municipal market update may 19, 2015 julie santamaria director rbc capital markets st. petersburg,...
TRANSCRIPT
Municipal Market Update
May 19, 2015
Julie SantamariaDirectorRBC Capital MarketsSt. Petersburg, [email protected]
Jim KellyDirectorRBC Capital MarketsChicago, [email protected]
RBC Capital Markets2
Table of Contents
1. Market Conditions
2. Pension Funding
3. Green Bonds
Market Conditions
SECTION 1
RBC Capital Markets4
1.000%
2.000%
3.000%
4.000%
5.000%
6.000%
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
10 Yr 20 Yr 30 Yr
Current Municipal Market Conditions: AAA MMD
AAA MMD January 1, 2007 to Present Shift in AAA MMD Since May 2014
Source: TM3, Thomson Reuters. 10, 20, and 30 year “AAA” MMD shown to represent different average lives of municipal transactions. Rates as of May 8, 2015
1.500%
2.000%
2.500%
3.000%
3.500%
4.000%
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
January 1, 2007 to Present
Maximum
Minimum
Current
Shift in 30-year "AAA" MMD
2008 2009 2010 2011 2012 2013 2014
0.790% -0.900% 0.520% -1.130% -0.740% 1.330% -1.340%
30 Year
5.940%
2.470%
3.130%
10 Year
4.860%
1.470%
2.180%
20 Year
5.740%
2.100%
2.940%
May 1, 2014 to Present10 Year 20 Year 30 Year
Maximum 2.380% 3.180% 3.440%
Minimum 1.720% 2.350% 2.500%
Average 2.104% 2.811% 3.038%
RBC Capital Markets5
Yield Curve Comparisons
AAA MMD Yield Curve
Source: Municipal Market Data
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Year
05/06/2015 05/06/2014
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Year
05/06/2015 05/06/2014
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Year
05/06/2015 05/06/2014
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 15 yr 20 yr 30 yr
05/06/2015 05/06/2014
Treasury Yield Curve
RBC Capital Markets6
Comparison of AAA MMD
Source: Thomson Municipal Market Data
2014 & 2015 Comparison Historical Ten Year Comparison
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
5 10 15 20 25 30
%
Min 05/08/2015 Max
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
5 10 15 20 25 30
%
Min
05/08/2015
Max
Current 2014 & 2015 10 Year
05/08/2015 Min Max Min Max
5 1.37 0.94 1.34 0.62 3.97
10 2.18 1.72 2.79 1.47 4.86
15 2.70 2.12 3.50 1.80 5.47
20 2.94 2.35 3.89 2.10 5.74
25 3.08 2.45 4.11 2.42 5.88
30 3.13 2.50 4.20 2.47 5.94
RBC Capital Markets7
2015 Market Dynamics
Municipal market supply is extremely high, driven primarily by refundings
$9 – 10 billion pricing weekly, supply up 81% year over year
Dramatically increased number of financings has affected market rather than large issuers from CA, NY and TX
Fixed number of investors cannot absorb weekly volume
Each deal must be approved individually
Difficult for small-to-medium sized transactions to get investor’s attention
Credit spread has widened over past several weeks
Muni Bonds: 2015 Issuance versus Redemptions
$0
$10
$20
$30
$40
$50
Par
Am
ount
($B
N)
Actual Supply RBC Forecast Supply Redemptions
2013 – 2015 Municipal Weekly Volume
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Jan
-13
Feb
-13
Mar
-13
Ap
r-13
May
-13
Jun
-13
Au
g-13
Se
p-13
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Mar
-14
Ap
r-14
May
-14
Jun
-14
Jul-1
4
Au
g-14
Se
p-14
Oct
-14
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-15
$ m
illio
ns
Competitive
Negotiated
Average
Source: Bloomberg, Lipper and Thomson Municipal Market Data
RBC Capital Markets8
2.30%
2.40%
2.50%
2.60%
2.70%
2.80%
2.90%
3.00%
3.10%
3.20%
09/02/14 10/02/14 11/02/14 12/02/14 01/02/15 02/02/15 03/02/15 04/02/15
20-Year MMD
0.90%
1.00%
1.10%
1.20%
1.30%
1.40%
1.50%
09/02/14 10/02/14 11/02/14 12/02/14 01/02/15 02/02/15 03/02/15 04/02/15
5-Year MMD
Number of factors have increased volatility:
- Consolidation has reduced number of active broker/dealers
- Regulatory changes have reduced liquidity from remaining dealers
- Many typical new issue market participants do not have capital to deploy in primary or secondary market
- Market indexes are not well geared to gauge/consider current market liquidity level and investor sentiment
- Periods of heavy supply create greater investor leverage in pricing
Significant credit spread shifts in addition to movement in MMD
However, credit spreads are tight compared to 5-year history
-6 bps
+9 bps
-17 bps +16 bps
-28 bps
-20 bps
+47 bps
+17 bps
+5 bps
-33 bps
+15 bps
-50 bps
+38 bps
-14 bps -21 bps
+12 bps+50 bps
-12 bps
Movement in 5 and 20-Year AAA MMD
Assessment of Secondary Market Liquidity is an Increasing Investor Focus
Source: Bloomberg, Lipper and Thomson Municipal Market Data
Credit Spreads Remain Tight
0
50
100
150
200
250
Ap
r-10
Ap
r-11
Ap
r-12
Ap
r-13
Ap
r-14
Ap
r-15
Bas
is P
oint
Spr
ead
to A
AA
MM
D
AA Spread
A Spread
BBB Spread
RBC Capital Markets9
Municipal Market Fund Flows
Until Fund Flows stabilize, trading in municipal market will remain volatile
According to data from Lipper, for week ended May 8, 2015, weekly municipal bond funds reported $211 million in outflows, down from previous week’s $481 million of inflows
Long-term muni bond funds also saw outflows, losing $396 million in latest week, after experiencing inflows of $305 million in previous week
Four week moving average is currently $80 million, down from last week’s number of $124 million
Period ended May 6, 2015
Lipper Municipal Fund Flows
($5,000)
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
$2,000
Dec-10 Mar-11 Jul-11 Oct-11 Feb-12 May-12 Aug-12 Dec-12 Mar-13 Jul-13 Oct-13 Feb-14 May-14 Sep-14 Dec-14 Apr-15
Fun
d F
low
($
mill
ions
)
Flow Change
4-Wk Moving Avg
($5,000)
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
$2,000
4/1 4/8 4/15 4/22 4/29 5/6
RBC Capital Markets10
Current Investor Preferences
Insurance companies and bank portfolios have been primary drivers of demand in 15-30 year range
In many instances, banks and insurers have been willing to purchase sub-5% coupons, reducing an issuer’s true interest cost
Bond funds remain somewhat active throughout yield curve
Professional retail investors have been reaching further out on yield curve, buying out to 15 years
Term / Maturity (Year)1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Money Market Funds
Corporate Cash Managers
Short-Duration Bond Funds
Municipalities
Professional Retail
Individual Retail
Intermediate Bond Funds
Bank Trust Departments
Insurance Companies
Long-Term Bond Funds
Relative-Value Buyers
Bank PortfoliosTarget high quality GO or essential service credits. Sweet spot is 20-30 years. Can buy sub-5% coupons depending on portfolio needs and credit quality.
Buyer Category Commentary
Active 13 months and in. Main buyers of sealed-bid maturities.
Target is 2 years and in; sometimes out to 5 years. Need high-quality paper with higher yield than agency debt.
Target 15-20 years. Can buy 4% or 5% coupons. Most focused on yield and retail arbitrage opportunities.
Target out to 8-10 years, where bonds are typically non-callable. Prefer par-ish bonds.
12 to 25 years; Are more dollar price sensitive than bond funds. Often will accept 4-handle coupons.
Max yield buyers, focusing on 20-30+ years. More focused on liquidity and deal size than short/intermediate funds. Minimum 5% coupon.
Inside of 5 years. Need high quality credits. Can buy 2-5% coupons depending on maturity.
Target 2-15 years. Need the income and coupon protection of a 5% structure.
Out to 15 years and select maturities in 20, 25, & 30 years. Not sizable on their own but will accept lower coupons.
Target 5-20 years. Often need 5% coupons. Can play in middle-market deals when new-issue volume is light.
Target is 5 years and in. Can buy 3-5% coupons. Are less constrained by deal size than long-end funds.
Current Volatility Levels Require Strong Pre-Sale Investor Dialogue on Issues
Source: RBC Capital Markets
RBC Capital Markets11
3.5%
5.5%
7.5%
9.5%
11.5%
13.5%
15.5% Bond Buyer Revenue Bond Index
Today's Rate at 4.47%
Bond Buyer Revenue Bond Index
36 Year Historical Perspective
Today’s 4.47% level is lower than 97% of historical rates since September 1979
Source: Bloomberg as of May 7, 2015 Weekly yields and indexes released by the Bond Buyer. Updated every Thursday at approximately 6:00pm EST. 25 Revenue Bond Yield with 30 year maturity, rated A1 by Moody's and A+ by S&P Arithmetic Average of 25 bonds' yield to maturity.
Bond Buyer Revenue Index since September 1979 % of Time in Each Range Since 1979
Yield Range
Less than 3.50% 0.00%
3.50% - 4.00% 0.00%
4.01% - 4.50% 4.46%
4.51% - 5.00% 13.50%
5.01% - 5.50% 21.95%
5.51% - 6.00% 13.45%
6.01% - 6.50% 9.09%
6.51% - 7.00% 3.82%
7.01% - 7.50% 6.72%
7.51% - 8.00% 5.38%
Greater than 8.00% 21.62%
Total 100.00%
RBC Capital Markets12
Alternatives
Bank Loans
Can be more economical than publicly offered bonds if amortization is 20 years or less
GFOA best practices
– Governments should consult with their financial advisors and counsel
– Disclose bank loan information via Municipal Securities Rulemaking Board’s EMMA website
Many banks now limited on length of financing with just a few that can go out 20 years
May have tax risk, where bank can increase rate if tax laws change
Acceleration in the event of default
SRF Loans
State Revolving Fund run by DEP for drinking water, wastewater and stormwater projects
Interest rate subsidized by state and federal government
Loans are up to 20 years with level annual debt service
May be wage act requirements
SRF loans can be subordinate to outstanding bond issues and bank loans
Older loans may be able to be refinanced with bank loan or as part of bond issue as senior lien debt for savings
Pension Funding
SECTION 2
RBC Capital Markets14
Typical pension bond is debt issued to reduce plan sponsor’s Unfunded Accrued Actuarial Liability (UAAL) for its
defined benefit pension plan
UAAL is Accrued Actuarial Liability (AAL) less Actuarial Value of Assets (AVA)
AAL is present value of projected future benefits discounted at retirement system’s assumed rate of return
UAAL amortized over predetermined period of time
Annual cost to amortize UAAL is added to Normal Cost (portion of cost of projected benefits allocated to
current plan year reduced by employee contributions) to determine Actuarially Required Contribution (ARC)
Debt service on bonds typically patterned after projected amortization payments
Due to use of funds, pension bonds are issued on taxable basis
What are characteristics of Pension Bonds?
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
2015$0
$2,000$4,000$6,000$8,000
$10,000$12,000$14,000$16,000$18,000$20,000
Annual Par Amount of Pension Bonds Issued ($bil)
Source: SDC; RBC.
RBC Capital Markets15
-
200
400
600
800
1,000
1,200
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -
10
20
30
40
50
60
70
80
90
100
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
ARC Employer Contributions
Overview of a Sample Municipal Retirement Fund
Employer Contributions ($ millions) Unfunded Actuarial Accrued Liability ($ millions)
Asset Allocation Investment Earnings ($ millions)
(300)
(200)
(100)
-
100
200
300
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Domestic Equity
58.26%
International Equity9.41%
Fixed Income28.17%
Short Term Investments
4.15%
RBC Capital Markets16
Points of View When Considering Pension Funding Bonds
Investment expectations should be consistent with overall Retirement Fund Planning should be undertaken regarding investment of bond proceeds given potential size of investment Poor performance of Fund’s investment may lead to negative perception of issuer
Investment Expectations Based on Overall Pension Fund
Actual investment results for entire fund over time are important, but impact of introducing PFB proceeds to reduce or eliminate Unfunded Liability has net positive impact on funded ratios even if investment returns are below bond rate going forward
PFB Proceeds Have Net Positive Impact on ARC and Funded Ratio
Rating agencies now combine UAAL of debt (plus OPEB obligation) in determining credit strength of issuer Issuing PFB will greatly reduce amount of unfunded pension liability required to be disclosed on sponsor’s
balance sheet by immediately improving plan’s funded ratio This is offset by addition of pension bond principal
PFB Now Has Greater Impact on Unfunded Liabilities
Annual PFB debt service obligations are fixed and negative consequences of non-payment is far greater than deferring pension contributionSoft vs. hard liability
Dependent on future investment performance means that at time of borrowing, it is unknown whether investment returns rate will exceed the cost of PFBs
Ability to generate sufficiently high level of return
Potential for crowding out debt capacity (both from balance sheet and annual budget viewpoint) for infrastructure needs
Impact of increased debt on borrowing capacity
RBC Capital Markets17
Pension Funding Bond Issues
PFB Issuances
Issuer Sale Date Par Issued Objective
Illinois Jun 2003 $10.0 bn Reduce large UAAL; achieve budgetary savings
Oregon Oct 2003 $2.1 bn Reduce large UAAL
Wisconsin Dec 2003 $850 mmFund UAAL of pension and accrued sick leave (OPEB) plans; achieve budgetary savings
Puerto Rico Jan 2008 $1.6 bn Increase funding of closed pension systems with few assets
Connecticut Apr 2008 $2.3 bn Reduce large UAAL; implement reforms for COLA calculation
Denver Public Schools Apr 2008 $450 mm Reduce UAAL to enable merger into statewide system
Chicago Transit Authority Jul 2008 $1.9 bnSecure reforms negotiated with unions to significantly reduce benefits and increase employee contributions; also OPEB bond issue to remove employer obligation to fund retiree healthcare
Milwaukee County Mar 2009 $400 mmFund large UAAL and create pension stabilization reserve to absorb volatility from future UAAL as result of sub-par investment returns
Kentucky Aug 2010 $468 mm Refinance Commonwealth loans to Retirement Systems at lower rate
Fort Lauderdale Sep 2012 $338 mmReduce large UAAL; establish ordinance requiring full funding of benefit enhancements at time benefits granted
Baltimore County Nov 2012 $256 mmFund UAAL created as result of reduced investment return assumption
Source: Official Statements.
RBC Capital Markets18
Pension Funding Bond Mechanics
Investors
Principal & Interest Payments
Bond Proceeds
Pension Retirees
Benefit Payments
EmployeesContributions
Net Proceeds
Contributions
Issuer Pension System
RBC Capital Markets19
Bond Proceeds
36%
UAAL10%
Base Assets54%
Unfunded Liabilities Earn Zero Return, but Increase at Actuarial Rate
Cost:Normal Contributions
Earns:7.50%
UAAL Cost:7.50%
Earns:0.00%
Bonds Cost:3.96%
Earns:7.50%
Replacing portion of UAAL borrowing (7.50%) with lower cost of bonds (3.96%) is expected to save Issuer $32.4 million per year – or eliminate the UAAL 13 years sooner
Blended Cost of Capital moves from 7.50% to 4.73%
(1) Assumes Bond Proceeds to increase funding to 90%
RBC Capital Markets20
Sample Pension Bonding Results
Status Quo Proportional Solution versus Status Quo
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2016 2022 2028 2034 2040 2046
Mill
ions
Outstanding PrincipalOutstanding UAALStatus Quo UAAL
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
2016 2024 2032 2040 2048U
AA
LC
ontr
ibut
ion
Contribution UAAL
Assumptions
Costs of Issuance 0.25%
Underwriters' Discount 0.50%
Delivery Date 07/01/2015
Funding Target Date 07/01/2050
Target Funding Level 90.00%
Actuarial Rate 7.50%
Payroll Growth Rate 3.70%
AVA $1,263,000,000
AAL $2,296,000,000
UAAL $1,033,000,000
Funded Ratio 55.01%
Summary of Results
Uniform Expected Savings Proportional Expected Savings Frontloaded Expected Savings Backloaded Expected Savings
All-in-TIC 3.968% 3.957% 3.975% 3.702%
Gross Expected Savings $1,076,441,314 $1,134,783,454 $994,387,772 $1,636,659,602
PV @ All-in-TIC $510,184,636 $512,806,403 $508,606,314 $574,455,220
PV @ Actuarial Rate $296,483,576 $288,907,788 $305,422,535 $208,206,055
Deposite to Retirement Fund $870,181,360 $870,181,360 $870,181,360 $870,181,360
Average Life 29.6 years 27.9 years 31.9 years 14.1 years
Year funded if expected savings are reinvested 2037 2040 2036 2050
(1) Expected savings portrayed above represent the difference between RBCCM’s forecasted UAAL amortization and debt service. Achieving these payment reductions are contingent on the Fund meeting its actuarial assumptions, in particular, but not exclusively, those related to the Retirement Fund’s investment earnings. Fund investment performance and meeting other actuarial assumptions will impact what results are ultimately achieved over the life of the bonds.
RBC Capital Markets21
Hallmark of “successful” pension bond financing is low borrowing cost
RBCCM analyzed 50 of largest pension bond financings since 1994
We performed analysis of hypothetical investment portfolio with 60-35-5 allocation in stocks, bonds, and cash
Utilized benchmarks of S&P 500, Barclays Aggregate Bond Index and 3-month T-Bill
Hypothetical investment returns calculated from Q1 after issuance to final bond maturity or 12/31/14
For variable rate financings, borrowing cost calculated from swaps or original forecasted variable cost in official statement
Results indicated that the 50 largest issues would have had an average investment return of 8.51% compared to the average all-inclusive true interest cost of 6.04% on the pension obligation bond issues for this period
8 of the 50 issues would have had pro forma investment returns below their borrowing costs
The average borrowing cost of these 8 is 6.92%, with average pro forma investment returns of 5.85%
For the 20 POBs issued over the last 10 years, average borrowing costs have been 5.60% compared to average pro forma returns of 9.25%
Analysis does not represent actual investment performance of each pension fund, but provides guideline to compare borrowing cost of pension bond to generalized investment returns
Hypothetical Investment Return Compared to Pension Bond Borrowing Costs
RBC Capital Markets22
Tax and Revenue Anticipation Notes for Pension Systems
How does modifying timing change Actuarially Determined Contribution (ADC)?
Actuary determines size of ADC not just on normal cost and any unfunded liability amortization, but also considers when contributions are expected to be received and how long they may be invested by Fund during year
Annual contribution that participants make is available to be invested by Retirement Systems at actuarial rate
Therefore, a contribution made in June can only be invested for a single month, while a contribution made at beginning of July is expected to earn at actuarial rate for 12 months
Because contributions made sooner are worth more to Retirement Systems than those made later, actuary will lower ADC if contributions are made in July rather than periodically throughout year
Participants can Save Money by Changing Contribution Timing
Plan sponsor can either fund upfront contribution with cash or issue notes
Could also develop pool program to issue 1-year cash flow note to fund local participants’ entire ADC in July
Actuarial recalculation would reduce ADC required to fully fund System
Difference between PV of status-quo contributions over course of year and P+I of the note equals savings
In example below, net savings for program could exceed $22.0 million each year after interest and issuance costs are included
Short term notes can provide savings simply by adjusting timing of pension contributions
Deposit Assumed Earnings Balance Deposit Assumed Earnings Balance
Jul-15 54,290,425 - 54,290,425 624,487,857 4,104,171 628,592,028
Aug-15 54,290,425 356,800 108,937,651 - 4,131,144 632,723,172
Sep-15 54,290,425 715,945 163,944,021 - 4,158,294 636,881,466
Oct-15 54,290,425 1,077,450 219,311,896 - 4,185,623 641,067,089
Nov-15 54,290,425 1,441,331 275,043,652 - 4,213,131 645,280,219
Dec-15 54,290,425 1,807,603 331,141,681 - 4,240,820 649,521,039
Jan-16 54,290,425 2,176,283 387,608,389 - 4,268,691 653,789,730
Feb-16 54,290,425 2,547,385 444,446,199 - 4,296,745 658,086,475
Mar-16 54,290,425 2,920,927 501,657,551 - 4,324,983 662,411,458
Apr-16 54,290,425 3,296,923 559,244,900 - 4,353,407 666,764,865
May-16 54,290,425 3,675,391 617,210,716 - 4,382,018 671,146,883
Jun-16 54,290,425 4,056,345 675,557,487 - 4,410,817 675,557,700
Total 651,485,105 24,072,382 624,487,857 51,069,844
Monthly Deposits Upfront Deposits
RBC Capital Markets23
Pre-Funding Pension Contributions
Many California issuers, including Orange County, CA and City of Los Angeles, fund annual Pension contributions at beginning of fiscal year with a note issuance instead of funding equally over monthly payments or at year end
Structure creates true arbitrage benefit between cost of Notes and assumed rate of return on Pension funds
City of Los Angeles issued $1.37 billion tax and revenue anticipation note in 2014 and used $625 million to pre-fund annual pension contribution to Fire and Police Pension Plan and $412 million to pre-fund contribution to Los Angeles City Employees’ retirement system
Benefits of Structure
RBC Capital Markets24
Portfolio Analysis: January Lump Sum Contributions vs. Dollar Cost Averaging Contributions
RBCCM has analyzed quarterly returns for S&P 500 index, US Treasury bills, and Barclays Aggregate Fixed Income index
Goal to compare returns of two similar portfolios on quarterly basis over last 21 years
- Utilized portfolio mix of 60% stocks, 5% US Treasury bills, and 35% fixed income securities (bonds)
- In first portfolio, contributions made at beginning of period, in this case, January 1 (Lump Sum Portfolio)
- In second portfolio, investments made in quarterly installments at beginning of each quarter (Dollar Cost Averaging Portfolio)
Compared to dollar cost averaging, lump sum investing in January provided superior returns 17 out of last 21 years
Annual S&P 500 Total Return 3-month T.Bill
Annual Barclays Agg
Index Lump SumDollar Cost Averaging
Superior Performance
12/31/1994 1.32% 3.99% -2.92% 99.97$ 101.71$ Dollar Cost Avg
12/31/1995 37.58% 5.52% 18.46% 129.30$ 116.23$ Lump Sum
12/31/1996 22.96% 5.02% 3.64% 115.30$ 110.51$ Lump Sum
12/31/1997 33.36% 5.05% 9.64% 123.65$ 114.10$ Lump Sum
12/31/1998 28.58% 4.73% 8.70% 120.42$ 113.23$ Lump Sum12/31/1999 21.04% 4.51% -0.82% 112.56$ 108.99$ Lump Sum12/31/2000 -9.11% 5.76% 11.63% 98.90$ 97.34$ Lump Sum12/31/2001 -11.89% 3.67% 8.43% 96.00$ 101.08$ Dollar Cost Avg12/31/2002 -22.10% 1.66% 10.26% 90.42$ 95.52$ Dollar Cost Avg12/31/2003 28.68% 1.03% 4.10% 118.70$ 113.78$ Lump Sum
12/31/2004 10.88% 1.23% 4.34% 108.11$ 106.52$ Lump Sum
12/31/2005 4.91% 3.01% 2.43% 103.95$ 103.61$ Lump Sum
12/31/2006 15.79% 4.68% 4.33% 111.23$ 108.45$ Lump Sum
12/31/2007 5.49% 4.64% 6.97% 105.97$ 102.90$ Lump Sum
12/31/2008 -37.00% 1.59% 5.24% 79.71$ 83.19$ Dollar Cost Avg
12/31/2009 26.47% 0.14% 5.93% 117.96$ 115.77$ Lump Sum
12/31/2010 15.06% 0.13% 6.54% 111.33$ 109.90$ Lump Sum
12/31/2011 2.11% 0.03% 7.84% 104.01$ 103.22$ Lump Sum
12/31/2012 16.00% 0.05% 4.21% 111.08$ 104.61$ Lump Sum
12/31/2013 32.39% 0.07% -2.02% 118.73$ 111.19$ Lump Sum
12/31/2014 13.69% 0.03% 5.97% 110.30$ 106.64$ Lump Sum
Portfolio Performance
Source: Bloomberg; RBC Capital Markets.
Green Bonds
SECTION 3
RBC Capital Markets26
Overview, Proceeds, Principles and Certification
Green Bonds are standard bonds dedicated to financing projects with clearly identified environmental and climate benefits
Green Bond Principles (GBP) recognize broad categories of Green Projects:
– Renewable Energy
– Energy Efficiency (including efficient buildings)
– Sustainable waste management
– Sustainable land use
– Biodiversity conservation
– Clean transportation
– Clean water and/or drinking water
GBP recommend that all designated Green Project categories provide clear environmental benefits that can be described, assessed, and quantified
For buildings, LEED (Leadership in Energy and Environmental Design) Certification generally achieves Green Bond criteria of being in top 15% of energy efficient buildings
– Must be approved by U.S. Green Building Council, which assigns points to projects based on levels (Silver, Gold, and Platinum) of achievement in improved environmental performance
Municipal Green Bond Issuance
Green Bond Principles and Certifications
Green Bonds: Definition
Green Bond Use of Proceeds
RBC Capital Markets27
Green Bonds Have Risen to Prominence in Municipal Sector
Total par amount of $2.9 billion financed in 2015 YTD, with expectations of $100 billion
Green Bonds have recently been issued by:
– Water and Sewer issuers such as City of Venice, FL, East Central Regional Wastewater Treatment
Facilities Operations Board (Palm Beach County), District of Columbia Water and Sewer Authority, The
Metropolitan District, Hartford County, Metropolitan Water Reclamation District of Greater Chicago
– Higher education institutions such as MIT, University of Cincinnati, and Indiana University
– State-level issuers such as California, Indiana Finance Authority (SRF), NY Environmental Facilities Corp and
Massachusetts
In corporate bond market, Green Bond issuance was $36 billion in 2014, $14 billion in 2013 and $2 billion in 2012
Green Bonds Designation Implies Commitment to Environmental Standards
Use of Green Bond proceeds have clearly stated environmental benefits
Green Bond issuers may have reporting requirements on use of proceeds
Municipal Green Bond Issuance
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The Bond Buyer: Green Bond Funds Take Interest in Municipals
In September 2014, The Bond Buyer published article titled “A Flood of Green Debt Stands Out”
According to article, muni managers are turning to Green Bonds to meet rising demand from investors
Municipal green bonds account for 1.83% of Standard & Poor’s Green Bond Index
Fund managers have found that interest in green funds is generally result of investors motivated by desire to promote conservation or help offset global warming, not just prospect of earning a return
No green bond funds have yet been devoted entirely to municipal debt – the ones in existence include corporate and asset-backed bonds
Municipal issuers recently issuing green bonds have been able to attract new investors to their credit, and in some cases, municipal bonds as a whole
Bond funds have also been able to increase and diversify the type of investors in their funds by going green
Green Bond funds have attracted new investors without outperforming benchmark municipal or corporate bond funds with similar maturities
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Disclaimer
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