debt issuance primer - antn digicast€¦ · · 2014-03-17commercial paper: 1-270 days variable...
TRANSCRIPT
1
Outline
Introduction to Debt Financing
Security and Credit Considerations
Forms of Indebtedness
Underwriting and Marketing Securities
3
A Municipal Bond Issue
Issuer's Project Issuer
Investors
Bank Trusts
Investment Advisors
Individuals
Bond Trustee
&
Paying Agent
Bond Proceeds
Monthly Principal and Interest
Payments
BondsBond
ProceedsSemiannual Interest
and Annual Principal
Monies
from
Pledged
Source
4
Participants in a Financing
Bond/Special
Counsel
Bond Trustee
Investment Banker/
Underwriters/
Specialists
Underwriters'
Counsel
Rating
Agencies
Insurer/Guarantor
Trustee's Counsel
Issuer/Borrower
Financial
Advisor
Auditor
Engineering/Feasibility
Consultant
Issuer's Counsel
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Issuers/Borrowers - City or Airport Authority serving as issuer of the debt. Responsible for the repayment of the debt and the accuracy of the Offering Statement Bond Counsel - Law firm working on behalf of the issuer and bondholders. Primary responsibility is preparation of legal documents and rendering of an opinion concerning the validity of the bonds with respect to statutory authority and tax status
Financial Advisor - Acts on behalf of Issuer advising on wide range of financial management issues. Reviews pricing and advises issuer on fairness of rates and fees.
Underwriter - Investment bank responsible for the pricing/marketing of the bonds and often involved with the plan of financing, credit rating process, and shaping of the legal documents
Underwriter’s Counsel - Law firm responsible for drafting the Offering Statement. Prepares underwriting documents (Agreement Among Underwriters, Bond Purchase Contract, etc.)
Feasibility Consultant - Performs economic and financial study covering new project construction and viability of undertaking. Feasibility typically includes an aviation forecast
Primary Participants in a Financing
6
Secondary Participants in a Financing
Issuer’s Counsel - Reviews all legal documents on behalf of issuer and assists in drafting documents
Auditor - Provides most recent annual Audited Financial Statements for the Official Statement for the assessment of the issuer’s financial condition and historical performance
Bond Insurer/Guarantor - Financial services company or bank that may provide credit enhancement through a municipal bond Insurance policy or letter of credit
Rating Agencies - National organizations (S&P, Moody’s, Fitch) that provide ratings on debt and an assessment of a borrower’s ability to repay. Issues credit reports detailing credit strengths and weaknesses.
Bond Trustee - Retained by Issuer, but represents Bondholders’ interests. Manages bond funds, reserves and construction funds. Receives interest and principal payments from Issuer/Borrower and distributes to Bondholders.
7
Legal Authority for the Issuance of Debt
Legislation or
Incorporation
Issuer
General CounselBond Counsel
Bond Documents
Bondholders
Create legal, valid and binding
pledge and security for
8
Municipalities and Other Political Subdivisions A state political subdivision (a municipality) possesses only those powers which are expressly delegated to it by its state government and those powers which are necessarily implied in order for the political subdivision to carry out its expressly delegated powers.
The power to issue debt (i.e., to borrow money) is a fundamental power which must be expressly delegated — it can not be implied.
Issuing debt (i.e., borrowing money) can occur in different forms, including without limitation: the public sale of bonds or notes to investors the execution of a loan agreement, typically with a bank the execution of a lease with an entity such as an airline or a group such as the rental car operators
Interest on municipal obligations is exempt from federal income taxation and often from state taxation.
Legal Authority for the Issuance of Debt
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Various federal (primarily the Securities Acts of 1933 and 1934) and state (also known as “blue sky”) laws exist to protect the investing public.
Basic objectives of securities laws: require disclosure of material information about securities to allow investors to make informed investment decisions; and prohibit misrepresentation or other fraudulent
conduct.
The issuer has a “continuing obligation” to provide material information to the public under Rule 15c2-12.
Bottom line: the Official Statement must not contain any untrue statement of a material fact or omit to state any material facts.
The Disclosure Document (Official Statement)
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The Security
Pledge all project net revenues Net revenues (with rate covenant > 125%
of debt service) after payment of O&M expenses
Airport Revenues Landing Fees Terminal Rents Parking Rental Car Revenues Concessions
Other funds often pledged to repay the debt
Debt Service Fund Debt Service Reserve Fund
Security Sources and Funds
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The Flow of Funds
Revenue Fund
O&M Expense Fund
Debt Service Fund
Debt Service Reserve Fund
Coverage Fund
Maintenance Reserve Fund
Surplus Fund
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What is a Credit Rating?
A rating is an opinion by a rating agency as to the willingness and ability of an issuer to repay principal and interest in full on a timely basis.
15
Moody’s/S&P or Fitch
Investment Grade Ratings
Aaa/AAA } Highest Quality
Aa1/AA+ Aa2/AA Aa3/AA-
} Very Strong Capacity
A1/A+ A2/A A3/A-
} Strong Capacity
Baa1/BBB+ Baa2/BBB Baa3/BBB-
} Adequate
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Moody’s/S&P or Fitch
Non-Investment Grade Ratings
BB+/Ba1 BB/Ba BB-
} Less near term vulnerability to default
B1/B+ B2/B B3/B-
} Greater Default Vulnerability
CCC/CCC CC/CC C/C
} Certain of Default
D } Default
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Key Covenants
Security: 1st Lien on Gross or Net Revenues of System
Rate Covenant: Net Revenues > 1.25x Annual Debt Service
Flow of Funds: Open or Closed
Additional Bonds Test: Historic: Net Revenues in the Prior Year > 1.25x Maximum Annual Debt Service Proposed & Outstanding Debt
Projected: Net Revenues for 5 Years After Issuance > 1.25x Maximum Annual Debt Service Proposed & Outstanding Debt
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Population growth, income levels, unemployment and the labor mix
Size of the capital plan and other outstanding debt/obligations The terms of the Airline Use Agreement and the rate-making provisions
Rate Setting Mechanism
The Strength of the Service Area
Other Rating Factors
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
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Short-term products Uses: Cash flow, deficit, bridge financings Commercial Paper: 1-270 days Variable rate notes: 6-13 month final maturity Fixed or variable rate bank loans
Medium term notes: 1-10 years with rolling maturities
Long-term issues Uses: long-term project financing Fixed rate bonds: 1-40 year final maturity
Forms of Indebtedness/Financial Products
0.0325
0.035
0.0375
0.04
0.0425
0.045
0.0475
1 6 11 16 21 26
Yie
ld
Year
Interest Rates
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Short-term debt may require bank credit enhancement/liquidity (“put”) facility
Are the amounts and the dates when money is needed known?
Can the debt easily be converted to another mode such as a fixed rate term?
What is the best adjustable rate period: daily, weekly, monthly, quarterly, semi-annually, multi-annually, commercial paper (1-270 days)
Does the short-term debt need to be remarketed?
If a bank loan, are the bank covenants acceptable to both the issuer and to outstanding bondholders?
Considerations for Short-Term Products
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Considerations for Long-Term Debt Products
What is the appropriate call feature - 10-years at par?
What is the best mix of serial bonds and term bonds?
Can we match the debt term with the asset life?
Should the debt service be level or are there reasons for a non-level debt structure?
Does bond insurance provide an economic advantage?
How can we attract retail buyers in addition to the larger, institutional investors?
What are the best days to price and close the bonds?
Par Amount of Bonds 85,045,000$
Reoffering Premium 7,249,315
Transfers from Prior Issue DSF 3,596,620
Issuer Equity Contribution 768,589
Total Sources 96,659,524$
Cost of Issuance* 1,281,469$
Refunding Escrow 95,378,055
Total Uses 96,659,524$
* Includes Insurance Premium and Surety Bond Fee
Series 2010B&C Sources and Uses
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Underwriters Develop marketing strategy Coordinate input from co-managers and sales Help finalize bond sales/structure Establish price/yield levels on the bonds
Sales Professionals: Institutional and Retail Help coordinate marketing strategy Obtain input from investors Solicit orders for the bonds
Internal Credit/Research Staff Write credit report and assist institutional sales force
Bond Investors: Institutional and Retail Submit orders for new issues Buy and sell bonds in secondary market
Underwriting and Marketing Participants
MATURITY MMD Scale Principal Coupon Spread Yield 7/1/2014 0.20 45,000 2.000 0.250 0.450
7/1/2015 0.29 45,000 2.000 0.350 0.640
7/1/2016 0.42 1,850,000 3.000 0.350 0.770
7/1/2017 0.56 1,985,000 3.000 0.450 1.010
7/1/2018 0.75 2,020,000 4.000 0.500 1.250
7/1/2019 0.93 2,075,000 4.000 0.550 1.480
7/1/2020 1.15 2,145,000 5.000 0.600 1.750
7/1/2021 1.36 2,245,000 4.250 0.650 2.010
7/1/2022 1.55 2,250,000 5.000 0.700 2.250
7/1/2023 1.71 2,635,000 5.000 0.750 2.460
7/1/2024 1.85 2,600,000 4.000 0.900 2.750
7/1/2025 1.98 2,200,000 3.000 1.070 3.050
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The Bond Market Interest rates Supply of bonds Financial Outlook Economic Releases Federal Reserve Policy The yield where similar bonds are trading in the secondary market
Investor demand depends on Federal and State Income Taxes Where are the bonds on the yield curve Coupons: premiums and discount Underlying Credit Rating and Credit Enhancement Size Serials versus terms bonds
How Securities are Priced
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Key Components of the Pricing
The Wire
Priority of Orders
Takedowns
Yields
The Order Book
Re-Pricing
The Award Date
The Closing
Investors Amount ($) Amount (%)
Capital Reinsurance Co. 10,690 28.9%
Oppenheimer & Co. 5,825 15.7%
Brown Brothers Harriman 5,000 13.5%
Eaton Vance 5,000 13.5%
Wellington Mgt Co. 4,000 10.8%
Goldman Sachs Asset Mgt 2,000 5.4%
Chubb Insurance 2,000 5.4%
Goldman Arb 1,480 4.0%
Fidelity 1,000 2.7%
Total 36,995 100.0%