new clerk academy key west, florida. overview debt management
TRANSCRIPT
Overview of Bond Progress
What is a Bond?• Similar to a home mortgage; long-term liability• Debt repaid from pledged revenues• Usually has maturity from 1-30 years• Many states issue primarily general obligation
bonds(full faith and credit)
• In Florida, general obligation bonds must be approved by voter referendum
• Florida governments issue mostly revenue bonds (secured by a specific tax or enterprise fund revenue)
Characteristics of Municipal Bonds
Exempt from Federal (and in some cases state) income taxes.Lower interest rates than corporate securitiesGenerally sold as serial bonds as opposed to term or bullet maturitiesExempt from SEC regulations (Tower Amendment)Dealers regulated by MSRB (Municipal Securities Rulemaking Board
Types of Municipal Debt
Bonds classified by source of securityYou can not pledge assets as security-only revenuesGeneral obligation (full faith and credit)Revenue bonds• Limited tax bonds• Enterprise bonds• Special assessment bonds
Housing BondsSpecial Assessment BondsIndustrial Revenue BondsLease/Purchase
Sources of Security
State Revenue SharingGuaranteed EntitlementSecond Guaranteed EntitlementAdditional State Revenue Sharing Funds
Local Government Half Cent Shared Sales TaxGas TaxesOne Cent Optional Sales TaxToursit Development TaxUtility RevenuesCovenent to Budet and AppropropriateUtility Tax Revenues
Overview of Bond Process
Bond History• Florida used to issue more general obligation
bonds• Florida Constitution requires referendum due to
bond defaults during the depression• As a state with many retirees, voters not inclined
to vote for debt due to fixed incomes and lack of community ties
• Florida governments needed to issue bonds to finance capital projects and began to use more revenue bonds to avoid referendum
• Credits became more complex, and bond buyers began favoring the use of bond insurance
Clerk’s Role
Varies county to county based upon tradition, knowledge, skills and personalities. Know your role and ensure there is agreement with BoardPart of financing teamMay prepare financing plan and participate in selection of external financing teamResponsible for financial disclosureSigns bond documents at closingSigns a statement of no omission of material facts
Finance Team
Principal Players• Staff• Bond Counsel• Financial Advisor• Underwriter• Disclosure Counsel/Underwriter’s Counsel• Rating Agencies• Consulting Engineer/Rate Consultant
Finance Team
Staff• Finance• Attorney• Administration• Operating department director
Role of Staff• Protect government’s interests• Obtain lowest borrowing cost (consistent
with risk) • Liaison with board members
Finance Team
Bond Counsel• Prepares legal documents• Opines on validity of bonds• Opines on tax exemption• Helps develop structure of debt• Adequate disclosure is the responsibility
of the issurer not bond counsel
Finance Team
Financial Advisor• Helps develop structure of debt
Variable vs. Fixed RateLevel debt service for each issue or level for all outstanding debtCoverageMaximum maturity of bonds
• Provides recommendation on economic feasibility of refunding
• Helps with selection of finance team• Conducts document review• Coordinates ratings and bond insurance• Advises on fairness of pricing, terms and bond
ratings
Finance Team
Underwriter• Purchases bonds from issuer for resale to
investors• Underwriters represents the buyers, not the
issurer• Based upon market demands, provide input
into the structure of financing• Monitors outstanding debt for refunding
opportunities• Conducts document review• Assists with ratings and bond insurance
Finance Team
Disclosure Counsel/Underwriter’s Counsel and Difference Between the Two• Assists with preparation of POS and OS• Provides knowledge of disclosure
requirements (including continuing disclosure)
Finance Team
Rating Agencies• Objective and expert evaluation of credit
Insured Ratings – Based on rating of bond issuerUnderlying Ratings – Based on rating of issuer and source of repayment of bonds
• Provide feedback on bond structure• Improve efficiency of market• Additional source of information for
investors on suitability of investment• Investment grade ratings enhance sale of
bonds
Finance Team
Consulting Engineer/Rate Consultant• Necessary for certain construction projects• Provides information on construction cost
and rate implications• Enhances credibility of project• Helps develop structure of debt
Finance Team
Paying Agent/Escrow Agent• Invoices issuer when debt payment is due• Makes payment to bondholders• Holds refunding escrow on behalf of
bondholders• Sends redemption notice to bondholders
for refunding
Finance Team
Other Participants• Accountants and Auditors• Credit Enhancers (Insurance, Letters of
Credit)• Verification agents (refunding)
Finance Plan
Topics• Debt Management Plan• Capital Improvement Plan• Pledged Revenue• Debt Structure• Method of Sale
Finance Plan
Debt Management Plan• Recommended practices by GFOA and
rating agencies• Parameters for issuing debt and refunding• Protects credit quality• Provides basis for making decisions• Demonstrates a commitment to long-term
financial planning
Finance Plan
Capital Improvement Plan• Considerations
Match projects with revenue sourcesIncreased operating expenses from new projectsDeferred maintenance itemsPrioritized and fully funded capital plansDebt service costs as percent of budgetBalance financing sources
• Fund balancesLevels, policies – formal vs. informal
Finance Plan
Pledged revenue depends on …• Type of project• Availability of revenues to pledge
Impact of debt service on operational fundingCash flow flexibility
• Bond CovenantsNew debt may be constrained by existing covenantsMaximize future flexibility with new covenantsBalance between flexibility and ratings. (The more flexibile your documents the more potential risk will be perceived by markets.)
Finance Plan
Debt Analysis• Review outstanding debt• Identify any refunding candidates • Debt service pattern and revenue cash flow• Consider existing and future debt
structures• Term of the debt (1-30 years)
Match life of the assetMatch duration of the pledged revenues
Finance Plan
Sale Process• Competitive• Negotiated• Private placement
Types of Debt• Fixed rate vs. variable rate• Rate swaps (fixed to variable or variable to
fixed)• Tax-exempt vs. taxable
Bond Ratings
What is a Bond Rating?• Measure of risk to bondholders• Agencies: S & P, Moody’s and Fitch• Reflects issuer’s ability and willingness to repay
debt on time and in full (who, how, what)• Denotes credit quality by rating level• Independent opinion (subjective process)• Forward looking projection• Each credit is unique
Bond Ratings
Bond rating is not…• …an audit• …a recommendation to buy, sell or hold a
security • …static or permanent• …an opinion of a community’s quality of
life• …a performance evaluation of current
political leadership• …a judgment of quality of service delivery
Bond Ratings
Value of Bond Ratings• Lower interest rates on bonds if
insurance purchased• Access to market for lesser known
credits• More efficient secondary market trading• Increased investor demand
Some institutional investors can only purchase certain rated securities
Bond Ratings
Rating Process• Send bond documents to rating agencies• Analysis• Have conference call or meeting• Complete analysis• Rating committee• Rating released• Surveillance
Bond Documents
Bond Resolution or IndentureOfficial StatementBond Purchase AgreementCompetitive Sale DocumentsContinuing Disclosure CertificateOther Documents
Bond Documents
Official Statement• Prepared by Disclosure Counsel or
Underwriter’s Counsel• Not a sales document• Disclosure standard
No untrue statementNo material omission
• Issuer is responsible for disclosure• Certificates and Opinions
Bond Documents
Bond Purchase Agreement• Contract between issuer and underwriter
for negotiated sales• Prepared by underwriter’s counsel• Executed after pre-marketing period• Includes
Transaction termsResponsibilitiesDocument requirements“Outs”
Bond Documents
Competitive Sale Documents• Notice of sale• Summary notice of sale• Bid forms• Prepared by bond counsel and financial
advisor
Bond Documents
Continuing Disclosure Certificate• Annual financial information• Material event notices• Electronic Municipal Market Access (EMMA)• Not required for private placements and
variable rate debt
Bond Documents
Other Documents• Closing Documents• Escrow Deposit Agreement• Insurance Agreements• Reserve Sureties• Investment Agreements
Pricing and Sale
Topics• Bond insurance
History and Current Status• Underlying ratings• Call features• Method of sale• Bond sale process
Pricing and Sale
Ratings• Investment grade ratings affect pricing
(lower yields)• Create more demand for and interest in
bonds• Greater universe of potential bond buyers• Assist in attracting more bidders at
competitive sale• Rating upgrades signal positive trend to
underwriters and investors
Pricing and Sale
Call Features• Optional redemption
Issuer’s right to prepay after a stated date at specific price
- Call Date – typically 8 to 10 years from date of issuance
- Call Premium – typically 100 at par (100 percent)
Pricing and Sale
Method of Sale• Competitive Sale
Underwriters bid against each other- Specific bid date and time- Sealed or electronic bid- Awarded by lowest true interest cost
• Negotiated SaleUnderwriter chosen prior to saleAssists with structuring and pre-marketingGreater market timing flexibilityPrivate Placement
Pricing and Sale
Negotiated Bond Sale Process• Establish target sale date• Monitor market for favorable conditions• Pre-marketing
POS mailed and emailedMarketing circular for sales peopleCommunication with potential buyers
- Conference calls- Direct mailings
Pricing and Sale
Negotiated Bond Sale Process (continued)• Day prior to sale have pricing call
Underwriter and financial advisorPreliminary yields
• Establish pricing structure (“scale”)Sale at parOriginal issue discountOriginal issue premiums
• Retail order periodDay prior to institutional order periodCommitted entirely to retail ordersPriority for local or Florida residents
Pricing and Sale
Negotiated Sale Day of pricing• Underwriter and FA confirm initial pricing• Underwriter “goes into market” around 9
a.m.• Receives retail and institutional orders
Individual investorsBond mutual fundsInsurance companiesBanks – own portfolios, trust departments
Pricing and Sale
Negotiated Sale--Day of pricing (continued)• Repricing
Changes in market conditionsSignificantly more or less orders than bondsYields may be decreased or increased based on orders
• Underwriter makes offer to underwrite to issuer• Issuer gives verbal award• Underwriter prepares final numbers• Bond purchase agreement finalized and signed
that afternoon or next day
Post Closing
Topics• Managing rating and rating agency
relationships• Maintenance of funds and accounts• Other resolution requirements• Arbitrage• Investment of proceeds
Ongoing Requirements
Maintenance of Funds and Accounts• Construction Fund• Revenue Fund• Debt Service Fund
Principal AccountInterest AccountAmortization AccountDebt Service Reserve Account
• Rebate Fund• Other accounts for enterprise activities
Ongoing Requirements
Other Resolution Requirements• Rate covenant• Additional bonds (parity) test• Permitted investments• Restriction on asset sales• Insurance or inspection requirements• Audited financial statements
Secondary Market Disclosure
Undertaking requirements is contact between you and bond holderEvent disclosure
OnGoing Requirements
Arbitrage• Bonds issued tax-exempt• If bonds proceeds invested taxable, interest
earnings may exceed interest expense on bonds
• Creates positive interest gain (arbitrage)• Interest in excess of bond yield must be
rebated to IRS every five years
Ongoing Requirements
Investments• Tax-exempt vs. taxable returns• Resolution restrictions• Integrate bond investment restrictions into
investment policies• Legal restrictions and arbitrage• Types of investments• Purchasing investments