Transcript Sacramento Regional County Sanitation District

Technical Discussion of:
Debt Financing Alternatives for Private Water Utilities
(Infrastructure, Refinancings, Acquisitions & Raising Capital)
Presented by:
Mark Reader, Managing Director, Phoenix
[email protected]; (602) 794-4011
Bryan Lundberg, Managing Director, Phoenix
[email protected]; (602) 794-4007
Monday, October 31, 2011
11:45 A.M. – 1:00 P.M.
2555 East Camelback Road, Suite 280 Phoenix, Arizona 85016 (602) 794-4000
Disclosure
Pursuant to revised Municipal Securities Rulemaking Board (“MSRB”) Rule G-23 (the “Rule”), in connection with new issues for which
the Time of Formal Award occurs after November 27, 2011, a broker, dealer, or municipal securities dealer (“dealer”) is prohibited
from acting as a Financial Advisor or Municipal Advisor, as defined in Section 15B of the Exchange Act of 1934 (as amended), to an
issuer for a particular issue sold on a negotiated or competitive bid basis and subsequently switching roles to act as underwriter or
placement agent with respect to the same issue. In compliance with the rules set forth by the MSRB, Stifel, Nicolaus & Company, Inc.
(“Stifel”) may act as an underwriter or placement agent and not a Financial Advisor or Municipal Advisor in connection with all
services proposed and/or provided. MSRB Notice 2011-29 (the “Notice”) defines as “underwritings” both (i) the acquisition of all or any
portion of an issue, directly or indirectly, from the issuer as principal, either alone or as a participant in a syndicate or other similar
account formed for that purpose and (ii) acting as an agent for the issuer in arranging the placement of an issue. Additionally, the MSRB
defines the role of an underwriter in the Notice, which states, “the primary role of an underwriter is to purchase securities in an arm’slength commercial transaction between the issuer and the underwriter” and, “the underwriter has financial and other interests that
differ from those of the issuer.” Furthermore, the Rule states that an underwriter may provide advice concerning the structure, timing,
terms, and other similar matters related to the issuance of municipal securities to the extent the underwriter discloses that such advice
is provided with respect to the underwriting and not in relation to a financial advisory relationship, as specifically defined in the Rule.
Accordingly, any such services provided by Stifel as they relate to our role as underwriter or placement agent should not be construed
as those of a Financial Advisor or Municipal Advisor and such notice, as described above, is hereby provided as set forth in the Rule.
Additional information is available upon request
Stifel, Nicolaus & Company, Inc., 501 N. Broadway, St. Louis, MO 63102
1
Table of Contents
1. Purpose of Presentation
2. Executive Summary
3. U.S. Tax Exempt Capital Markets
4. U.S. Debt Securities Markets
5. Private Water and Wastewater Utility Credit Rating Criteria
6. Financing Alternatives for Private Water Companies (Water & Wastewater Infrastructure
Improvements)
•
•
•
•
•
7.
8.
Summary
Water Infrastructure Finance Authority of Arizona (WIFA)
Private Activity (Tax-Exempt) Bonds [Public Offering or Private Placement]
Sample $10 Million Financing
Sample Refunding Case Study: ABC Water Company Revenue Bonds-Refunding Analysis
Financing Alternatives Utilized by Arizona Governments to Fund Water & Wastewater
Acquisition & Infrastructure Improvements
Role of Underwriter/Private Placement Agent or Financial Advisor
2
Table of Contents
APPENDIX (Included as Separate handout)
A. Water & Wastewater Utility Credit Rating Criteria & Reports
B. Sample IDA Policies and Procedures and Application Guidelines
C. Arizona Commerce Authority Program Summary and Private Activity Bonds & Volume
Cap Application Procedures
D. WIFA Policies & Procedures
E. Utility Bond Experience Since January 2006
3
Purpose of Presentation
Purpose of Presentation
 Educate WUAA members on how to access tax-exempt, low cost, debt financing options
available in Arizona, including Private Activity Tax-Exempt Utility Revenue Bonds (Public Offering
or Private Placement) and the Water Infrastructure Finance Authority of Arizona (WIFA)
~ Taxable obligations can also be issued for raising equity capital
 Review utility revenue bond refinancing mechanics and current opportunities
 Educate WUAA members on how Arizona cities/towns/counties and special districts finance
their public infrastructure improvements (if desired)
 Introduce S&Y – a premier investment banking firm that specializes in water & wastewater
utility revenue & tax secured financings
~ Underwriter (UW)/Private Placement Agent (PPA)
~ Financial Advisor (FA)
5
Executive Summary
Executive Summary
 Tax exempt markets are a viable source of low cost debt capital
 Equity market remains volatile
 Treasury yields plummet; approach all-time lows; tax exempt market follows
 Demand for tax exempt rated utility system credits has been elevated in today’s market
 Industrial Development Authorities provide access for private utility companies
 Federal tax exempt borrowing authority given to each state, for annual capacity allocation
 Entities eager to provide capacity for viable projects
 Project Finance Approach de linked from corporate guarantees
 Debt is issued leveraging the credit of the customer rate base of individual water systems
 Rate setting covenant to maintain minimum debt service coverage ratio
 Anti dilution covenant via additional bonds test
 Pledge of net revenues and not balance sheet assets
 No corporate cross collateral pledges
 Arizona Corporation Commission Oversight
 Review of rate setting process
 Cost of capital calculations included in rate process
7
U.S. Tax-Exempt Capital Markets
Municipal Tax-Exempt Interest Rates
Tax-exempt revenue bond rates remain near historic lows
Source: The Bond Buyer. Tax-Exempt Bonds maturing in 30 years with average rating of A1/A+. As of 10/24/2011.
9
Municipal Tax-Exempt Interest Rates
Tax-exempt revenue bond rates remain near historic lows
Percentage of the Time RBI Has Been Below the
Current Level Since 1980
+70 bps
Historical RBI Levels (January 1980 to Present)
42.50%
14.0
+60 bps
39.60%
(+)
+50 bps
36.05%
+40 bps
12.0
32.43%
+30 bps
28.33%
10.0
(%)
+20 bps
23.75%
+10 bps
18.08%
5.07% (Current)
-10 bps
8.0
Average = 6.90%
14.35%
10.97%
6.0
(-)
Current Level = 5.07%
-20 bps
7.78%
4.0
-30 bps
4.58%
1980
1985
1990
1995
2000
2005
2010
Source: The Bond Buyer. Tax-Exempt Bonds maturing in 30 years with average rating of A1/A+. As of 10/24/2011.
10
10
Municipal Market Overview
Positive market tone cools, but rates remain low
 Municipal market sells off over the past few weeks
 Yields remain historically low following recent Treasury rally
 Recent correction brings rates just above 2010 lows but still well below January 2011 highs
 Yield curve particularly steep inside of 10 years
30-Year MMD Yield (1/1/2010-10/24/2011)
Municipal Market Data (MMD) Yield Curves
5.1%
5.0%
4.8%
4.0%
January 2011 Yield Highs
(1/14/11 'AAA' MMD)
Current
(10/24/11 'AAA' MMD)
4.5%
3.0%
4.2%
3.9%
2.0%
3.6%
1.0%
Summer 2010 Rally Lows
(8/26/10 'AAA' MMD)
3.3%
0.0%
3.0%
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
1
4
7
10
13
16
19
22
25
28
Maturity
Source: Thomson Financial.
11
Financial Markets Overview
10-Year and 30-Year U.S.Treasuries (1/1/11-10/24/11)
 Financial markets
5.0
 Equity markets rebound slightly after enduring heavy losses
in September; Q3 2011 finished as worst quarter in
previous 3 years
4.0
30-year UST
3.5
(%)
3.0
2.5
 Unemployment rate holds at 9.1%
 Eyes on the Fed
 Federal Reserve announces operation “twist”; to be
completed by June 2012

Will buy $400 billion of UST securities with maturities in 6- to
30-year range, sell equivalent amount of securities with
maturities of 3 years or less
 Fed Funds rate to remain “exceptionally low” at least
through mid-2013 (Fed)
Source: Bloomberg.
Oct-11
Aug-11
Apr-11
May-11
Market-Surveyed Forecasts1 ( %)
Mar-11
 Q2 2011 GDP abysmal at 1.3%
Feb-11
1.5
Jan-11
 Payrolls increased by 103,000 in September (forecast:
60,000), lowering fears of recession
Jul-11
2.0
Jun-11
 Economic indicators
10-year UST
Sep-11
 Treasury rates remain historically low amid European debt
fears and economic uncertainty
4.5
10 / 2 4 / 11
C urre nt
Q 4 '11
F o re c a s t
Q 1 '12
F o re c a s t
Q 2 '12
F o re c a s t
Q 3 '12
F o re c a s t
Fed Funds Target 2
0.25
0.25
0.25
0.25
0.25
2-Year T-no te
0.28
0.25
0.30
0.40
0.45
10-Year T-no te
2.23
2.10
2.25
2.40
2.60
30-Year B o nd
3.25
3.25
3.29
3.50
3.65
3
Current Rates
( %)
Securities Industry and Financial M arkets A sso ciatio n (SIFM A ) Index
0.14
1-M o nth LIB OR
0.24
B o nd B uyer 20 – B o nd Index GO
4.08
B o nd B uyer Revenue B o nd Index
5.07
Economic Data
4
( %)
Q 2 '11
A c t ua l
Q 3 '11
F o re c a s t
Q 4 '11
F o re c a s t
Q 1 '12
F o re c a s t
Q 2 '12
F o re c a s t
2.20
Real GDP
1.30
1.95
2.00
2.00
Co nsumer P rices
3.47
3.70
3.30
2.50
2.10
Unemplo yment (%)
9.10
9.10
9.10
9.00
8.90
1
Bloomberg Surveys as of October 12, 2011.
2
On December 16, 2008, the Fed lowered its target rate to a range of 0.00%- 0.25%.
3
M arket data as of October 24, 2011.
4
Bloomberg Surveys as of October 12, 2011.
12
12
U.S. Debt Securities Markets
Debt Issuance in the U.S. Securities Markets
Debt Issuance in the U.S. Securities Markets
Asset-Backed
Type of Security
Federal Agency Securities
Corporate Debt (a)
Mortgage-Related (b)
Treasury (c)
Municipal
$0.0
$250.0
$500.0
$750.0
$1,000.0
$1,250.0
$1,500.0
$1,750.0
$2,000.0
Amount ($ Billions)
2009
2010
(a) Includes all non-convertible debt, MTNs and Yankee bonds, but excludes CDs and federal agency debt.
(b) Includes GNMA, FNMA, and FHLMC mortgage-backed securities and CMOs and private-label MBS/CMOs.
(c) Interest bearing marketable coupon public debt.
Source: Federal Reserve System and Securities Industry and Financial Markets Association (SIFMA)
14
Outstanding U.S. Debt Securities (2nd Quarter 2011)
Outstanding U.S. Debt Securities
2nd Qtr 2011
(as of June 30, 2011)
($s in Billions)
Asset-Backed (c)
Money Markets (d)
$2,897.0
Federal Agency Securities
8.2%
$2,380.6
$1,877.9
5.3%
Total = $35,227.3
Municipal
$2,886.0
8.2%
Treasury (a)
6.8%
$9,191.6
26.1%
Corporate Debt (c)
$7,666.5
21.8%
Mortgage-Related (b)
$8,327.7
23.6%
(a) Interest bearing marketable public debt.
(b) Includes GNMA, FNMA and FHLMC mortgage-backed securities and CMOs and private-label MBS/CMOs.
(c) Estimates by the Securities Industry and Financial Markets Association.
(d) Includes commercial paper, bankers acceptances and large time deposits.
Source: Federal Reserve System and Securities Industry and Financial Markets Association (SIFMA)
15
Holders of Municipal Securities and Loans (Debt) 2nd Q 2011
Holders of Municipal Securities and Loans (Debt)
2nd Qtr 2011
(as of June 30, 2011)
Other (a)
($s in Billions)
Total = $2,886.0
$131.9
Individuals
4.6%
$1,066.2
36.9%
Insurance Companies (b)
$464.3
16.1%
Banking Institutions (c)
Mutual Funds (d)
$310.5
$913.1
10.8%
31.6%
(a) Includes nonfinancial corporate business, nonfarm noncorporate business, state and local governments and retirement funds and government-sponsored
enterprises.
(b) Includes property-casualty and life insurance companies.
(c) Includes commercial banks, savings institutions and brokers and dealers.
(d) Includes mutual funds, money market funds and close-end funds.
Source: Federal Reserve System.
16
Amount of Arizona Municipal Financings by Purpose
Amount of Arizona Municipal Financings by Purpose
(2005-2010)
100%
General Purpose
Utilities
Transportation
80%
Public Facilities
Housing
Health Care
By Purpose
60%
Environmental Facilities
Electric Power
Education (a)
40%
Development
20%
0%
2005
2006
2007
2008
2009
Fiscal Year
(a) Includes issues sold for primary and secondary education, higher
education, student loan programs and miscellaneous education
projects.
Source: Thomson Financial.
2010
Purpose
General Purpose
Utilities
Transportation
Public Facilities
Housing
Health Care
Environmental Facilities
Electric Power
Education (a)
Development
Totals (millions)
2005
1,400.6
887.3
412.0
1,067.0
311.4
1,626.5
330.6
352.7
2,478.1
389.9
$9,256
2006
1,158.8
775.9
535.4
105.0
460.5
597.8
180.2
296.0
1,357.4
2.5
$5,470
2007
1,987.8
938.2
654.2
118.5
640.4
1,463.6
10.0
1,179.7
1,854.3
136.5
$8,983
2008
1,465.3
789.4
909.4
573.4
146.2
2,327.1
239.3
834.1
2,284.3
36.0
$9,605
2009
1,486.0
919.8
671.9
200.8
0.0
390.8
565.4
1,045.0
1,261.1
0.0
$6,541
2010
1,928.1
611.6
233.9
714.3
0.0
110.3
197.0
716.8
1,522.2
196.6
$6,231
17
Private Water Utility Credit Rating Criteria
Credit Rating Criteria
Regulated Water and Wastewater Utility Companies
 Credit rating agencies active in the regulated water & wastewater utility sector include S&P
and Moody’s
 Fitch is not active in the sector
 S&Y would assist issuer with carefully managing the credit rating agency process
 Recent S&P report: U.S. investor owned water utilities continue to display rating stability
 Credit rating gradation system as follows:
Moody's
S&P / Fitch
Risk
Grade
Aaa
Aa
A
Baa
AAA
AA
A
BBB
Highest Quality
High Quality
Strong
Medium Grade
Investment
Ba,B
Caa, Ca
Caa, Ca
BB,B
CCC,CC,C
D
Speculative
Highly Speculative
Default
Junk
U.S. Credit Ratings Comparison
Company
S&P Credit Rating
Moody’s Credit Rating
American Water Works Co., Inc.
BBB+ (stable)
Baa2 (stable)
Long Island Water Corp.
AA- (watch dev)
-
New Jersey-American Water Co.
BBB+ (stable)
Baa1 (stable)
Pennsylvania-American Water Co.
BBB+ (stable)
Baa1 (stable)
Missouri-American Water Co., Inc.
AA+ (stable)
-
Middlesex Water Co.
A- (stable)
-
The York Water Co.
A- (stable
-
Golden State Water Company
-
A2 (stable)
19
Credit Rating Criteria
Regulated Water and Wastewater Utility Companies
 Regulatory
Environment &
Asset Ownership
Model
 Operational
Characteristics &
Asset Risk
 Stability of
Business Model &
Financial Structure
 Key Credit Metrics
20
Credit Rating Criteria
Sample S&P Credit Rating Report Summary: American Water Works Company, BBB+ (stable)
 Strengths:




A diverse geographic and regulatory environment
Largely residential and commercial customer base, enabling cashflow stability
Relatively low operating risk of nonregulated operations
Above-average service territory
 Weaknesses:


Acquisition-based growth strategy
High expected capital expenses of over $1 billion for each of the next three years
 Rationale:







Company’s reliance on acquisitions to provide growth partly offset above strengths
Average ROE (in AWW’s seven largest jurisdictions) approximates 10.3%
AWW recovers replacement capital spending up to a stated percentage
Certain states allow for surcharges related to the cost of power, chemicals and purchased water
$75 million of rate increases granted in 2010
Funds from Operations (FFO) total $830 million; FFO/Debt: 13%; debt to capital: 60.5%
Uncertainties associated with the timing of the rate cases and the substantially higher capital plans
are significant risks
21
Financing Alternatives for Private Water Companies (Water
and Wastewater Infrastructure Improvements)
Financing Alternatives Summary
Type of Debt
Tax-Exempt
Bonds
New Money
 (a)
Refunding
 (b)
Equity
[Conversion to
Debt]
Taxable
Bonds
WIFA
Bank Loan (Tax-Exempt
or Taxable)(d)
 (d)
 (e)
 (c)
 (f)


(a)
(b)
(c)
(d)
(e)
Private Activity Bond (PAB) volume cap required. Financing required to be issued through an IDA.
No PAB volume cap required if par-to-par maintained (expected). Financing required to be issued through an IDA.
Does not require PAB cap approval. Economics are based on market conditions of tax-exempt versus taxable.
S&Y would serve as Financial Advisor to assist with all aspects of the WIFA financing program.
Could be tax-exempt (similar to bond transaction) if PAB volume cap is obtained. Financing required to be issued
through an IDA.
(f) No PAB volume cap required if par-to-par maintained.
23
Water Infrastructure Finance Authority of Arizona (WIFA)
General Program Overview
 State Revolving Loan Fund to assist cities/towns, counties, special districts, Indian tribes, nonprofits and private water companies with low cost financing programs
 Programs subsidized by Federal Government (EPA) with State of Arizona matching funds
 Separate programs for water (DW) and wastewater (CW)
 Private company financial assistance policies outlined in Appendix, Section D
 Private company interest rate setting methodology and annual fees outlined in WIFA Policy #III.3
 Interest Rate: Prime rate (currently 3.25%) plus adjustment based on amortization period
 20-year amortization: 2.00% over prime or 5.25%
 15-year amortization: 1.00% over prime or 4.25%
 10-year amortization: prime or 3.25%
 5-year amortization: prime – 1.00% - 2.25%
 Other WIFA rules:
 Amortization periods generally limited to 20-years
 Davis-Bacon wage requirements apply which could increase costs
 Credit approval required by staff and WIFA Board of Directors (including financing covenants)
24
Private Activity (Tax-Exempt Water & Wastewater Revenue Bonds)
Industrial Development Authority Bonds
 Government lends tax-exempt status to private corporation (pursuant to Internal Revenue Code
141 et. Seq.)
 Conduit financing - Issued by governmental entity for private facility (i.e., IDA)
 Bonds paid by loan repayments from private corporation from revenue of utility system
 Used previously in Arizona by Chaparral City Water Company, Liberty Water Company, Arizona
Water & Global Water
 Eligible exempt facilities include water and sewer facilities, airports, docks, parking garage and
certain rental housing
 Volume cap allocated by Federal Government to each State based on population:
 Arizona 2011 Allocation: $600 million ($593,241,615 available)
 New Mexico 2011 Allocation: $277 million ($215,820,000 available)
25
Private Activity (Tax-Exempt) Bonds
Steps in Issuance
1) IDA selected by issuer. Several in AZ, but cost varies significantly
2) Application is made to an IDA for preliminary approval
3) A preliminary resolution (or inducement resolution) is considered by the IDA
4) Borrower submits application/request to Arizona Commerce Authority

Includes preliminary resolution (or inducement resolution) from IDA
Application for Volume Cap


Maximum allocation of $35 million until December 17, 2011
Thereafter at Director’s discretion (currently $593 million available in AZ and $215.8 million in NM)
5) If required under Section 147, a notice of public hearing is published-TEFRA Hearing
(Tax Equity and Fiscal Responsibility Act of 1982)
6) Public TEFRA hearing is held (at least 14 days after publication notice)
7) If necessary under Section 147, approval is obtained from entity that formed the IDA
and entities having jurisdiction over location at facilities financed (“host approval”)
8) Timing
26
Private Activity (Tax-Exempt Bonds)
Application Deadlines for Issuance Under $35 Million
 Applications received in 2011, are on a first come, first serve basis. If the application is received in
2011, the deal will need to close by 12/16 unless extended until 12/26.
 Applications received in 2012 are on a first come first serve basis. If an application is received
between January 1 and April 1, 2012, it will need to close within 90 days or by June 30th, whichever
is first.
 Application fees due with application and all other fees are due prior to receiving a confirmation
27
Private Activity (Tax-Exempt) Bonds (a)
Summary of Private Activity Bond Transaction
(Public Offering or PP Agent)
Sells Bonds
Industrial Development
Authority (IDA)(b)
$ Received from
Bondholders
Trustee (pursuant to
Trust Indenture)
Principal and
Interest Payment on Bonds
Bondholders (d)
Principal and
Interest Payments
Loan Repayments
Loans Bond Proceeds
Underwriter (S&Y)
Private Utility
Finance Project
Revenues Generated
by Utility
Project
New Money, Acquisition, Refunding (c)
(a) Arizona Commerce Authority administers allocation of Private Activity Bonds through application process summarized herein.
(b) An IDA serves as the conduit issuer. IDAs have authority under U.S. tax law to issue, on behalf of private companies tax-exempt bonds
for eligible public infrastructure projects.
(c) U.S. tax laws limit the amount of bonds that can be issued for acquisition. (Further discussion with bond counsel required)
(d) Could include marketing bonds to utility customer base.
28
Sample $10 Million Tax-Exempt Financing
Draft Sources & Uses of Funds
 Assumes a bond sale or private placement in
March 2012
SOURCES
Bond Proceeds
$10,000,000
TOTAL:
$100,000,000
USES
Project Fund
Debt Service Reserve Fund1
Estimated Costs of Issuance2
TOTAL:
1
$8,869,312
983,188
147,500
$10,000,000
Approximates one-year debt service. Asset of borrower. Used to make
final debt service payment. Possible opportunity to secure surety policy.
2
2% limit on the amount of COI paid from tax-exempt bond proceeds
 Assumes AZ Commerce Authority approval of
requested volume cap in the amount of $10
million
 Assumes 15-year amortization, level debt service
structure (Annual debt service of approximately
$980,650 per year-subject to change)
 All-in true interest cost: 4.93%
 Assumes debt service reserve fund with bond
proceeds (subject to change)
 Assumes ‘A+’ underlying credit rating
 Does not assume credit enhancement (subject
to be further discussed)
29
Sample $10 Million Tax-Exempt Financing
Estimated Costs of Issuance
Estimated Tax-Exempt Costs of Issuance 1
IDA Fees:
Application (Non-refundable)
Annual Administrative Fee2
$3,000
7,000
Commerce Fees:
Application
Confirmation Fee ($320/million)
$750
3,200
Issuance Costs:
IDA Counsel
Bond Counsel
Issuer Counsel
Trustee/Bond Registrar & Paying Agent
Trustee's Counsel3
Disclosure Counsel 4
Credit Rating4
OS preparation & printing4
DTC/CUSIP 4
Underwriter's Discount 4
Miscellaneous
$7,500
10,000
2,500
3,000
0
5,000
12,000
5,000
1,000
85,000
2,550
TOTAL:
$147,500
 Will endeavor to keep costs as low
as possible
 Select IDA which is most efficient for
issuer
1
2% limit on the amount of COI paid from tax-exempt bond proceeds.
Payable in advance semi-annually, 7 basis points of outstanding par, subject to possible
negotiation with the chosen IDA.
3
To be determined
4
Disclosure, credit analysis, registration and profit are made transparent in public bond sales
through required disclosures, but most often paid internally through the interest rate and not
transparent to the issuer in private bank or lender transactions. The amount of such costs
above translate into approximately 0.16% annual interest rate. Expenses may vary.
2
30
Sample $10 Million Financing
Estimated Cost of Capital to Sample Issuer1
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
MMD
0.25%
0.45%
0.66%
0.97%
1.27%
1.50%
1.75%
2.03%
2.27%
2.39%
2.51%
2.65%
2.79%
2.91%
3.02%
3.13%
3.23%
3.33%
3.40%
3.47%
AMT SCALE
Spread
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
2.30%
Yield
2.55%
2.75%
2.96%
3.27%
3.57%
3.80%
4.05%
4.33%
4.57%
4.69%
4.81%
4.95%
5.09%
5.21%
5.32%
5.43%
5.53%
5.63%
5.70%
5.77%
 Municipal Market Data (MMD) - benchmark index
for high grade national AAA/Aaa General Obligation
municipal bonds
 Spread assumes 230 basis points over natural AAA
index (includes AMT adjustment of approximately 75
basis points)
 All-in true interest cost: 4.93%
 Average weighted life: 8.287 years
¹ Based on estimated rates as of 10/26/2011 which includes AMT adjustment. Yields subject to change based on final credit structure,
rating(s) and bond market conditions at time of sale. Assumes “A+” underlying credit rating (to be determined).
Alternative Minimum Tax (AMT) is a separate tax computation under the Internal Revenue Code that, in effect, eliminates some
deductions and credits and creates a tax liability for an individual who would otherwise pay little or not tax.
31
Tax-Exempt Refunding Opportunity
ABC Water Company
 Outstanding Debt:
$10,000,000 The Industrial Development Authority of the County of XYZ
Water System Improvement Revenue Bonds (ABC Water Company Project), Series 1997A (AMT)
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Series 1997A (AMT) Bonds
Maturity
Amount
Coupon
12/1/2012 $
450,000
5.40%
12/1/2013
12/1/2014
12/1/2015
12/1/2016
12/1/2017
12/1/2018
12/1/2019
12/1/2020
12/1/2021
9,550,000
5.40%
12/1/2022T
Totals:
Status
Callable
Callable
$ 10,000,000
T
: Term Bond
 Callable in whole any date or in part on any interest payment date without a premium
 All maturities merit consideration (sinking fund installments 2013-2022)
32
Tax-Exempt Refunding Opportunity
ABC Water Company
 Spread to MMD¹
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Series 1997A (AMT) Bonds
MMD
Spread
Yield
0.25%
1.95%
2.20%
0.45%
1.95%
2.40%
0.66%
1.95%
2.61%
0.97%
1.95%
2.92%
1.27%
1.95%
3.22%
1.50%
1.95%
3.45%
1.75%
1.95%
3.70%
2.03%
1.95%
3.98%
2.27%
1.95%
4.22%
2.39%
1.95%
4.34%
2.51%
1.95%
4.46%
¹Based on rates as of 10/26/2011; subject to change. Assumes “AA-” underlying
credit rating.
33
Tax-Exempt Refunding Opportunity
ABC Water Company
 Net Present Value Savings1:
Tail End
Nominal
Savings
$
1,138
4,338
3,878
1,415
4,358
1,598
423
823
3,285
377,885
1,254,260
$ 1,653,398
Level
Nominal
Savings
$
118,225
118,175
114,140
118,103
116,495
114,185
117,573
116,773
117,435
114,610
115,210
$ 1,280,923
Up Front
Nominal
Savings
$
876,563
152,263
1,440
2,603
3,758
4,210
785
3,785
3,485
5,160
260
$ 1,054,310
Present Value Savings:
Less: Contribution2
Plus: Refunding Funds on Hand3
NET PRESENT VALUE SAVINGS
$ 1,141,327
(1,317,070)
1,018,591
$
842,848
$ 1,045,697
(1,317,070)
1,009,719
$
738,346
$ 1,054,310
(1,317,070)
1,017,094
$
754,334
% Savings of Refunded Bonds:
All-in True Interest Cost:
8.42%
3.97%
7.38%
4.11%
7.20%
4.12%
Period End.
Dec. 1
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Totals
Prior Bonds
Debt Service
1,260,000
1,280,700
1,299,390
1,209,840
1,177,720
1,295,060
1,293,760
1,264,760
1,234,410
1,302,710
1,254,260
$ 13,872,610
Savings can be
structured to achieve
issuer’s Operational
and Rate Structure
objectives
For example:
1) Up-front cash flow
savings
2) Tail-end savings
(payoff debt early)
with no cash flow
implications in early
years
¹Based on rates as of 10/26/2011; subject to change.
2Debt
service reserve fund amount from refunded bond issue.
3Refunding
funds on hand consist of debt service reserve funds and additional proceeds for refunding bonds.
34
Financing Alternatives Utilized by Arizona Governments to
Fund Water & Wastewater Acquisition & Infrastructure
Improvements
Financing Alternatives Utilized by Arizona Governments to Fund Water &
Wastewater Acquisition & Infrastructure Improvements
Governmental Issuers: Arizona, Cities, Towns, Counties & Special Tax Districts
State of AZ & Federal Bond/Loan Programs
Type of
Infrastructure
Water &
Wastewater
General
Obligation
Bonds
Utility Rev.
Bonds
Excise
Tax Rev.
Bonds



Comm.
Facilities
Districts
(CFDs)

Special
Assessment
Bonds
Water
Infra.
Finance
Authority
(WIFA)
Greater AZ.
Develop.
Authority
(GADA)
USDARUS
North
American
Develop.
Bank





 Additional Information included in the Appendix
 Most issue bonds in the capital markets or through WIFA
36
Role of Underwriter/Private Placement Agent
or Financial Advisor
Role of Underwriter/Private Placement Agent or Financial Advisor
Summary of Responsibilities
Type of
Role
Sell/
Underwrite
Bonds
Offering
Bonds to
Customer
Base
Assist
with
Selecting
Another
UW
Assist with
Reviewing
Investor/Bank
Proposals
Assist
with
Credit
Rating
Process
Assist to
Negotiate
Covenants,
Call
Features &
Costs
UW/PPA (a)
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
No
Yes
FA (b)
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Assist with
Securing PAB
Volume Cap
(TaxExemption) (c)
Assist with
Technical
Refunding
Process (d)
Assist
with
WIFA
Altern.
Assist
With
ACC (e)
(a)
Decision made by the borrower to retain an Underwriter such as S&Y to issue bonds in the public securities/bond market or privately
place the bonds with a bank / financial institution (depending up their preference). Public sale allows investors to bid on bonds across the
yield curve (each maturity).
(b)
Decision made by the borrower to retain a Financial Advisor such as S&Y (not to underwrite bonds). Financial Advisor would advise on
all aspects of financing transaction with the selected financial institution (see above services) .
(c)
Private Activity Bond Volume Cap required for tax-exempt new money and refunding (if not par to par).
(d)
Significant expertise required to comply with federal tax laws, notice to bondholders’, possible escrow cash verification requirements and
disclosure details. Note: most banks don’t routinely provide this expertise.
(e)
Technical debt structuring assistance and communications to aide in ACC communications and approval.
38