handout - 6 - sutter - joelsutter attractinginvestors · can learn from taylor swift • article...

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Attracting Investors – What to Do Before and After the Bond Sale

MASBO Annual Meeting May 14, 2015

Joel Sutter and Gary Olsen, Ehlers

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Overview

•  Virtually all school districts issue bonds at some point, primarily to finance larger capital projects

•  Some smaller districts may issue bonds only once every 20 – 40 years

•  Larger districts may issue bonds multiple times in some years –  Voter-approved building bonds –  Alternative facilities bonds –  Capital facilities bonds –  Refundings of existing debt –  Certificates of Participation (form of lease purchase) –  Cash flow certificates

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Overview

•  Today’s presentation applies to all districts, but is especially relevant to “frequent issuers”

•  One of your goals as a district administrator should be to issue debt at the lowest possible cost

•  A good financial advisor can help to meet that goal, by: –  Helping you to structure the bonds and providing terms that will

appeal to investors –  Preparing a thorough Official Statement –  Helping you with the rating process –  Advertising the bonds and soliciting proposals

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Overview

•  Our presentation is about what you as a school district can do to make your district and your bonds more attractive to investors, leading to: –  Increased demand for your bonds –  Lower interest rates –  Lower property taxes

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Overview

Why is Taylor Swift here? 1.  She is a major

shareholder in Ehlers

2.  She has a new song about being jilted by a municipal bond banker

3.  She is a savvy business woman who can teach us all a few things

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Overview

•  Alternate Title of our Presentation – What Bond Issuers Can Learn from Taylor Swift

•  Article with this title by Thomas Doe, CFO and Founder of Municipal Market Advisors, July 2014

•  Taylor Swift published a commentary in Wall Street Journal (7/7/14) –  Discussed the evolution of music sales in the era of social media –  To be financially successful, musicians need to use social media

to attract fans to buy their music

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Overview

•  Doe suggests that some of the same themes apply to issuers of bonds in today’s market –  Issuers shouldn’t just wait for investors to find them –  They should do what they can to attract investors

•  In my 18+ years at Ehlers, practices and expectations have changed dramatically –  The “Google effect” – many people expect instant access to

information on everything –  Potential investors increasingly doing their own research on

bond issues and issuers – not just relying on credit ratings –  Underwriters doing their own investigation of issuer’s

compliance with continuing disclosure obligations

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Overview

•  Commonwealth of Massachusetts –  Holds an annual “investor day” with presentations about the

Commonwealth’s economic conditions and financial health –  Has a web site designed to engage investors and provide them

with complete and timely financial information –  Has been diligent in filing timely information on MSRB web site

•  State of Minnesota (Kristin Hanson) –  For more unique financings (tobacco revenue bonds, stadium

revenue bonds) additional marketing techniques •  Scripted calls to potential investors •  “Investor road show” – Powerpoint presentation with verbal narrative •  Newspaper ads around the State for stadium bonds, to attract “retail”

investors –  Maintain a “bonding” web site with current information on

ratings, official statements, redemption notices, other information

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Overview

•  Major topics to be covered –  Bond ratings –  Continuing disclosure –  Making financial information accessible –  Side topic – SEC’s MCDC Initiative

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Bond Ratings

•  For MN school districts there are two kinds of ratings –  “Credit-enhanced’ ratings – the rating any district can receive if

they participate in the free State of MN Credit Enhancement Program

•  Aa2 from Moody’s •  AA+ from Standard and Poor’s

–  Underlying Rating – a rating based solely on the credit characteristics of the district and its bonds

–  Ten to 15 years ago, we frequently issued bonds (especially for smaller school districts) only with the credit enhanced rating – very simple and easy

–  In recent years, underwriters and investors are more persistent in wanting an underlying rating in addition to the credit-enhanced rating

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Bond Ratings

•  Three primary rating agencies for municipal debt – almost all MN school districts use Moody’s Investors Service or Standard & Poor’s

•  Ratings can have a significant effect on interest rates – recent average yields for bonds maturing in ten years (from Thomson Reuters’ Municipal Market Data) –  AAA 2.01% –  AA 2.24% –  A 2.53% –  Baa 2.95%

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Bond Ratings

•  Criteria Used by Moody’s - General Obligation Scorecard –  Economy / Tax Base (30%)

•  Full Value of Tax Base •  Full Value per Capita •  Socioeconomic Indices: Median Family Income

–  Finances (30%) •  Fund Balance as a percent of Revenues •  5 Year Dollar Change in Fund Balance as a percent of Revenues •  Cash Balance as a percent of Revenues •  5 Year Dollar Change in Cash Balance as a percent of Revenues

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Bond Rating

•  Criteria Used by Moody’s - General Obligation Scorecard –  Management (20%)

•  Institutional Framework - Flexibility to match Revenues with Expenditures – all MN School Districts are given an “A” score on this factor due to their high dependence on the State

•  Operating History - 5 year average of Operating Revenues divided by Operating Expenditures

–  Debt / Pensions (20%) •  Net Direct Debt per Full Value •  Net Direct Debt divided by Operating Revenues •  3 Year Average of Moody’s Adjusted Net Pension Liability per Full

Value •  3 Year Average of Moody’s Adjusted Net Pension Liability divided

by Operating Expenditures

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Bond Ratings

•  Criteria Used by Moody’s – Additional Factors •  The scorecard provides an initial rating that may be

modified by additional considerations: –  Institutional presence – university or military base (positive) –  Regional economic center (positive) –  Economic concentration (negative) –  High unemployment or poverty levels (negative) –  High contingent liability risk (negative) –  Unusually volatile revenue structure (negative) –  State oversight or support (positive or negative)

Bond Ratings

•  Criteria Used by Moody’s – Additional Factors –  Unusually strong or weak budgetary management and planning

(positive or negative) –  Unusually strong or weak security features (positive or negative) –  Unusual risk posed by debt/pension structure (negative) –  History of missed payments (negative)

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Bond Ratings

•  Criteria Used by Standard & Poor’s –  Economy / Tax Base

•  Indicated Market Value •  Market Value per Capita •  Diversity of Tax Base •  Income / Wealth Levels •  Changes in Work Force / Employment

–  Finances •  Fund Balance as a percent of Operating Revenues •  Budget Performance •  Changes in Fund Balance

–  Debt •  Direct Debt per Capita •  Direct and Indirect Debt per Capita

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Bond Ratings

•  Criteria Used by Standard & Poor’s (Continued) –  Financial Management Assessment (FMA)

•  Revenue and Expenditure Assumptions •  Budget Amendments and Updates •  Long-term Financial Planning •  Long-term Capital Planning •  Investment Management Policies •  Debt Management Policies •  Reserve and Liquidity Policies

–  FMA Scores •  Strong – strong well embedded and likely sustainable •  Good – good but not comprehensive •  Standard – adequate policies in most, but not all, areas •  Vulnerable – lacks policies in critical areas

Bond Ratings (Continued)

•  Many factors that affect your rating are outside of the district’s control –  Demographic Factors

•  Income and wealth levels •  Local economy

–  Tax base –  Changes in Enrollment –  Dependence on the State

•  Revenue Levels •  Cash flow

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Bond Ratings

Long Term Things District Can Do to Improve Bond Rating – 3 to 5 years before a Bond Sale • Build your Fund Balance – Rating agencies consider a fund balance of 5 – 10% of revenues to be “narrow;” Moody’s expectations by rating grade

–  Aaa - > 25% of Revenues –  Aa – 10% to 25% of Revenues –  A - -2.5% to 10% of Revenues

• Develop Sound Financial Policies and Practices –  Fund Balance Policy

•  Minimum and maximum targets •  Specify action to be taken if outside of target range

–  Investment Policy

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Bond Ratings

Long Term Things District Can Do to Improve Bond Rating – 3 to 5 years before a Bond Sale • Develop Sound Financial Policies and Practices (Continued)

–  Multi-year budget forecast •  Update frequently •  Share with the Board

–  Regular financial reporting to the Board •  Budget to actual comparisons •  Investment holdings

• Avoid audit findings as much as possible

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Bond Ratings

Short Term Things District Can Do to Increase Chances of a Higher Bond Rating – Preparing for a Rating Call • Your financial advisor can help

–  Gathering information –  Coaching –  Participating in the call

• Gather information from city/cities on development trends –  Housing permits –  New housing –  Commercial development

• Obtain preliminary property valuation from county/counties if available • Review most recent audit report and budget and be prepared to discuss key trends and details

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Continuing Disclosure

History and Requirements of SEC Rules (simplified version) • For many years, issuers of municipal bonds have provided “primary market disclosure” on new municipal bond issues

–  This primarily takes the form of an “Official Statement” or offering document which contains detailed information about the issuer and the issue

–  Many years ago, Official Statements were more like sales brochures, full of pictures and positive information about a community

–  In the 1970s, the predecessor to GFOA adopted recommended standards for content of Official Statements

–  In 1989, the SEC adopted rule 15c2-12 which set required standards for Official Statements

–  Official Statements are available to potential investors and underwriters prior to initial sale of the bonds

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History and Requirements of SEC Rules •  Until 1995, there was no requirement for bond issuers to

provide updated financial statements or updates of any of the other data in the Official Statement –  Bonds could be bought and sold at any time from initial sale to

maturity (often 20 to 30 years) –  Investors did not have easy access to accurate current financial

and other information on the issuer or the issue –  Made it difficult for investors to compare one issue to another

and assess the fair market value of an issue –  Big contrast to issuers of corporate debt, who were required to

make quarterly financial information available to investors

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History and Requirements of SEC Rules • SEC amended rule 15c2-12 in 1994 to require “continuing disclosure” for most bonds issued after July 1, 1995 • Three tiers of requirements, applied to each issue

–  “Full disclosure” applies to most issues – issues of $1 million or more for issuers who have more than $10 million in debt

–  “Limited disclosure” can apply to issues of $1 million or more for issuers who have $10 million or less of debt

–  “Exempt” from requirements – issues of less than $1 million; “privately placed” issues (won’t be publicly traded)

• For each issue, specific disclosure requirements are specified in an agreement (often called an “undertaking”) approved by the issuer at the time of sale

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Full Disclosure Requirements • Annual filing of information

–  Audited financial statements –  Updates of specific sections of the original Official Statement –

can vary by issue, but typically includes property values, tax levies and collections, enrollment, and debt

–  Filing deadline is specified in the undertaking – typically one year after end of fiscal year, but sometimes shorter

• “Material event notices” – timely filing of notices when specified events occur, including:

–  Defaults –  Bond calls –  Rating changes –  Other less common events

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Limited Disclosure Requirements • Annual filing only of audited financial statements • Same requirement for material event notices as with full disclosure • Prior to 2009, annual filings and event notices had to be filed with several specified “information repositories”

–  Private companies (e.g., Bloomberg) who agreed to gather and maintain data

–  Information was available only to paid subscribers of each repository

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The EMMA Website • In 2009, the Municipal Securities Rulemaking Board made a new web site available – Electronic Municipal Market Access, or EMMA – emma.msrb.org • Replaced all of the private information repositories – all continuing disclosure documents must now be filed here • Underwriters of new bonds required to file detailed information on EMMA – official statement, maturity schedule, interest rates • “Trade activity” information also included here • All information is free to anyone • Similar to the EDGAR web site for corporations

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The EMMA Website •  EMMA has greatly improved transparency and

information access regarding municipal debt •  Also has greatly increased the visibility and importance

of continuing disclosure –  Everyone has free and easy access to information –  Deficiencies in disclosure (late filings, failures to file) are much

more obvious to market participants - and to regulators

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Impact of Continuing Disclosure on Bond Sales • Official statements for new issues must include a statement about the issuer’s past compliance with disclosure requirements • SEC is increasing its enforcement and oversight of these requirements (MCDC Initiative) • If an issuer has consistently failed to meet its disclosure obligations, it may be difficult to find underwriters and investors who will purchase their debt, resulting in reduced market access and higher rates • If an issuer does not file information in a timely manner, some investors may be reluctant to purchase their debt

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What Should Issuers Do? • Unless you are very organized and understand disclosure requirements very well, contract with an experienced firm to file your annual reports and event notices

–  Ehlers and other firms have staff who specialize in doing this –  Fee can be charged to the debt service fund

• Timeliness – get audited financial statements completed and approved as early as possible (November is a good goal) and filed on EMMA as soon as they are available • Let your disclosure agent know about rating changes or other “material events” immediately, so they can file a notice on EMMA

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Making Financial Information Accessible

•  Most corporations have an “Investor Relations” or “Information for Investors” page on their home page

•  Public entities (especially larger entities) should consider similar practices

•  Consider having a “financial information” link on your home page, with: –  Audited financial statements/CAFRs for several years –  Budget documents –  Property tax information –  Interim financial reports to the Board (if you prepare them) –  Comparative information benchmarking you to other districts

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Making Financial Information Accessible

•  Goal should be to make key financial information readily available without requiring a lot of work

•  Can be beneficial for investors •  Also improves transparency of financial information for

district residents, taxpayers, and parents considering moving to your district or open enrollment to your district

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SEC’s MCDC Initiative

•  The SEC issued a very comprehensive “Report on the Municipal Securities Market” in July of 2012. Some of the key findings: –  Annual financial statements are filed late –  Market participants would like to have access to other financial

information –  The municipal securities market is “illiquid and opaque,” with

high transaction costs –  Filing of continuing disclosure information is not timely and

complete; not all issuers comply with disclosure agreements

•  Report includes a number of recommendations for changes in federal legislation, rules, and enforcement activities

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•  In April of 2014, SEC announced its Municipal Continuing Disclosure Cooperation (MCDC) Initiative –  Purpose was “to address potentially widespread violations of

the federal securities laws by municipal issuers and underwriters of municipal securities” in statements made in bond offering documents regarding compliance with continuing disclosure obligations

–  This is clearly a direct response to the findings in the 2012 report –  The violations they are referencing occur if:

•  An issuer has not complied with all obligations under previous continuing disclosure agreements (e.g., failure to file annual financial information by required deadlines, failure to file notices of events such as bond calls and rating changes)

•  Subsequent to these failures, an offering document was released which didn’t discloses these failures

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•  Key elements of MCDC –  Encouraged underwriters and issuers of bonds to “self report”

possible violations in regard to “materially inaccurate statements”

–  Original deadline to report to SEC was September 10 –  Subsequently, the deadline for issuers was extended to 5 PM

EST on Monday, December 1 –  SEC will recommend “favorable settlement terms” for issuers

and underwriters who self-report –  Despite numerous requests, SEC has not provided any guidance

on what is considered a “materially inaccurate statement”

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•  Response to MCDC –  Underwriters face significant financial penalties if they were

underwriters for bond issues with inaccurate statements – financial penalties may be less if they “self-reported”

–  Some spent millions of dollars and thousands of hours doing research on disclosure filings and past offering statements

–  Ehlers and many other financial advisory firms have also spent many hours tracking compliance for their clients

–  If you are an Ehlers client and you had a potential inaccurate statement, we informed you of it last fall and discussed options for reporting and followup

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•  What Happens if you Filed a “Self-Report” –  Report had to be sent electronically to SEC by 5 PM EST on

Monday, December 1 –  The required self-reporting form allowed you to submit

information explaining the potentially inaccurate statements –  SEC will either take no action (if they determine the inaccuracies

are not material) or recommend enforcement action –  Standard settlement terms

•  Issuer neither admits nor denies the findings of the SEC •  Issuer must agree to establish policies, procedures, and training

regarding continuing disclosure obligations •  Issuer must comply with existing continuing disclosure

undertakings, including updating past delinquent findings •  Issue must cooperate with subsequent investigation by the SEC

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•  What Happens if you Filed a “Self-Report” –  Standard settlement terms, continued

•  Issuer disclose the settlement terms in any future official statements for the next five years

•  Issuer must provide the SEC with a compliance certification one year after institution of the proceedings

•  The Division of Enforcement of the SEC “will recommend that the Commission accept a settlement in which there is no payment of any civil penalty by the issuer”

–  We are not aware of any settlements or other decisions from the SEC since the self-reports were filed last year

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•  Longer term implications of MCDC –  SEC clearly is going to step up efforts to enforce continuing

disclosure rules –  All market participants will need to be more diligent in tracking

compliance with the rules –  Continuing disclosure is likely to get more expensive –  From comments by SEC officials, it is likely they will get more

involved in the municipal market and will be pushing for more reforms consistent with the findings in their 2012 report

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651-697-8514 [email protected]

Joel Sutter Sr. Financial Advisor/Principal

651-697-8513 [email protected]

Gary Olsen Sr. Financial Advisor/Vice Pres.

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