 9 9 9 9 9 9 9 9 9