Donald Persinski HFMA Presentation - PNCCM
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Transcript Donald Persinski HFMA Presentation - PNCCM
Summer Educational Event
Capital and Finance Market Trends
July 29, 2013
Donald J. Persinski
Managing Director
PNC Capital Markets LLC
Presented to:
MSRB G-17 Disclosure
Donald J. Persinski
Managing Director
Health Care
John G. Bartolini
Analyst
Health Care
Three PNC Plaza, 4th Floor
225 Fifth Avenue
Pittsburgh, PA 15222-2707
Three PNC Plaza, 4th Floor
249 Fifth Avenue
Pittsburgh, PA 15222-2707
412-762-6227 T 412-762-5129 F
[email protected]
412-762-0254 T 412-762-5129 F
[email protected]
PNC Capital Markets (“PNCCM”) is providing the information contained in this document for discussion purposes only in anticipation of serving as an underwriter to the
issuer to whom this document is addressed. The information provided herein is not intended to be and should not be construed as “advice” within the meaning of Section
15B of the Securities and Exchange Act of 1934, as amended..
The following disclosures are required by Municipal Securities Rulemaking Board (“MSRB”) Rule G-17, as PNCCM proposes to serve as an underwriter, and not as a
financial advisor, municipal advisor or fiduciary to any person or entity, in connection with the issuance and sale of securities for the issuer to whom this is addressed: (i)
MSRB Rule G-17 requires an underwriter to deal fairly at all times with both municipal issuers and investors. (ii) An underwriter’s primary role is to purchase securities
with a view to distribution in an arm’s-length commercial transaction with an issuer; and an underwriter has financial and other interests that differ from those of such an
issuer. (iii) Unlike a municipal advisor, an underwriter does not have a fiduciary duty to an issuer under the federal securities laws and is, therefore, not required by federal
law to act in the best interests of that issuer without regard to its own financial or other interests. (iv) An underwriter has a duty to purchase securities from an issuer at a
fair and reasonable price, but must balance that duty with its duty to sell those securities to investors at prices that are fair and reasonable. (v) An underwriter will review
the official statement, if any, for those securities in accordance with, and as part of, its responsibilities to investors under the federal securities laws, as applied to the facts
and circumstances of the transaction.
2
Portfolio Management
Debt Portfolio
Fixed Rate
Variable Rate
Short-Term (working capital line)
Long-Term (PP&E)
Derivatives
Public Debt
Bank Loans
Investment Portfolio
Cash/Money Market Funds
Fixed Income – Corporate
Fixed Income – US Treasury
Equity – US
Equity – International
Equity – Mutual Funds
Alternative Investments
Strategies
Diversification
Risks
Duration
Liquidity
3
Sources of Capital
Operations – Cash Flow
Reserves – Balance Sheet
Philanthropy / Capital Campaign / Grants
Asset Monetization – Sale of Non Core Assets (Land, Skilled Nursing Facility, etc.)
Partnerships, Joint Ventures, Mergers
Capital Markets (Tax-exempt and Taxable Rates)
Fixed Rate Bonds
Variable Rate Demand Bonds supported by a Letter of Credit
Floating Rate Notes
Direct Bank Placement
Construction Loan
Line of Credit (Working Capital or Project Financing)
Leases (Capital and Operating)
Derivative Products and Strategies
4
Decade of Municipal Bond Finance ($000)
2004
Total
2005
2006
2007
2008
2009
2010
2011
2012
2013
$359,747.60 $408,282.80 $388,838.30 $429,893.70 $389,631.80 $409,688.50 $433,268.80 $287,718.40 $379,302.80 $175,451.70
13,614
13,959
12,766
12,659
10,830
11,721
13,828
10,574
13,102
6,373
29,103.70
38,797.40
40,346.50
49,820.50
61,094.10
46,151.80
31,440.70
26,763.50
37,276.30
14,226.10
Development
Education
Public Facilities
Transportation
Utilities
General Purpose
Tax Exempt
Taxable
Minimum Tax
Build America Bonds
Other Stimulus
New Money
Refunding
7,813.40
96,607.70
9,569.70
32,560.60
32,691.30
114,646.40
312,319.50
24,122.00
23,306.10
0
84.3
228,919.00
88,405.30
9,410.20
124,322.80
15,228.30
45,246.30
31,158.70
100,441.80
352,131.50
25,751.70
30,399.60
0
42.6
221,207.30
130,916.30
4,823.30
106,241.20
14,806.90
42,362.00
33,188.50
86,649.50
323,226.10
30,131.30
35,480.90
0
39
258,362.70
79,170.30
8,604.90
107,257.40
13,203.50
41,946.00
36,012.50
114,751.10
362,481.10
29,381.90
38,030.70
0
63.9
274,285.00
75,874.40
8,696.00
89,941.80
15,222.40
47,560.40
37,594.50
81,724.10
341,264.40
24,252.30
24,115.10
0
11.1
208,225.00
108,603.60
7,242.20
91,470.30
12,913.40
48,775.20
40,037.90
128,806.20
323,442.40
84,666.70
1,579.40
64,151.50
3,441.70
261,331.60
86,455.90
10,954.00
100,801.50
11,281.70
66,895.00
44,619.10
119,421.80
275,553.10
151,877.80
5,837.90
117,347.10
16,787.80
279,770.80
98,515.80
12,040.20
74,470.00
7,245.60
32,931.70
31,738.20
79,300.80
247,670.80
31,926.40
8,121.20
432.9
5,264.30
146,220.40
90,392.10
8,851.20
93,450.00
10,069.50
55,340.20
45,424.90
100,922.80
333,488.50
32,779.20
13,035.10
0
1,576.30
146,246.20
157,985.30
7,207.30
55,079.60
4,741.90
21,098.00
18,594.90
40,644.80
146,507.50
24,232.90
4,711.30
0
386.4
70,605.80
70,411.50
Fixed-Rate
Variable-Rate (Short Put)
Variable-Rate (Long/No Put)
260,781.50
47,018.50
5,864.30
306,200.20
61,799.90
2,772.80
288,946.90
55,899.00
6,115.90
320,515.80
50,391.50
13,177.10
262,634.30
116,345.90
6,440.10
362,120.20
32,333.90
8,565.80
392,149.10
24,969.80
3,593.70
256,082.50
14,384.00
2,572.00
345,298.90
15,005.50
2,530.10
160,639.50
3,235.60
1,395.00
Linked-Rate
Auction-Rate
Bank Qualified
Bond Insurance
Letters of Credit
Standby Purchase Agreements
227.4
42,228.50
16,644.60
194,895.30
23,623.50
3,429.00
0
33,053.20
18,511.50
232,976.10
27,050.90
12,980.50
0
32,131.20
17,392.80
191,326.20
21,520.20
14,057.10
0
38,769.20
16,312.70
201,017.80
20,732.30
17,722.20
328.4
0
15,302.60
72,181.10
71,520.60
28,061.60
1,982.10
0
33,147.90
35,401.20
20,434.40
4,071.70
9,062.20
0
36,876.50
26,857.40
11,817.10
3,469.30
12,093.40
0
18,821.20
15,256.50
9,891.60
1,688.20
14,216.20
0
25,093.60
13,272.70
6,076.60
1,974.70
9,263.20
0
11,785.10
5,626.40
805.2
566.4
Number of Issues
Health Care
5
Municipal Bond Issuance – Year-to Date Comparison (June 30)
2013
2012
Volume in millions Number of issues
TOTAL
Volume in millions Number of issues
Change from
previous period
175,451.7
6,373
195,348.5
6,991
-10.20%
January
February
March
April
May
June
26,807.5
24,426.3
32,248.0
37,144.3
29,467.7
25,357.9
887
1,016
985
1,184
1,311
990
17,438.6
27,027.8
34,746.0
34,833.2
37,876.6
43,426.3
723
1,053
1,257
1,229
1,496
1,233
53.7
-9.6
-7.2
6.6
-22.2
-41.6
First Quarter
Second Quarter
83,481.8
91,969.9
2,888
3,485
79,212.4
116,136.1
3,033
3,958
5.4
-20.8
Health Care
14,226.1
248
18,017.2
277
-21.0
Tax-Exempt
Taxable
146,507.5
24,232.9
5,602
714
178,091.1
12,768.4
6,382
551
-17.7
89.8
New-Money
Refunding
70,605.8
70,411.5
2,893
2,875
70,154.1
87,110.7
2,881
3,506
0.6
-19.2
160,639.5
3,235.6
9,263.2
6,034
75
58
183,105.7
5,543.9
4,374.7
6,776
101
60
-12.3
-41.6
111.7
5,626.4
805.2
566.4
561
23
7
7,697.4
3,654.8
833.4
700
63
11
-26.9
-78.0
-32.0
Fixed-Rate
Variable-Rate (Short Put)
Linked-Rate
Bond Insurance
Letters of Credit
Standby Purch Agreements
6
Municipal Bond Issuance – State Rankings
State
California
Texas
New York
New Jersey
Illinois
Florida
Ohio
Massachusetts
North Carolina
Pennsylvania
2013
Volume in
Rank
millions
1
2
3
4
5
6
7
8
9
10
2012
Volume in
Rank
millions
26,971.80
16,178.70
15,382.40
9,334.70
7,360.10
7,129.40
7,104.70
5,138.10
5,136.00
5,040.50
2
3
1
12
4
5
8
13
16
10
7
22,430.90
16,072.50
25,295.10
5,280.20
8,863.30
7,924.90
6,822.30
5,165.60
4,029.80
6,477.10
Change from
previous period
20.2
0.7
-39.2
76.8
-17
-10
4.1
-0.5
27.5
-22.2
Healthcare Bond Issuance
Billions
The volume of Health Care bond issuance has declined in recent years. Factors contributing to
this decline include: uncertainty due to healthcare reform; a tightened credit market; fewer
refunding opportunities; and significant growth in bank direct placements.
$60
61.1
$50
49.8
46.2
$40
38.8
40.3
37.3
$30
31.4
29.1
26.8
$20
14.2
$10
$0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Note: 2013 data is through June 30.
8
Healthcare Bond Issuance: January 1, 2013 – June 30, 2013
Total Par Amount: $195,200,000
St. Luke’s Health System
Doylestown Hospital
Catholic Health East
Hanover Hospital
The Washington Hospital
9
Recent Fixed Rate Healthcare Bond Issues
Obligor
Rating1
Award
Date
Call
Provision
Spread to
Yield %
MMD (bps) (Final Maturity)
Gross Revenue
Pledge?
DSRF?
Mortgage?
Baa1/nr/BBB+
32.995 7/18/2013
2023 at par
+160
5.34 (2033)
Yes
No
Yes
Baa1/BBB+/BBB+
140.430 7/16/2013
2023 at par
+160
5.24 (2031)
Pledged Assets
No
Yes
Aa2/AA/nr
68.950 7/10/2013
2023 at par
+90
4.84 (2039)
Springing
No
No
Methodist Hospitals of Dallas
Aa3/AA-/nr
189.065 7/10/2013
2023 at par
+107
5.08 (2043)
Yes
No
No
St. Joseph Health System (CA)
A1/AA-/AA-
324.840 7/9/2013
2023 at par
+122
5.05 (2037)
No
No
No
A1/A+/nr
56.745 7/3/2013
2023 at par
+123
4.20 (2026)
No
No
No
nr/nr/BBB
47.555 6/21/2013
2023 at par
+202
5.80 (2043)
Yes
Yes
Yes
nr/A-/A-
50.000 6/19/2013
2023 at par
+145
4.96 (2041)
Yes
No
Yes
A3/BBB+/nr
25.000 6/19/2013
2023 at par
+149
4.75 (2033)
Yes
No
Yes
Yavapai Community Hospital Association (AZ)
Palmetto Health (SC)
Cook Children's Medical Center (TX)
New Hanover Regional Medical Center (NC)
Palisades Medical Center (NJ)
Cape Cod Healthcare (MA)
St. Luke's Hospital of Bethlehem (PA)
Ascension Health (WI)
Par ($MM)
Aa2/AA/AA+
100.000 6/12/2013
2023 at par
+113.5
4.625 (2043)
Yes
No
No
Fairfield Medical Center (OH)
Baa2/nr/nr
96.600 6/12/2013
2023 at par
+169
5.18 (2043)
Yes
Yes
Yes
Beaver Dam Community Hospitals (WI)
nr/BBB-/nr
42.995 6/12/2013
2023 at par
+210
5.30 (2034)
Yes
Yes
Yes
nr/nr/nr
30.330 6/6/2013
2023 at par
+258.5
5.875 (2043)
Yes
Yes
Yes
Day Kimball Healthcare (CT)
Memorial Hospital (WY)
Nanticoke Memorial Hospital (DE)
St. Luke's Warren Hospital (NJ)
Riverside Health System (IL)
nr/BBB/nr
26.790 6/4/2013
2023 at par
+150
4.59 (2037)
Net Revenues
Yes
No
nr/BB+/BBB-
45.645 5/30/2013
2023 at par
+203
4.85 (2032)
Yes
Yes
Yes
A3/BBB+/nr
37.410 5/22/2013
2023 at par
+98
4.00 (2043)
Yes
No
Yes
A2/A+/nr
32.000 5/16/2013
2022 at par
+131
4.28 (2042)
Unrest. Rcvbles
No
No
Cleveland Clinic Health System (OH)
Aa2/AA-/nr
62.650 5/15/2013
2023 at par
+107
4.04 (2042)
Yes
No
No
Carolinas HealthCare System (NC)
Aa3/AA-/nr
127.260 5/15/2013
2023 at par
+65
3.56 (2039)
Yes
No
No
Skagit Regional Health (MO)
Baa2/nr/nr
27.360 5/15/2013
2023 at par
+150
4.35 (2037)
Yes
Yes
Yes
Beacon Health System (IN)
nr/AA-/AA-
162.835 5/9/2013
2023 at par
+134
4.23 (2044)
Yes
No
Yes
nr/A/nr
42.260 5/8/2013
2023 at par
+112
3.80 (2035)
Yes
No
Yes
Bowling Green-Warren County Community Hospital (KY)
MedStar Health (MD)
A2/A-/A
149.760 5/7/2013
2023 at par
+101
3.78 (2038)
Pledged Revs
No
Yes
A1/nr/AA
64.030 5/2/2013
2023 at par
+100
3.50 (2033)
Yes
Yes
Yes
Genesis HealthCare System (OH)
Ba1/BB+/nr
295.000 4/23/2013
2023 at par
+230
5.20 (2048)
Yes
Yes
Yes
Hanover Hospital (PA)
nr/BBB-/nr
15.610 4/16/2013
2023 at par
+180
3.66 (2024)
Yes
Yes
Yes
OhioHealth Corporation (OH)
Aa2/AA+/AA
226.000 3/27/2013
2023 at par
+104
4.15 (2043)
No
No
No
Doylestown Hospital (PA)
Baa2/BBB/nr
26.595 3/13/2013
2023 at par
+164
4.19 (2029)
Yes
No
Yes
Baa2/nr/BBB+
14.570 1/29/2013
2023 at par
+152
3.77 (2028)
Yes
No
Yes
Maine Health & Higher Ed (pool) (ME)
The Washington Hospital (PA)
10
Segmenting Market Risk
Fixed Rate Bonds
Hospital Rating
Variable Rate Debt
Bonds with Bank
Direct Bank
Facility
Placement/Loan
Synthetic Fixed Rate Debt
Bonds with Bank
Direct Bank
Facility
Placement/Loan
Interest Rate Risk
Risk of change in cost of funding due to fluctuation of interest rates
a
Trading Spread Risk
Risk that the interest rate widens from its relative index due to change
in investor perception of credit facility provider (bank or self-liquidity)
a
a
Put Risk
Risk that investors will put the bonds back to the credit provider or
trustee
a
a
Bank Renewal Risk
Risk that the pricing of the credit facility increases or the credit facility is
unable to be renewed
a
a
a
a
Counterparty Risk
Risk of bankruptcy or deteriorating financial position of a swap
counterparty
a
a
Termination Risk
Risk that a cancellation option is exercised by a counterparty
a
a
Basis Risk
Risk of change in interest rates and the payment/receipt on swaps due
to the value of tax exemption or market disruption
a
Tax Risk
Risk that changes in U.S. Tax Code could adversely affect trading of
bonds
a
11
a
a
Financing Option – Fixed Rate Bonds
Most conservative structuring alternative; Eliminates ongoing interest rate risk
Issue with a maturity of up to 40 years; Bonds typically not callable for 10 years
Bonds issued based solely on the credit strength of the borrower
Security, covenants and disclosure may include all, or most of the following:
Revenue pledge, mortgage, debt service reserve fund
Tightened liquidity and capital structure covenants – additional ratios have emerged, including variable
rate and short term debt ratios/measures
Quarterly disclosure
Credit rating from multiple agencies
Steepening yield curve
1-year yield has not
changed
Current 30-year yield
164 basis point
increase since the
low on November 30,
2012 (approximately
8 months)
100+ basis point
increase since May
15, 2013 (2 months)
4.50
4.14
4.00
3.50
3.00
2.50
2.00
07/19/13
1.50
07/08/13
1.00
05/15/13
0.50
11/30/12
0.00
1
2
3
4
5
6
7
8
12
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Current and Historical MMD Rates
AAA MMD
10, 20 and 30-Year Maturity Historical Rates
July 2011- July 2013
AAA MMD
30-Year Maturity Historical Rates
January 7, 2013 to Present
5.00
10 Yr MMD
4.50
20 Yr MMD
4.13
4.50
3.96
30 Yr MMD
4.00
4.00
4.14
3.50
3.83
3.00
3.52
3.50
2.50
3.00
2.00
1.50
2.79
2.50
1.00
0.50
• Municipal Market Index (MMD) "Municipal Market Data," is a proprietary yield curve for municipal market (tax-exempt) issues published
daily by Thomson Financial Services and widely used as a benchmark for determining interest rates on new issue and secondary market taxexempt issues.
• In November 2012, the 30-year MMD maturity fell to its historic low of 2.47%. As of July 19, 2013, the 30-year MMD maturity was 4.14%.
13
07/15/2013
07/08/2013
07/01/2013
06/24/2013
06/17/2013
06/10/2013
06/03/2013
05/27/2013
05/20/2013
05/13/2013
05/06/2013
04/29/2013
04/22/2013
04/15/2013
04/08/2013
04/01/2013
03/25/2013
03/18/2013
03/11/2013
03/04/2013
02/25/2013
02/18/2013
02/11/2013
02/04/2013
01/28/2013
01/21/2013
01/14/2013
06/27/2013
05/27/2013
04/27/2013
03/27/2013
02/27/2013
01/27/2013
12/27/2012
11/27/2012
10/27/2012
09/27/2012
08/27/2012
07/27/2012
06/27/2012
05/27/2012
04/27/2012
03/27/2012
02/27/2012
01/27/2012
12/27/2011
11/27/2011
10/27/2011
09/27/2011
08/27/2011
07/27/2011
06/27/2011
01/07/2013
2.00
0.00
Credit Spreads – Tax-exempt Healthcare Bonds
Healthcare Credit Spreads
Municipal Market Data High-Grade Yield Curve
30-year maturity spread to Bloomberg's 30-year AAA General Obligation Index
Industry standard (Both Buy Side and Sell
Side)
Represents where high-grade, natural Aaa
paper is trading
4%
The MMD curve serves as a benchmark for
municipal bonds just as Treasury bonds do
for corporate bonds
3%
5%
2%
1%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
AA Rated Healthcare Spread
BBB Rated Healthcare Spread
Source: Bloomberg
14
A Rated Healthcare Spread
10YR AAA MMD versus 10YR US Treasury Yields
5/2
MMD: 1.66
UST: 1.62
102%
15
7/12
MMD: 2.66
UST: 2.58
103%
Municipal Fund Flows vs 20 year MMD
Funds Flow
20Y MMD
6,000.00
5.00
4,000.00
4.50
2,000.00
4.00
3.50
0.00
3.00
(2,000.00)
2.50
(4,000.00)
2.00
(6,000.00)
1.50
(8,000.00)
1.00
(10,000.00)
0.50
(12,000.00)
0.00
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
Dec-10
YTD 2013: $8.5B outflows
June 2013: $10.7B outflows
*MMD is graphed at monthly average
16
Variable Rate Alternatives – Key Differentiating Factors
Variable Rate Demand Bonds
• Letter of Credit (LOC) or Standby Bond
Purchase Agreement (SBPA)
• Renewal Risk
• Basel III Regulatory Risk
Bank Purchased Bonds
Public Floating Rate Notes (FRN)
• Priced as spread to percent of LIBOR or
SIFMA
• Limited Put Risk
• Longer Tenor than Letter of Credit
• Newest Product
• Priced as a spread to LIBOR or SIFMA
• No LOC or SBPA required
17
Billions
Municipal Bond Issuance
$500
Fixed Rate
$450
$400
408.3
97.6
389.6
388.8
359.7
$350
$300
433.3
429.9
94.1
37.6
27.2
123.1
95.3
373.1
42.9
102.3
287.7
Variable rate issuance has declined
following the events of 2008 which
heightened awareness of certain
risks.
29.0
$250
$200
$150
Total municipal issuance peaked in
2010 followed by a sharp decline in
2011.
Variable Rate
409.7
310.7
264.4
294.7
366.8
327.6
175.5
395.6
345.9
266.5
13.9
258.7
$100
161.6
$50
$0
Billions
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
$50
2011
$45
2012
2013
$40
$35
$30
$25
$20
$15
$10
$5
$0
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
18
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
History of Municipal Variable Rate Bond Issuance
140,000,000,000
VRDB Issuance
$124,870,154,000
120,000,000,000
% Change 07-08
142% increase
100,000,000,000
80,000,000,000
% Change 08-09
67% decrease
60,000,000,000
$51,410,123,000
% Change 09-10
27% decrease
$41,502,630,000
40,000,000,000
$30,212,967,000
% Change 10-11
19% decrease
$24,447,686,000
% Change 11-12
2% decrease
$23,809,480,000
% Change 12-13
48% decrease
20,000,000,000
$12,387,902,448
0
2007
2008
2009
2010
19
2011
2012
2013
Annualized
Total VRDN Market Size ($000)
VRDN Market Size
$450,000,000
$430,000,000
$424,254,920
$417,181,468
$410,000,000
$390,000,000
$395,934,747
$391,844,805
$373,230,665
$370,000,000
$350,000,000
$344,078,555
$330,000,000
$310,000,000
$301,454,364
$290,000,000
$270,000,000
$250,000,000
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
20
Feb-11
Jul-11
Dec-11
May-12
Oct-12
Mar-13
Financing Option – Variable Rate Bonds with Bank Letter of Credit
Variable Rate Demand Obligation (VRDO) with Direct-Pay Letter of Credit (LOC)
Short-term multi-mode interest rate reset (daily, weekly, monthly, etc.)
Exposure to interest rate risk
Produces lower cost of debt when yield curve is normal (upward sloping)
Provides the most flexible redemption options
The bonds will be sold on the credit strength of the bank providing the LOC
LOC terms can be extended 3 to 5 years with annual renewal provisions
Interest rates at historically low levels
Successful remarketing each week
Bank letters of credit may be challenging to procure
Fewer options due to credit deterioration throughout the industry
Bank renewal concern
Pricing may be tiered to rating and/or financial performance
Ancillary business may be required
21
SIFMA Index
SIFMA – Median, Maximum and Minimum Rates
8%
(2000 to Present)
7%
6%
5%
4%
3%
2%
1%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Ma x
5.840
4.480
1.850
1.360
1.990
3.510
3.970
3.950
7.960
0.670
0.340
0.290
0.260
0.180
Mi n
2.930
1.100
1.010
0.700
0.870
1.480
2.930
3.090
0.850
0.220
0.150
0.070
0.060
0.050
Medi a n
4.190
2.380
1.350
1.060
1.075
2.515
3.475
3.610
1.820
0.380
0.270
0.175
0.160
0.100
10yr Rol l i ng Avg
3.415
3.237
3.097
2.958
2.799
2.665
2.667
2.663
2.535
2.246
1.863
1.621
1.500
1.488
22
Liquidity and Letter of Credit Trends
After spiking in early 2009, liquidity and LOC pricing has declined considerably
Depending on Credit Profile, Term and Structure
LOC pricing at 150+ basis point in early 2009, now as low as 60 – 125 basis points
Multi-year commitments now available (1 Year LOCs were common in 2008 and 2009)
Incremental business expectations have lessened, but continue
Greater variation in remarketing rates based on liquidity or LOC provider
Variation has settled somewhat, but market extremely sensitive
Fewer acceptable names causing greater concentration
Money market eligibility
Greater interest in self liquidity issues
Exclusion of “Auction Rate Mode”
Inclusion of a “Bank Mode”
Takes advantage of bank qualification
Can include “draw down” provisions
Especially beneficial for long construction projects
Conversion into public market may require additional work
Rating, Disclosure document, Remarketing agreement
Inclusion of an “Index Mode”
23
Access to Commercial Bank LOC’s
•
Highly Rated, Relationship Banks = Best Partner/Provider
– One-off transactions may not prove to be reliable long term (i.e., renewal/extension
concerns)
•
Pending Regulations
– Bank capital reserve requirements
– Direct Bank Placements may be offered as an alternative
•
Increased Awareness on Covenants and Other Terms/Conditions
– More restrictive covenants
– Increased focus on term out provisions, expiration dates (i.e., long-term balance sheet
classification)
– Grid pricing, rating triggers
– Yield protection language
•
Ancillary Requirements
•
Capacity/Hold Limits
24
US Banks’ Municipal Holdings – Cost Basis
2012
254.0
2011
207.8
2010
179.6
2009
As of December 31
1993 to 2012
Increase of $175.3 billion
222.7% increase
2012: 22.3%
2011: 15.7%
2010: 13.7%
158.0
2008
154.6
2007
144.2
2006
137.0
2005
124.3
2004
112.2
2003
109.3
2002
101.9
2001
97.7
2000
93.6
1999
92.0
1998
86.6
1997
76.5
1996
75.0
1995
73.8
1994
78.1
1993
78.7
0
50
100
150
200
25
250
300
What is a Direct Bank Placement/Loan?
A Direct Bank Loan is a financing structure in which debt is purchased by a financial institution instead of being
publicly sold / remarketed in the capital markets
Purchaser
- Buys debt from Issuer under Credit Agreement
- Holds debt at a variable index rate plus a fixed spread for a specified period
Bank Loan
Proceeds
Bank Loan
Issuer / Borrower
- Proceeds from bank loan used to finance tender of existing bonds or for new
money purposes
- Pays a fixed spread over variable index rate for initial purchase period
Tax-exempt Direct Bank Loan structures have been used with increasing frequency over the past two years due
to decreased bank capacity for letters of credit and significant number of expiring letters of credit on variable
rate bonds
Driven by borrowers’ desire to shed bank trading risk and lock in a fixed spread
26
Direct Bank Loan Structures
Similar to variable rate bonds
–
Direct Bank Loan is treated as another mode
–
Requires a Trust Indenture
–
Allows bonds to be converted to variable rate with letter of credit
–
Requires a Bond Trustee
–
Provides additional flexibility allowing borrower to convert to other modes in the
future
–
Bank covenants and terms in separate document (i.e. Bondholder Agreement,
Funding Agreement– similar to Reimbursement Agreement)
Alternative structure
–
No Trust Indenture
–
Bank covenants typically in Loan Agreement
–
Assumes debt will remain in Direct Bank Loan form
27
Bank Loan as an Alternative to a Public Offering
Direct Bank Loans have become an attractive alternative to public offerings of fixed or
variable rate bonds
Bonds are usually placed with a long-term maturity and can have periodic puts/renewals
(e.g., 3, 5 or 7 years)
Can be structured as variable or fixed rate (conventionally fixed based on cost of funds or
interest rate swap)
Variable rate are priced at a spread to LIBOR and adjusted by a tax factor
–
The credit/loan spread is determined by the credit profile of the borrower
–
Tax factor is typically 65-70%
–
Pricing may look like (70% of 1 Month Libor) + credit spread
28
Upfront Cost Comparison
Direct Bank Loan
Capital Markets
Official Statement/Disclosure Requirements
NO
YES
Rating Agency
NO
YES
Indenture
YES
YES
Tax-Exempt Opinion
YES
YES
Underwriter
NO
YES
Underwriters’ Counsel
NO
YES
Bank Counsel
YES
NO
Bond/Tax Counsel
YES
YES
29
Direct Bank Loan vs Direct-Pay Letter of Credit
Benefits of a Direct Bank Loan
Reduce remarketing risk by moving outstanding debt out of the capital markets and placing directly with the bank
– Avoid liquidity event caused by a failed remarketing
Reduce bank counterparty risk in uncertain environment for bank ratings
– Interest rate paid is tied to underlying index
– Rate not affected by changes in bank rating or investor sentiment
Reduce exposure to unexpected market shocks causing bonds to be “put back” by investors
Possible longer tenor on facility, reducing renewal risk
Possibly reduce annual costs by eliminating remarketing and trustee fees
Benefits of Direct-Pay Letter of Credit
Mature structure with full acceptance in the capital markets
Potentially lower up-front costs when switching credit providers due to familiarity of structure and consistency of
documentation across transactions. Up-front costs are becoming more comparable
More conducive structure for bonds with bullet maturities
– Direct bank loan may require some level of annual principal amortization
Multi-year term-out provisions typical in the event of a failed remarketing
– Term-out provisions are not typical with Direct Bank Loan structures
– Full principal is typically due at the end of purchase period if facility is not renewed or replaced
30
Floating Rate Notes (“FRNs”)
2012 through
2013 Year to Date
Number
of Issues
Issue Amount
Total FRN Market
80
$17.5 Billion
Healthcare
13
$1.3 Billion
BBB Healthcare
3
$306.0 Million
No bank support and no ongoing remarketing
Float relative to an index, typically SIFMA, but can be priced as a percentage of LIBOR. The pricing spread is
determined at the time of pricing and fixed for the duration of the Floating Rate Note Period
The Floating Rate Note Period is typically 1 to 5 years in length, but PNCCM has observed periods as long as
10 to 15 years
FRNs can be issued with either a hard put or a soft put. With a hard put structure, upon maturity or the
mandatory tender date, outstanding principal is due and failure to pay is an event of default
With a soft put structure, upon maturity or the mandatory tender date, failure to pay at the tender date
constitutes a “failed remarketing” and can trigger interest rate escalation to a maximum rate and/or
accelerated amortization. An FRN with a soft put could also be structured with an interest rate that
gradually “steps up” to the max rate instead of directly defaulting to max rate at the time of the failed
remarketing
FRNs generally are not subject to optional redemption until six months prior to the end of the Floating Rate
Note Period. If the FRNs are not retired at maturity or at the end of the Floating Rate Note Period, the FRNs
may be remarketed into a new Floating Rate Note Period or refinanced by new FRNs, variable rate demand
obligations (VRDBs), fixed rate bonds, or other obligations.
Market Overview of FRNs
The market for FRNs has grown significantly since the auction market collapse in 2008. Initial issuances
involved highly rated issuers, but FRNs are now available as a tool for issuers in a broad range of credit
quality
The market initially expanded as a result of reduced capacity in the bank market. More recently, the market
has grown as long-term municipal investors increase exposure to variable rate products to position for rising
rates. FRNs serve as a non-bank alternative to a traditional VRDBs
“Linked-rate” volume increased by 17.56% from 2011 to 2012. Volume increased 123% in the first quarter of
2013 over 2012, and we expect continued growth in this market
FRN Market Stats
2012-2013YTD
THOMSON-REUTERS SDC FINANCIAL REPORTED LINKED RATE ISSUANCE (000s) 1
# Issues
120
# Series
276
$16,000
Total Par
$18.7 B
$14,000
Ave Deal Size
$156 MM
$12,000
Max Deal Size
$964 MM
$10,000
Min Deal Size
$1 MM
$8,000
Ave Maturity Size
$68 MM
$6,000
Max Maturity Size
$964 MM
$4,000
Min Maturity Size
$1 MM
$2,000
Max Rating
Min Rating w/ insurance
Min Rating w/o insurance
Aaa / AAA
Baa3 *- / BBB- *BBB
$14,326
$12,340
$9,303
$3,773
$0
2010
1
Ma rch 31, 2013
2011
2012
2013
FRN Considerations
BENEFITS
Third-party credit and liquidity support is not
required – eliminating bank renewal risk,
counter-party risk and ongoing remarketing
risk
During the Floating Rate Note Period, the
bonds can not be tendered by investors
Borrowers can select SIFMA, LIBOR, or a % of
LIBOR as the underlying index. This may be
beneficial if the borrower has existing swaps
that they do not wish to terminate and can use
as a hedge for an FRN with a matching index
FRNs can be issued as part of a multi-modal
issue providing flexibility at the end of the
Floating Rate Note Period to refinance into a
variety of alternate structures (or a
subsequent Floating Rate Note Period)
CONSIDERATIONS
Interest rate risk is inherent to this structure and is
based on the selected underlying index (SIFMA,
LIBOR, or a % of LIBOR)
At the mandatory tender date or maturity, the
borrower is subject to refinancing risk and
potentially higher spreads to the underlying index
based on a change in market conditions, changes in
tax law, or the borrower’s credit profile
If structured with a “hard put” the borrower may be
required to fund the entire purchase price of the
FRNs. If structured with a “soft put” the interest
rate could escalate to the maximum interest rate
and/or accelerated principal payments (if
remarketing is unsuccessful)
Optionality within the structure is achievable but
the extent of optionality will be less than what is
embedded within a typical VRDB solution
Term on both put structures is getting longer, but
price discovery is critical in this phase of the
market’s development
FRNs- Hard Put vs Soft Put
Hard Put
Soft Put
A hard put can be incorporated in a structure with a mandatory tender or
A soft put is typically structured as part of a term mode remarketing of
maturity. Both structures typically incorporate a call date 6 months prior to
the principal payment date
multi-modal bonds, often with a call date 6 months prior to the soft put date
In soft put structures, investors will also focus on refinancing risks and the
An event of default occurs if the FRN is not funded on the date of the
maximum rate in the case of a failed remarketing
mandatory tender or maturity
The primary concern for investors is the ability of the borrower to access the
market at the mandatory tender date
Call Date
(6 months prior)*
HARD PUT
w/
maturity
Soft puts can be structured with a step coupon, where at the time of failed
remarketing the interest rate gradually steps up to increasingly penalizing
rates until it reaches the max rate
Maturity
Index + Spread
Nominal
Call Date
(6 months prior)*
HARD PUT
w/
mandatory
tender
Mandatory
Tender
Maturity
-Fixed Rate Bonds
-New FRNs
Index + Spread
-Alternative Variable Rate Structure
-Bank Solution
-Event of Default
Call Date
(6 months prior)*
Nominal
Maturity
Mandatory
Tender
-Fixed Rate Bonds
-New FRNs
SOFT PUT
Index + Spread
-Alternative Variable Rate Structure
-Alternative Mode
-Bank Solution
"Failed
Remarketing
Event"
*This is feature, not a structural requirement
-Refinance
-Floating rate resets to failed remarketing
rate (as defined in documents)
-Accelerated Amortization (term out)
Capital Structure Consideration
Offering Documents
Costs of Issuance
Public Rating
Optionality
Term
Market Access Risk
BANK FRN
(Direct
Purchase)
FIXED RATE
BANK LOAN
FRN PUBLIC
OFFERING 67%
of LIBOR
FRN PUBLIC
OFFERING
SIFMA
TAX-EXEMPT
FIXED RATE
NOTE
VRDB with
LETTER OF
CREDIT*
Not Required
Not Required
Required
Required
Required
Required
Bond Counsel +
Bank Counsel
Bond Counsel +
Bank Counsel
Full
Full
Full
Full
Not Required
Not Required
Required
Required
Required
Required
Full
Prepayment
Penalty
Difficult Given
Rating
(Expensive)
Difficult Given
Rating
(Expensive)
Difficult Given
Rating
(Expensive)
Difficult Given
Rating
(Expensive)
Short Term
Short Term
Retained
Retained
Retained
Retained
Retained
Retained
Indicative Pricing
3 Years
Floating Rate Note
Public Offering
10 Years
5 Years
Period
Spread to Index
1
2014
+ 5 bps
2
2015
+ 15 bps
3
2016
+30 bps
4
2017
+45 bps
5
2018
+55 bps
6
2019
+65 bps
7
2020
+75 bps
8
2021
+85 bps
9
2022
+95 bps
10
2023
+105 bps
11
2024
+115 bps
12
2025
+125 bps
13
2026
+130 bps
14
2027
+135 bps
Sources of Capital – Summary of Costs and Risks
30-Year Bond Yield
AA
Fixed Rate
A
Fixed Rate
BBB
Fixed Rate
VRDB with
LOC
VRDB Self
Liquidity
5.14% *
5.64% *
5.94% *
SIFMA *
100 bps
(3 year LOC)
SIFMA *
10 bps
SIFMA
+ 0.10%
70% 1M LIBOR
+ 1.25%
Letter of Credit/Bank Rate
Direct Bank
Placement
70% 1M LIBOR
+ 125 bps
5.14%
5.64%
5.94%
10 bps
SIFMA
+ 1.10%
Put Risk
No
No
No
Yes
Yes
No
Bank Renewal Risk
No
No
No
Yes
No
Yes
Bank/Credit Risk
No
No
No
Yes
Yes
No
Interest Rate Risk
No
No
No
Yes
Yes
Maybe
Tax Risk
No
No
No
Yes
Yes
Maybe
Borrower Downgrade
No
No
No
Yes
Yes
Yes
Reserve Fund
No
Maybe
Yes
No
No
No
Mortgage
No
Maybe
Yes
Maybe
No
No
Annual Remarketing
Cost of Capital
Risks
* 30-year Municipal Market Data on July 19, 2013 was 4.14%; SIFMA reset on July 24, 2013 at 0.06%.
Note: Yields are indicative estimates.
36
Capital Structure & Bank Renewal Consideration
Series
Outstanding
Par (000)
Mode
Average
Cost
Final
Maturity
LOC
LOC
Ratings Provider Expiration
Call
Date
Call
Price
Swap Variable
Receipt
Out. Notional
Swap
Swap
Amount (000) Fixed Rate Expiration
Fixed Rate
Series of 2012
$10,000,000 Bank Qualified
1.990%
1
12/2032
2
NR
Series of 2010
$23,415,000 Bank Qualified
3.040%
1
12/2017
4
NR
Series A of 2009
$19,040,000
Weekly VRDB
0.179%
3
12/2039
AA+/A-1 PNC Bank
07/2015
Any IPD 100%
Series B of 2009
$19,040,000
Weekly VRDB
0.179%
3
12/2039
AA+/A-1 PNC Bank
07/2015
Any IPD 100%
Series C of 2009
$20,000,000
Weekly VRDB
0.179%
3
12/2039
AA+/A-1 PNC Bank
07/2015
Any IPD 100%
TOTAL
$91,495,000
Variable Rate
Bank Renewal Risk
Fixed Rate Bank Loan
2
Bank has right to Put the note back on the 5th, 10th and 15th anniversaries
3
Average Remarketing Rate Since 7/23/2009
4
7 Year Maturity Date; 21 Year Amortization.
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
1
60,000,000
Series 2009 A
Series 2009 B
Series 2009 C
Series 2010
Series 2012
Capital Structure & Interest Rate Risk Consideration
Series
Outstanding Par
Fixed Rate Bonds
Series 2009B
Series 2010
Rate Mode
$111,530,000
$27,150,000
$138,680,000
Variable Rate Bonds
Series 2009A
$34,585,000
Series 2009C
Series 2009D
Final
Maturity*
LOC Bank/
Insurer
LOC
Expiration
Call Date
Call Price
Swap Variable
Receipt
Outstanding
Notional
Swap Fixed
Rate
Swap
Expiration
N/A
N/A
Fixed
Fixed
2/1/2038
2/1/2018
Assured
-
2/1/2019
Non-callable
Par
-
N/A
N/A
N/A
N/A
N/A
N/A
Variable
2/1/2035
LOC
4/2/2014
At all times
Par
N/A
N/A
$55,700,000
(as of last
audit)
N/A
N/A
N/A
3.51%
Through
maturity
N/A
N/A
$56,450,000
Variable
2/1/2033
LOC
5/13/2014
At all times
Par
(65% L) + 145 bps
$18,615,000
Variable
2/1/2039
LOC
5/13/2013*
At all times
Par
N/A
$109,650,000
Total Outstanding
$248,330,000
*EMMA indicates the LOC on Series 2009D expires May 2013 and LOC for Series 2009C expires in 2014. Bloomberg indicates both LOCs expire in 2013.
Composition of Underlying Debt
Fixed Rate
$138,680,000
56%
0%
10%
20%
30%
Variable Rate
$109,650,000
44%
40%
50%
60%
70%
80%
90%
100%
Interest Rate Exposure
Fixed Rate,
$138,680,000
56%
0%
10%
20%
30%
Synthetically Fixed
$56,450,000
23%
40%
50%
60%
70%
Variable Rate
$53,200,000
21%
80%
90%
100%
Standard Disclosure
PNC Capital Markets LLC ("PNCCM"), member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. PNCCM is
an affiliate of PNC Bank, National Association; however, it is not a bank or a thrift and is a separate and distinct corporate entity from its bank
affiliate.
This document is for informational purposes only. No part of this document may be reproduced in any manner without the prior written
permission of PNCCM. Under no circumstances should it be used or considered as an offer to sell or a solicitation of an offer to buy any of the
securities or other instruments mentioned in it. The information contained herein is based on information PNCCM believes to be reliable and
accurate, however, no representation is being made that this document is accurate or complete and it should not be relied upon as such.
Neither PNCCM nor its affiliates make any guaranty or warranty as to the accuracy or completeness of the data set forth herein. Opinions
expressed herein are subject to change without notice. The securities or other instruments mentioned in this document may not be eligible for
sale in some states or countries, nor suitable for all types of investors; and their value and the income they produce may fluctuate and/or be
adversely affected by changes in exchange rates or interest rates or other factors.
PNCCM and/or its affiliated companies may make a market or deal as principal in the securities mentioned in this document or in options or
other derivative instruments based thereon. In addition, PNCCM and its affiliated companies, shareholders, directors, officers and/or other
employees may from time to time have long or short positions in such securities or in options, futures or other derivative instruments based
thereon. One or more directors, officers and/or employees of PNCCM or its affiliated companies may be a director of an issuer of securities
mentioned in this document. PNCCM or its predecessors and/or affiliates may have managed or co-managed a public offering of or acted as
initial purchaser or placement agent for a private placement of any of the securities for any issuer mentioned herein within the last three
years, or may from time to time perform investment banking or other services for or solicit investment banking or other business from any
company or issuer mentioned in this document.
PNC Capital Markets is the marketing name used for investment banking and capital markets activities conducted by The PNC Financial
Services Group, Inc. through its subsidiaries PNC Bank, National Association and PNC Capital Markets LLC. Services such as public finance
advisory services, securities underwriting, and securities sales and trading are provided by PNC Capital Markets LLC. Foreign exchange and
derivative products are obligations of PNC Bank, National Association
39