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					Texas Bond Review Board
     DEBT PRIMER




    Prepared by staff of the
   Texas Bond Review Board

      Robert C. Kline
     Executive Director

                               1
Introduction
The Texas Bond Review Board (BRB) consists of the Governor, the Lieutenant Governor,
the Comptroller of Public Accounts (voting members) and the Speaker of the House of
Representatives (non-voting member). The BRB is responsible for the approval of all state
bond issues and lease purchases with an initial principal amount greater than $250,000 or of
a term longer than five years with the exception of Permanent University Fund Debt and
Tax and Revenue Anticipation Notes issued by the Comptroller of Public Accounts. In
addition, the BRB is responsible for collecting, analyzing and reporting debt information for
local political subdivisions in Texas. The BRB is also charged with the administration of the
state’s Private Activity Bond Allocation Program. The BRB’s statutory authority is provided
in Texas Government Code Chapters 1231 and 1372.

This Debt Primer is intended to provide basic knowledge of debt for government officials
and other interested parties. It covers topics such as types of debt issued by the state of
Texas, the state's constitutional debt limit and policy implications of debt issuance. The Debt
Primer concludes with a glossary of terms.

What is a Bond?
A bond is a long-term debt security issued to evidence a loan between a lender and a borrower
specifying the:
     due date for the loan called the term or maturity, e.g. 20 years;
     interest rate, e.g. 5%;
     debt service (repayment) schedule, e.g. monthly, semi-annually or annually; and
     revenue source pledged to repay the debt.

Common Terms for Debt Securities
      Par – 100% of the face value of a security.
      Premium – the amount by which the price paid for a security exceeds par value.
      Discount – the amount by which the price paid for a security is less than par value.
      Maturity date – the date the principal is due.
      Coupon – the interest rate paid on a security.
      Fixed interest rate - an interest rate that does not fluctuate during the life of a security.
      Variable interest rate - an interest rate that fluctuates based on a predetermined index
       or formula.
      Liquidity Provider – a financial intermediary that facilitates the remarketing of variable-
       rate debt at reset dates.
      Yield – the investor’s rate of return.

(See the Glossary below for a more complete list of bond terms.)

Municipal Debt
Municipal debt is issued to finance any number of purposes for a governmental entity or
institution of higher education. An investor who buys municipal debt is lending money to
the issuer and receives a document evidencing the issuer’s promise to repay the principal
plus a specified rate of interest during the life of the debt. Interest earned on municipal debt
is usually exempt from federal income taxes.

                                                                                                  2
Prior to issuance, the issuer usually hires both a financial advisor to advise on the structure
and sale of the debt and bond counsel to provide a legal opinion that the issue meets all
federal and state securities laws and that the debt is exempt from taxation.

The underwriting syndicate is a group of underwriting firms that buy the issue for resale
to investors.

The type of sale is a critical component in the security sale process. Municipal securities are
sold to underwriting firms through a competitive, negotiated or private placement sale.

       In a competitive sale underwriting firm(s) submit sealed bids to purchase the securities,
        and the winning bidder is the firm(s) whose bid provides the lowest true-interest cost
        (TIC) and otherwise meets all specifications outlined in the Notice of Sale. A
        competitive sale helps achieve the lowest possible TIC but may reduce the issuer’s
        flexibility to change the terms and/or conditions of the sale. Competitive sales are
        best reserved for highly-rated issuers that have historically been well-received by
        investors.

       In a negotiated sale the issuer chooses an underwriting firm(s) prior to pricing to assist
        with structuring, documentation and pre-sale of the securities to investors. At the
        time of sale, the issuer negotiates a price at which the securities are purchased for
        resale to investors. A negotiated sale provides the issuer with more flexibility to size
        and structure the sale than is available with competitive bids. Negotiated sales are
        best suited for issues that require a special selling effort either because the market is
        unfamiliar with the issuer or due to unique features of the issuance.

       A private placement is a negotiated offering in which an issuer’s securities are sold
        directly to a private investor(s) rather than through a public offering. Private
        placement investors are usually banks, mutual funds, insurance companies and
        pension funds and are generally smaller transactions than public sales.

If the municipal debt has a variable interest rate that resets at certain intervals after which the
debt is remarketed, a liquidity provider is used to assure the market that the securities will
be purchased in case of remarketing failure.

Types of Debt Used
General Obligation (GO) Debt
GO debt is legally secured by a constitutional pledge of the first monies coming into the
State Treasury not constitutionally dedicated for another purpose and must be approved by a
2/3 vote of both houses of the legislature and a majority of the voters. GO debt may be
issued in installments as determined by the legislatively appropriated debt service or by the
issuing agency or institution and often has a 20-year maturity with level principal payments.
The final maturity may depend on the useful life of the project to be financed. Examples
include GO securities issued by the Texas Public Finance Authority (TPFA) to finance
correctional and mental health facilities and GO securities issued by the Veterans Land
Board to finance land and housing loans to qualified veterans.




                                                                                                 3
Revenue Debt (non General Obligation debt)
Revenue debt is legally secured by a specific revenue source(s), does not require voter
approval and usually has a 20-year final maturity depending on the project to be financed.
Examples include State Highway Fund bonds issued by the Texas Department of
Transportation secured by the motor fuels tax and other revenues for construction and
maintenance of the state’s highway system, and securities issued by institutions of higher
education secured by tuition and fees used to finance projects such as classroom facilities,
dormitories and other university buildings.

Lease Purchases
Lease purchases finance the purchase of an asset over time through lease payments that
include principal and interest. They can be financed through a private vendor or through one
of the state's pool programs such as TPFA's Master Lease Purchase Program. Lease
purchase financings include equipment purchases such as automobiles, computers,
data/telecommunications equipment and equipment purchased for energy savings
performance contracts.

Commercial Paper (CP)
CP is a short-term debt obligation with a maturity not greater than 270 days. A CP program
can be secured by the state's general obligation pledge or by a specified revenue source(s). A
CP program secured by the state's general obligation pledge must be initially approved by
2/3 vote of both houses and a majority of the voters. When CP matures it can be either be
rolled-over (reissued) or refinanced (repaid) with long-term debt. Examples include CP
issued by TPFA to finance its Master Lease Purchase Program and CP issued to finance the
early stages of construction projects.

Tax and Revenue Anticipation Notes (TRANs)
TRANs are notes issued by the Comptroller of Public Accounts - Treasury Operations to
address cash flow shortfalls caused by the timing mismatch of revenues and expenditures in
the general revenue fund. TRANs must be repaid by the end of the biennium in which they
are issued but are usually repaid by the end of each fiscal year with tax receipts and other
revenues of the general revenue fund.

Permanent University Fund (PUF)
The PUF is a public endowment that contributes to the support of institutions of The
University of Texas System and The Texas A&M University System. The PUF was
established by the Texas Constitution in 1876 through the appropriation of land grants
previously given to The University of Texas at Austin plus one million acres. The BRB has
no authority over PUF debt issuance.

Variable Rate Demand Obligations (VRDOs)
VRDOs may be either general obligation or revenue obligations and generally have a stated
maturity. The interest rate may be reset daily, weekly, monthly or annually. The VRDOs are
redeemable with specified (e.g. 7 days) notice at par (face value) at the holder's option when
the rate resets. If redeemed, the VRDOs are then resold by the remarketing agent in the
secondary market to other investors. If the remarketing agent is unable to resell the VRDOs,
a liquidity provider will buy the issue for later resale. Without a liquidity provider interest
rates on VRDOs would be higher. Both the remarketing agent and the liquidity provider
charge fees for their services. The Comptroller of Public Accounts acts as the liquidity
provider for several of the state issuers.
                                                                                             4
Self-Supporting Debt
Self-supporting debt is repaid from revenues other than state general revenues. Self-
supporting debt can be either general obligation or revenue debt. Examples of self-
supporting GO debt include Veterans Land Board bonds that are repaid from loan
payments made by qualified veterans and related interest earnings, and GO bonds issued by
the Texas Water Development Board that are repaid with loan payments made by political
subdivisions for water projects and related interest earnings. Examples of self-supporting
revenue debt include bonds issued by institutions of higher education that are repaid from
tuition, fees and other revenues generated by colleges and universities.

Not Self-Supporting Debt
Not self-supporting debt is intended to be repaid with state general revenues. Not self-
supporting debt can be either general obligation debt or revenue debt. Not self-supporting
GO debt is included in the Constitutional Debt Limit (see below). Examples of not self-
supporting GO debt include TPFA bonds to finance correctional and mental health
facilities. Examples of not self-supporting revenue debt include TPFA bonds to finance
parks and wildlife improvements.

Texas Debt Outstanding
As of August 31, 2010 Texas had approximately $37.95 billion in total outstanding, a 62.7%
increase since fiscal-year end 2006. During this period general obligation debt has increased
by 74.2% and revenue debt rose by 57.2%. Self-supporting debt has increased by 70.2% but
not self-supporting debt has remained relatively constant since the mid 1990’s. The table
below shows debt outstanding by type as of fiscal-year end 2010 ($ in millions).

                                    Self-Supporting       Not Self-Supporting         Total*
 General Obligation                     $10,188                 $2,944               $13,132
 Revenue                                $24,432                  $381                $24,813
 Total                                  $34,620                 $3,325               $37,945
* Includes commercial paper and variable rate notes but does not include short-term debt issued by the
Comptroller of Public Accounts - Treasury Operations for cash management purposes (TRAN) or lease
purchases that have been financed through means other than state commercial paper or bonds.

The chart below shows the state’s debt outstanding by type over the past decade.




                                                                                                    5
                                                                       Table 3.1
                                                         STATE OF TEXAS DEBT OUTSTANDING
                                                                 (amounts in thousands)
                                                                        8/31/2006       8/31/2007               8/31/2008          8/31/2009           8/31/2010
General Obligation Debt
   Self-Supporting
     Veterans' Land and Housing Bonds                                          $1,852,137        $1,845,187     $1,832,472         $1,867,107         $1,970,203
     Water Development Bonds                                                      887,340           847,905        803,385            986,195            900,855
     Water Development Bonds-State Participation                                        0                 0              0                  0            139,585
     Water Development Bonds - WIF                                                      0                 0              0                  0            230,125
     Economic Development Bank Bonds                                               45,000            45,000         45,000             45,000             45,000
     Park Development Bonds 1                                                      20,080             1,805              0                  0                  0
     College Student Loan Bonds                                                   625,601           661,367        727,343            708,945            746,380
     Texas Agricultural Finance Authority2                                         25,000            25,000         25,000             25,000              9,000
     Texas Mobility Fund Bonds                                                  1,725,515         3,886,750      4,955,850          6,132,055          6,097,325
     Texas Public Finance Authority - TMVRLF                                            0            49,595         49,595             49,595             49,595
   Total, Self-Supporting                                                      $5,180,673        $7,363,334     $8,438,645         $9,813,897        $10,188,068

     Not Self-Supporting 3
      Higher Education Constitutional Bonds 4                                     $63,000           $58,310        $51,605            $54,875            $49,255
      Texas Public Finance Authority Bonds 5                                    1,978,685         1,810,644      1,850,644          1,870,530          1,830,410
      Cancer Prevention and Research Institute of Texas                                 0                 0              0                  0            225,000
      Park Development Bonds                                                        3,300            16,544         15,164             14,145             12,745
      Agriculture Water Conservation Bonds                                          7,410             5,040          2,575                  0                  0
      Water Development Bonds - EDAP 6                                            165,725           180,185        172,495            162,805            174,375
      Water Development Bonds - State Participation                               141,445           160,280        140,130            139,750             38,480
      Water Development Bonds - WIF                                                     0                 0        106,120            388,870            383,580
     Total, Not Self-Supporting                                                $2,359,565        $2,231,003     $2,338,733         $2,630,975         $2,713,845
Total General Obligation Debt                                                  $7,540,238        $9,594,337    $10,777,379        $12,444,872        $12,901,913
Non-General Obligation Debt
   Self-Supporting
     Permanent University Fund Bonds
        The Texas A&M University System 5                                       $429,210           $409,344       $434,630           $577,105           $611,895
        The University of Texas System 5                                        1,032,860         1,062,625      1,318,980           1,524,235         1,736,380
     College and University Revenue Bonds 5, 7                                  5,857,034         6,305,867      7,362,004           8,457,339         9,487,043
     Texas Dept. of Housing and Community Affairs Bonds 5                       2,305,689         2,606,999      2,783,482           2,658,191         2,663,799
     Texas State Affordable Housing Corporation                                   515,148           621,887        696,136             568,780           497,551
     Texas PAB Surface Transportation Corporation                                       0                 0              0                   0         1,015,000
     Texas Small Business I.D.C. Bonds                                             99,335            99,335         99,335              60,000            60,000
     Economic Development Program 2                                                13,000             8,235          6,407               9,332            11,500
     Texas Water Resources Finance Authority Bonds                                 21,315            15,830         10,740               5,195                 0
     College Student Loan Bonds                                                         0                 0              0                   0                 0
     Texas Department of Transportation Bonds - CTTS                            2,199,994         2,075,063      2,563,947           2,563,222         2,538,949
     Texas Workers’ Compensation Fund Bonds                                        24,217                 0              0                   0                 0
     Veterans' Financial Assistance Bonds                                          25,689            24,444         23,987              24,227            23,210
     TPFA Charter School Finance Corporation                                            0            10,380         10,145             127,740           236,955
     Texas Workforce Commission Unemp Comp Bonds                                  712,935           396,060              0                   0                 0
     State Highway Fund                                                           688,850         1,689,740      3,076,660           3,091,755         4,252,655
     Water Development Board Bonds - State Revolving Fund                       1,234,300           932,448      1,357,383           1,522,933         1,296,588
   Total, Self-Supporting                                                     $15,159,576       $16,258,257    $19,743,836         $21,190,054       $24,431,525

     Not Self-Supporting 3
      Texas Public Finance Authority Bonds                                       $454,085          337,015         321,470            278,486            232,350
      TPFA Master Lease Purchase Program 2,8                                      105,290          110,800         122,440            107,320             96,635
      Texas Military Facilities Commission Bonds                                   21,690           20,150          18,555             17,350             16,105
      Parks and Wildlife Improvement Bonds                                         41,880           52,330          46,895             41,320             35,615
     Total, Not Self-Supporting                                                  $622,945         $520,295        $509,360           $444,476           $380,705
Total Non-General Obligation Debt                                             $15,782,521       $16,778,552    $20,253,196        $21,634,530        $24,812,230
Total Debt Outstanding                                                        $23,322,759      $26,372,889     $31,030,574        $34,079,402        $37,714,143
 1
     Amounts do not include premium on capital appreciation bonds.
 2
     Commercial Paper
 3
     Bonds that are not self-supporting (general obligation and non-general obligation) depend solely on the state’s general revenue fund for debt service.
 4   While not explicitly a general obligation or full faith and credit bond, the revenue pledge contained in Constitutional Bonds has the same effect. Debt
     service is paid from annual constitutional appropriation to qualified institutions of higher education from first monies coming into the state treasury not
     otherwise dedicated by the Constitution.
 5
     Includes commercial paper and bond anticipation notes outstanding.
 6
     Economically Distressed Areas Program (EDAP) bonds do not depend totally on the state's general revenue fund for debt service.
 7   Outstanding amounts for tuition revenue bonds are included in these totals. Table 3.2 provides amounts of outstanding revenue bonds for each
     institution. All college and university revenue bonds are equally secured by and payable from a pledge of all or a portion of certain "revenue funds" as
     defined in Chapter 55, Texas Education Code, as amended, of the applicable system or institution of higher education. Historically, however, the state has
     appropriated funds to the schools in an amount equal to all or a portion of the debt service on revenue bonds issued pursuant to certain specific
     authorizations to individual institutions in Chapter 55, Texas Education Code ("Tuition Revenue Bonds").
 8
     This figure reflects only the commercial paper component of the Master Lease Purchase Program (MLPP).

     Note: The debt outstanding figures include the accretion on capital appreciation bonds as of August 31, 2010.
     Source: Texas Bond Review Board - Bond Finance Office.


                                                                                                                                                                   6
The chart below shows the state’s not self-supporting over the past decade.

                                         TEXAS STATE DEBT OUTSTANDING
                                          BACKED BY GENERAL REVENUE
                                                 (Not Self-Supporting)


                                                                                                                 $3,500

                                                                                                                 $3,000

                                                                                                                 $2,500

                                                                                                                 $2,000




                                                                                                                          In Millions
                                                                                                                 $1,500

                                                                                                                 $1,000

                                                                                                                 $500

                                                                                                                 $0
            2001       2002      2003       2004       2005        2006       2007         2008   2009    2010

                                        General Obligation        Non-General Obligation

  Source: Texas Bond Review Board - Bond Finance Office.




Texas' Constitutional Debt Limit (CDL)
Overview of the CDL
The 75th Legislature and Texas voters approved the constitutional provisions for the CDL
in 1997. The CDL applies to debt that is expected to be repaid with state general revenues
and includes:
     Issued debt;
     Authorized but unissued debt; and
     Lease purchases with a principal amount greater than $250,000.

The CDL provides that additional debt that is intended to be paid from general revenues
may not be authorized if the maximum annual debt service on debt payable from the general
revenue fund would exceed five 5% of the average general revenue fund revenues for the
previous three years. The table below shows the CDL for FY’s 2006-10 (calculated as of
8/31 of previous fiscal year).

                                   FY06                FY 07                   FY 08              FY 09               FY 10
 Issued Debt                       1.28                 1.32                    1.30               1.22                1.36
 Authorized but                    0.52                 0.50                    2.79               2.86                2.74
 Unissued Debt
        CDL                         1.80                   1.82                 4.09               4.08                 4.10

From fiscal year 2007 to fiscal year 2009 the CDL for authorized but unissued debt
increased by 124.9% as a result of the passage of constitutional amendments in the
November 2007 general election for more than $9.75 billion in additional not self-supporting
general obligation debt including $3 billion for cancer research and $5 billion for
transportation projects.



                                                                                                                                        7
Ten Most Populous States
The most recent U.S. Census Bureau data for state and local debt outstanding show that for
calendar 2007-08, Texas was the nation’s 2nd most populous state and ranked 2nd among the
ten most populous states in terms of Local Debt Per Capita but 9th in State Debt Per Capita
and 5th in Total State and Local Debt Per Capita. In 2008, 84.6% of the state’s total state and
local debt burden was at the local level. Local debt includes debt issued by cities, counties,
school and hospital districts and special districts.

                       TOTAL STATE AND LOCAL DEBT OUTSTANDING: TEN MOST POPULOUS STATES
                                  State
                            Total Per and Local Debt                  Per            State Debt of
                                                                                              %           Per        Per            Local Debt of
                                                                                                                                            %             Per
                Population      Capita     Amount Per Capita         Capita     Amount        Total      Capita     Capita      Amount      Total        Capita
      State    (thousands)      Rank      (millions) Amount          Rank      (millions)     Debt      Amount      Rank       (millions)   Debt        Amount
  New York        19,490           1      $269,742   $13,840            1      $114,240      42.4%      $5,861        1        $155,502    57.6%        $7,979
  Illinois        12,902           2       124,163     9,624            2        58,437      47.1%       4,529        6          65,726    52.9%         5,094
  Pennsylvania    12,448           3       118,611     9,529            4        40,100      33.8%       3,221        3          78,511    66.2%         6,307
  California      36,757           4       341,094     9,280            3       121,930      35.7%       3,317        4         219,164    64.3%         5,963
  Texas           24,327           5       215,877     8,874            9        33,299      15.4%       1,369        2         182,578    84.6%         7,505
  Florida         18,328           6       142,129     7,755            7        42,321      29.8%       2,309        5          99,808    70.2%         5,446
  Michigan        10,003           7        75,247     7,522            5        29,065      38.6%       2,906        7          46,182    61.4%         4,617
  Ohio            11,486           8        68,658     5,978            6        26,885      39.2%       2,341        9          41,773    60.8%         3,637
  North Carolina   9,222           9        51,202     5,552            8        19,605      38.3%       2,126       10          31,597    61.7%         3,426
  Georgia          9,686          10        50,561     5,220           10        13,072      25.9%       1,350        8          37,489    74.1%         3,870
    MEAN                                  $145,728       $8,317                 $49,895      34.6%      $2,933                 $95,833      65.4%       $5,384
  Note: Detail may not add to total due to rounding.
  Source: U.S. Census Bureau, State and Local Government Finances by Level of Government and by State: 2007-2008, the most recent data available.



Bond Review Board Policies for State Debt Issuance and Derivative
Agreements
HB 2190 passed in the 77th Legislature directed the BRB to adopt formal debt policies and
issuer guidelines to provide guidance to issuers of state securities and to ensure that state
debt is prudently managed. These policies and guidelines are posted on the agency’s website
at http://www.brb.state.tx.us/bfo/guidelines.aspx.

SB 1332 passed in the 80th Legislature amended the agency’s statutes to require the BRB to
adopt a state policy related to the risks and effects of derivative (swap) agreements. This
policy is available on the agency’s website at
http://www.brb.state.tx.us/pub/bfo/StateSwapPolicies.pdf.

Additional Information
For more information on debt issuance in the state of Texas, please contact the Texas Bond
Review Board at:

Texas Bond Review Board
300 West 15th Street, Suite 409
P.O. Box 13292
Austin, TX 78711
(512) 463-1741
(512) 475-4802 fax
www.brb.state.tx.us
bondz@brb.state.tx.us

Bond Review Staff
                                                                                                                                                    8
January 2011

Glossary
Allotment – Amount of securities distributed to each member of the underwriting syndicate
to fill orders.

Advance Refunding – A refunding in which the refunded issue remains outstanding for a
period of more than 90 days after the issuance of the refunding issue.

Bond – Debt instrument in which an investor loans money to the issuer that specifies: when
the loan is due (“term” or “maturity” such as 20 years), the interest rate the borrower will
pay (such as 5%), when the payments will be made (such as monthly, semi-annually,
annually) and the revenue source pledged to make the payments.

Bond Counsel – Attorney retained by the issuer to give a legal opinion that the issuer is
authorized to issue the proposed securities, the legal requirements necessary for issuance
have been met and the proposed securities will be exempt from federal income taxation and
state and local taxation where applicable.

Bond Insurance – A legal commitment by a third party to make timely debt service
payments if the issuer is unable to do so.

Certificate of Obligation – A bond issued by a local taxing authority secured by property
taxes to finance public projects without the approval of voters. The issuance can be blocked
if 5% of the voters petition to stop the sale prior to approval of the sale ordinance.

Certificate of Participation – A financial document specifying that investors will receive a
return based on the lease revenues associated with the offering.

Commercial Paper – Short-term, unsecured promissory notes that mature within 270 days
and are backed by a liquidity provider (usually a bank) that stands by to provide liquidity in
the event the notes are not remarketed or redeemed at maturity.

Competitive Sale – A sale in which the issuer solicits bids from underwriting firms and sells
the securities to the underwriter or syndicate offering the most favorable bid that meets the
specifications of the notice of sale.

Conduit Issuer – An issuer, usually a government agency that issues municipal securities to
finance revenue-generating projects in which the funds generated are used by a third party
(known as the "conduit borrower" or "obligor") for debt-service payments.

Costs of Issuance – The expenses associated with the sale of a new issue of municipal
securities including printing, legal fees, rating agency fees and other fees associated with the
transaction.

Coupon – The interest rate paid on a security.

Current Refunding – A refunding transaction in which the municipal securities being
refunded will mature or be redeemed within 90 days or less from the date of issuance of the
refunding issue.
                                                                                              9
CUSIP – A unique nine-character identification for each class of security approved for
trading in the U.S. CUSIPs are used to facilitate clearing and settlement for market trades.

Dealer Fee – Cost of underwriting, trading or selling securities.

Disclosure – The act of releasing accurately and completely all material information to
investors and the securities markets for outstanding or to be issued securities.

Discount – The amount by which the price paid for a security is less than its par value.

Escrow – Fund established to hold moneys or securities pledged to pay debt service.

Escrow Agent – Commercial bank or trust company retained to hold the investments
purchased with the proceeds of an advance refunding and to use the invested funds to pay
debt service on the refunded debt.

Expenses – Component of the underwriting spread representing the costs of operating the
syndicate such as financial advisors, legal counsel, travel, printing, day loans, wire fees and
other associated fees.

Financial Advisor – A securities firm that assists an issuer on matters pertaining to a
proposed issue such as structuring, timing, marketing, fairness of pricing, terms and debt
ratings.

Fixed rate – An interest rate that does not fluctuate during the life of the security.

General Obligation Debt – Debt legally secured by a constitutional pledge of the first
monies coming into the State Treasury not otherwise constitutionally dedicated for another
purpose. General obligation debt must be approved by a 2/3 vote of both houses of the
Texas Legislature and by a majority of the voters.

Indenture – Deed or contract which may be in the form of a resolution that sets forth the
legal obligations between the issuer and the securities holders. The indenture also names the
trustee that represents the interests of the securities holders.

Issuer – A legal entity that sells securities for the purpose of financing its operations. Issuers
are legally responsible for the obligations of the issue and for reporting financial conditions,
material developments and any other operational activities.

Lease Purchase – Financing the purchase of an asset over time through lease payments that
include principal and interest. Lease purchases can be financed through a private vendor or
through one of the state's pool programs such as the Texas Public Finance Authority’s
Master Lease Purchase Program.

Letter of Credit – A credit enhancement used by an issuer to secure a higher rating for its
securities. A Letter of Credit is usually a contractual agreement between a major financial
institution and the issuer consisting of an unconditional pledge of the institution’s credit to
make debt-service payments in the event of a default.



                                                                                               10
Liquidity – The relative ability of a security to be readily traded or converted into cash
without substantial transaction costs or loss in value.

Liquidity Provider – A financial intermediary that facilitates the remarketing of variable-
rate debt at reset dates.

Management Fee – Component of the underwriting spread that compensates the
underwriters for assistance in creating and implementing the financing.

Maturity Date – The date principal is due and payable to the security holder.

Mortgage Credit Certificate – A certificate issued by certain state or local governments
that allows a taxpayer to claim a tax credit for some portion of the mortgage interest paid
during a given tax year.

Municipal Bond – A debt security issued to finance projects for a state, municipality or
county. Municipal securities are exempt from federal taxes and from most state and local
taxes.

Negotiated Sale – A sale in which an issuer selects an underwriting firm or syndicate to
assist with the issuance process. At the time of sale, the issuer negotiates a purchase price for
its securities with that underwriting firm or syndicate.

Net Interest Cost –The rate of interest calculated over the life of the debt excluding the
time value of money.

Not Self-Supporting Debt – Either general obligation or revenue debt intended to be
repaid with state general revenues.

Notice of Sale – Publication by an issuer describing the terms of sale of an anticipated new
offering of municipal securities.

Official Statement – The document published by the issuer which provides complete and
accurate material information to investors on a new issue of municipal securities including
the purposes of the issue, repayment provisions and the financial, economic and social
characteristics of the issuing government.

Par – The face value of a security that is due at maturity. A “par bond” is a bond selling at
its face value.

Paying Agent – The financial institution that makes debt-service payments to the security
holders.

Premium – The amount by which the price paid for a security exceeds par value.

Printer – Produces offering and other documents.

Private Placement – A direct sale of securities to investors without a public offering.



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Credit Rating Agency – An entity that provides ratings of the credit quality for a security
issuance that measures the probability of the timely repayment of principal and interest.

Refunding – An issuance to retire or defease all or a portion of outstanding debt.

Registrar – An entity responsible for maintaining ownership records on behalf of the issuer.

Remarketing Fee – Compensation to an agent for remarketing a secondary offering of
short-term securities, usually for a mandatory or optional redemption or put (return of the
security to the issuer).

Revenue Debt – Debt that is legally secured by a specified revenue source(s). Revenue debt
does not require voter approval and usually has a maturity based on the life of the project to
be financed.

Self-Supporting Debt – Debt that is designed to be repaid with revenues other than state
general revenues. Self-supporting debt can be either general obligation debt or revenue debt.

Selling Group – Group of municipal securities brokers and dealers that assist in the
distribution of a new issue of securities.

Structuring Fee – Component of the underwriting spread that compensates the
underwriters for assistance with developing a marketable securities offering within the
issuer’s legal and financial constraints.

Syndicate – Group of underwriters formed to purchase a new issue of securities from the
issuer and offer it for resale to investors.

Takedown – The discount that the members of the syndicate receive when they purchase
the securities from the issuer. Takedown is also known as the selling concession.

True Interest Cost – The rate of interest calculated over the life of the debt including the
time value of money.

Trustee – Bank or trust company designated by the issuer or borrower under the indenture
or resolution as the custodian of funds. The trustee represents the interests of the security
holders including making debt-service payments.

Underwriter – An investment banking firm that purchases securities directly from the issuer
and resells them to investors.

Underwriting Spread – Amount representing the difference between the price at which
securities are bought from the issuer by the underwriter and the price at which they are
reoffered to the investor. The underwriting spread generally includes the takedown,
management fee, expenses and underwriting fee.

Underwriting Risk Fee – A portion of the underwriting spread designed to compensate
the underwriter for the risk associated with market shifts and interest rate fluctuations.



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Underwriter’s Counsel – Attorney who prepares or reviews the issuer’s offering
documents on behalf of the underwriter and prepares documentation for the underwriting
agreement and the agreement among underwriters.

Underwriter’s Risk – The underwriter’s risk of resale.

Variable Rate – An interest rate that resets at fixed intervals based on a predetermined
index or formula.

Yield – The investor’s rate of return.




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