Transcript Slide 0

PFM
Utility Financing 101
Presented by
PFM Public Power Group
September 14, 2009
Introduction
PFM
• Public Financial Management
-
Offering financial and investment advice to governments & not-for-profits
-
400 professionals in 30+ offices throughout the US
-
Two separate operating companies
Public Financial Management
PFM Asset Management
Financial Advice & Strategic Consulting
Investment Management & Consulting
$50+Bn/Yr Capital Markets Transactions
SEC Registered & Regulated
10 Person Public Power Group
Managing $35+ Billion of Client Assets
-
No bond underwriting or trading for our own account
-
Helping our clients maximize financial value
-
Within risk tolerances consistent with public sector objectives
1
Table of Contents
I.
Why Do Utilities Issue Debt?
II.
Basic Terminology
PFM
III. Debt Financing Process
Public Financial Management , Inc.
2
PFM
Why Do Utilities Issue Debt?
3
Why do utilities issue debt?
PFM
► New Money
•
•
New generation or transmission needs
Capital improvements
► Refinancing
•
Current interest rates are lower than rates on outstanding bonds (high-to-low)
► Debt Restructuring
•
Match life of the asset (license extended)
► Meet Immediate Cash Needs
•
Unforeseen market events (ARS meltdown)
► Why not just pass through new money needs to the rate payers?
ACME POWER
Last
Month
Current
Month
$100.00
$750.00
4
PFM
Overview of Municipal Market (2008)
Development, 1.8%
General Purpose, 17.9%
Education, 20.4%
Transportation, 11.0%
Electric Power and
Utilities, 13.2%
Public Facilities, 3.4%
Housing, 4.0%
Health Care, 13.5%
Environmental
Facilities, 1.7%
Source: The Bond Buyer 2009 Yearbook
Public Financial Management , Inc.
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PFM
Basic Terminology
6
PFM
What is a bond?
► Nominal or Coupon rate
► Simply put – a bond is a loan.
•
•
Buyer of the Bond is the lender or
investor
Seller of the Bond is the borrower or
the issuer
•
•
► Price
•
► Principal or Face Amount or Par
Amount
•
Amount a lender will lend in
consideration of future receipt of
principal and interest payments
► Yield
•
Amount of loan
► Maturity date
•
Interest rate paid periodically on the
loan
Usually expressed as a percentage of
par amount
Single rate that sets the PV of the
principal and interest payments equal
to the price
Repayment date of loan
Principal
Annuity of Interest
Maturity
7
PFM
Types of Bonds
► Fixed Rate Bonds – bonds whose interest rates remain constant over the life of the
issue. These rates are determined on the date the bonds are priced.
0
► Variable Rate Bonds (VRDBs, ARS): bonds whose interest rates change at specified
intervals over the life of the issue. They may be adjusted on a daily, weekly,
monthly, annual or longer-term basis
0
Public Financial Management , Inc.
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When is interest paid?
PFM
► Current Interest Bonds (CIBs) : pay interest periodically from the date of issue
0
► Capital Appreciation Bonds (CABs): or zero coupon bonds pay interest at maturity.
0
► Convertible CABs/Deferred Interest Bonds (DIBs): pay interest beginning at a date
later than issuance, but prior to maturity.
0
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PFM
Serial Bonds
► All or a portion of an issue with stated maturities in consecutive years.
Millions
20
Serial Bond Structure
18
16
14
12
10
8
6
4
2
2010
2011
2012
2013
Maturity
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Principal
7,950,000
8,350,000
8,765,000
9,205,000
9,665,000
10,145,000
10,655,000
11,185,000
11,745,000
12,335,000
Totals
100,000,000
Public Financial Management , Inc.
2014
Coupon
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
2015
2016
2017
2018
2019
Interest
5,000,000
4,602,500
4,185,000
3,746,750
3,286,500
2,803,250
2,296,000
1,763,250
1,204,000
616,750
Debt Service
1,486,111
14,070,000
14,066,500
14,070,500
14,070,500
14,070,500
14,069,250
14,065,500
14,068,000
14,070,000
29,504,000
128,106,861
10
PFM
Term Bonds
•
What are the implications if you are selling 30-year bonds and investors are only interested in
years 1-24 and year 30?
1
24
30
–
Debt service structure will not be level
–
Yields may have to increase in order to interest buyers in years 25-29 (increased cost to you)
• To mitigate this, underwriters may spread out the 30 year par amongst the 25-30 year maturities
as mandatory sinking funds. All maturities will be priced to the 30 year period.
1
24
30
11
PFM
Debt Financing Process
12
PFM
Overview
Plan of Finance
•
•
•
•
•
Select the Team
Determine project cost & timing
Identify source of repayment
Size & structure the bonds
Determine method of sale
Legal Framework
•
•
•
•
Board approval, if required
Public notice & hearing, if required
Tax analysis & due diligence
Prepare disclosure document (official statement)
Marketing
•
•
•
•
Obtain ratings
Obtain credit enhancement, if needed
Underwriter & investor out reach
Sell & price the bonds
Administration
Public Financial Management , Inc.
• Closing/money transfer
• Invest bond proceeds
• Begin project & track progress
• Make principal & interest payments
• Monitor for refinancing opportunities
• Comply with Arbitrage Rebate Regulations (IRS/Tax Code)
• On-going disclosure by complying with SEC Rule 15( c)2-12
13
Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
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Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
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What type of sale should I use?
PFM
► Negotiated
•
•
•
•
Identified underwriting team prior to sale date
Negotiated underwriting spread
Pro-active marketing campaign
Assistance in developing plan of finance and legal framework
► Competitive
•
•
•
Underwriting team selected based on bid rate/spreads (TIC)
Less pre-sale marketing
FA and Client staff jointly develop plan of finance
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PFM
Who is involved?
Financial
Advisor
Verification
Agent /
Accountant
Registrar
Paying Agent
Escrow Agent
Tax
Counsel
Bond
Counsel
Special
Counsel
ACME
POWER
Underwriter
Credit
Enhancers
Bond
Insurers
UW
Counsel
Trustee
LOC/
Liquidity
Providers
Rating
Agencies
Trustee
Counsel
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Responsibilities of the Issuer
PFM
► Before issuance:
•
•
Select financing team: Bond Counsel, Financial Advisor and Underwriter
Understand the financing plan and chooses the financing structure
► After issuance:
•
•
•
•
•
•
•
•
Supervising, investing and administering the expenditure of bond proceeds
Collecting, or monitoring the collection of revenues (taxes)
Use of revenues to pay operating expenses and debt service
Compliance with all undertakings, covenants and agreements
Management of any enterprise funded by the debt
Filing of any required reports with various governmental regulators, a bond insurer or other
credit enhancement provider, if any, and credit rating agencies
Addressing any problem that may arise with respect to the bonds, such as a shortfall in
revenues, a tax audit or a regulatory issue
Preparing, reviewing, and filing Annual Reports and Listed Event Notices under SEC Rule
15c2-12
*Certain information taken from the CDIAC Primer of 2006
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Financial Advisor
PFM
► The financial advisor is a professional consultant retained to advise and assist the
issuer by:
•
•
•
•
•
•
•
Determining financing needs and preparing analyses and plans
Evaluating financing options (long-term vs. short-term debt) and different types of securities
under difference scenarios
Recommending negotiated or competitive sales
Assisting in underwriting selection for negotiated sale
Assisting in preparation of documents (official statement and notice of sale) for competitive
bonds sales
Preparing for and participating in rating agency presentations
Giving advice during pricing and sale of bonds
*Certain information taken from “The Fundamentals of Municipal Bonds”
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Selection of the Financial Advisor
►
PFM
General Request for Proposal (RFP) Format
•
•
•
Turnaround time: 1-2 weeks
Page/ font size limitation
Questions:
-
-
General firm information (i.e., history, managerial organization, etc.)
Local Office
Team/Resumes
Applicable Transactional History (i.e., negotiated, lease revenue, higher education, general
obligation, etc.)
Structuring Discussion (i.e., suggested structures for new debt, re-organization of old debt,
incorporation of new products, etc.)
Fees
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Bond Counsel
PFM
► Bond Counsel is a lawyer who opines upon the security, legality, and tax-exemption
of an issue.
► Essential every municipal security is accompanied by an opinion of bond counsel,
who represents the legal interests of the bondholders. That opinion addresses that:
•
•
The bonds constitute legal, valid and binding obligations of the issuer
Interest on the bonds is exempt from federal income taxation under applicable tax laws
The bond opinion does not make financial recommendations or represent a financial
judgment as to the acceptability of the bond for the investor
► Other responsibilities of bond counsel:
•
•
•
•
•
Prepares and supervises bond proceedings
Obtains necessary approvals from governmental authorities
Discloses and examines litigation that may jeopardize the validity of the offering
Interprets arbitrage regulations and tax law and provides guidance on structuring
Drafts key financing documents
► Bond Counsel May NOT be Underwriter’s Counsel
*Certain information taken from “The Fundamentals of Municipal Bonds”
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Underwriter
PFM
► An underwriter is a securities dealer who helps government entities bring bond
issues to market by purchasing a bond from an issuer and reselling it to investors.
•
•
•
•
Sets prices and yields on new issues, working closely with traders and salespeople to
determine the right price
May act together or with more firms through a syndicate
Ensures that appropriate continuing disclosure undertakings are entered into by the issuer
to show compliance with SEC Rule 15c2-12
After sale, confirms orders, delivers and pay for bonds, and meets various legal
requirements
► In a negotiated sale, the issuer, prior to the sale date, selects a lead underwriter(s),
who coordinates and manages the financing through all of its stages:
•
•
Leading up to the bond sale the underwriter is a critical member of the finance team,
opining on how various legal and structural decisions will impact the marketability of the
eventual bond issue.
Obtains agreement from the underwriting syndicate to the interest rates and terms of sale
for the bonds
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Underwriter RFP Process
►
Client issues Underwriter RFP
•
•
•
►
Similar to FA RFP:
Lead, Co-manager, Selling Group role selection (vs. sole vs. joint)
List of transactional experience (i.e., roles, size, etc.)
FA usually maintains responsibility of summarizing RFP responses
Client and FA develop “short-list”
Underwriter Short-List Presentation*
•
•
•
►
PFM
Client Staff and Financial Advisor Panel
30-45 minute presentations
10-15 minute Question and Answer period
Underwriter Selection
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PFM
Syndicate of Underwriters
► Using a syndicate of underwriters can greatly improve the sale of bonds
•
•
Individual firms may lack the ability to underwrite entire transactions on their own
Multiple firms can be strategically organized to garner broader retail interest
Senior/Co-Senior
Manager
•
•
•
•
Leads syndicate
Assists with structuring of bonds
Assists with credit package
Manage marketing of bonds and institutional investor communication
Co-Managers
• Provide greater network to sell bonds
• Provide additional capital to underwrite bonds
• Provide additional color on marketplace
Selling Group
• Firms with a strong local presence and healthy retail network
• Manage local marketing efforts
• Target retail investors
Public Financial Management , Inc.
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Underwriter’s Counsel
PFM
► Underwriter's counsel is customarily selected by the underwriter to:
•
•
Represents the underwriter and its interests in a negotiated sale
Competitive sales generally do not require the retention of underwriter’s counsel
► Underwriter’s counsel customarily review, from the underwriter’s perspective, the
documents prepared by bond counsel and negotiate matters relating to those
documents on behalf of the underwriter.
► Underwriter’s counsel conducts a thorough due diligence analysis of the issuer.
•
Due diligence involves questions the issuer and important related parties about their
financial conditions, plans, reports, and other factors that are important for the purchaser to
know in order to make an investment decision.
► Underwriter’s counsel also prepares the bond purchase agreement of contract ,
pursuant to which the debt is sold to the underwriter.
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PFM
Rating Agencies
► Credit rating agencies are firms that analyze the probability of the debt instrument
returning all of the principal to the investor
► Municipal credit ratings are opinions of the relative investment quality of issuers and
issues in the municipal and tax-exempt markets
•
Underwriters and investors rely upon the credit quality judgment made by the rating
agencies
► The municipal bond market has slightly different
rating criteria from the corporate debt market owing
to the unique characteristics inherent in public debt
► Credit considerations may include:
•
•
•
•
•
•
Management, governance and business strategy
Market position
Service area
Financial position
Debt and capital plan
Legal framework
Public Financial Management , Inc.
INVESTMENT GRADE RATINGS
MOODY’S
S&P
FITCH
Aaa
AAA
AAA
Aa1
AA+
AA+
Aa2
AA
AA
Aa3
AA-
AA-
A1
A+
A+
A2
A
A
A3
A-
A-
Baa1
BBB+
BBB+
Baa2
BBB
BBB
Baa3
BBB-
BBB-
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PFM
Trustee
► The trustee is responsible for carrying out the administrative functions that are
required under the bond documents, which may include:
•
•
•
•
Establishing and holding the funds and accounts relating to the bond issue
Authenticating the bonds
Paying principal and interest on the debt
Protecting the interests of bondholders by monitoring compliance with covenants and acting
on behalf of bondholders in the event of default
► The trustee generally acts as the liaison to the bondholders, particularly when a
decision needs to be made about restructuring the debt or making only a partial
repayment.
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PFM
Credit Enhancement
► Entities that guarantee or
insure in one form or another
the sufficiency of revenues to
pay the bonds
Previous Ratings
(December 2007)
Insurance
Company
Ambac
► In each case the purpose of
the credit enhancement is to
provide:
•
•
Additional security for the
bonds that improves the
credit rating of the bonds
Lower borrowing cost to the
issuer
Assured
CIFG
FGIC
FSA
MBIA/NPFGC
Public Financial Management , Inc.
S&P
Moody's
Fitch
S&P
Moody's
Fitch
AAA
Aaa
AAA
CC
Caa2
n/a
AAA
Aaa
AAA
AAA
Aa2
AA
AAA
Aa1
n/a
Berkshire
Hathaway
XLCA/Syncora
Current Ratings
not in market
AAA
Aaa
AAA
n/a
Ca
n/a
AAA
Aaa
AAA
CC
Caa2
n/a
AAA
Aaa
AAA
n/a
n/a
n/a
AAA
Aaa
AAA
AAA
Aa3
AA+
AAA
Aaa
AAA
A
Baa1
n/a
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Others
PFM
► Bond registrar - maintains a list of the names and addresses of all registered owners
of the bonds and recording transfers and exchanges of the bonds
► Authenticating agent - authenticating bonds upon initial issuance or upon transfer or
exchange
► Paying agent - paying interest on the bonds by check or wire to the respective
registered owners, and paying principal of the bonds to the registered owners upon
surrender of the bonds at maturity or upon earlier redemption
► Escrow agent - holding the investments acquired with the proceeds of an advance
refunding and using payments on those investments to pay debt service on the
refunded bonds
► Dissemination agent - acting on behalf of the issuer or other obligated person to
disseminate annual reports and event notices to repositories under SEC Rule 15c212
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Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
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“Kick-off” Meeting
►
Working Group:
•
•
•
•
•
•
•
►
PFM
Client staff
Financial Advisor
Bond Counsel
Lead Underwriter
Underwriter’s Counsel
Trustee
Trustee Counsel
Agenda
•
•
Roles and Responsibilities
Financing Timetable (approximately 8-12 weeks)
-
Documents (i.e., Indenture, Supplemental Indenture, POS, Official Statement, Bond
Purchase Agreement, Verification Agent Report, Investment Agreements, etc.)
Meetings with Rating Agencies
Printing
Mailing POS (i.e., pre-marketing)
Pre-Pricing/Pricing
Closing
31
Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
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What goes into Bond Documents?
PFM
► Official Statement
•
•
•
•
•
Similar to a prospectus for investors
Purpose of the issue
Description of the bonds
- Security
- Debt Service Reserve Requirements
- Additional Bonds Test
- Optional/Mandatory Redemptions
Description of the Issuer
Tax Opinion
33
Mandatory Redemption Provisions
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PFM
34
Mandatory Redemption Provisions (cont’d)
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PFM
35
PFM
Optional Redemption Provisions
► An optional redemption (or call) provision allows the issuer to redeem bonds on a
date prior to final maturity at a pre-set price (usually par).
► The call provisions are described in the bond resolution and official statement.
► A series of call dates may be specified for different lengths of time.
► If the bonds are to be called on the first call date at a premium to par, bonds called
on subsequent call dates will generally be redeemed at descending prices.
► For example:
OPTIONAL REDEMPTION
The Bonds maturing on or before November 1, 2010 shall not be subject to redemption prior to
maturity. The Bonds maturing on or after November 1, 2011 shall be subject to optional redemption by the
City on or after November 1, 2010 in whole at any time or in part from time to time in such order as
determined by the City and by lot within a maturity (if less than a full maturity is to be redeemed) at the
respective prices which are expressed as percentages of the principal amount of the Bonds to be redeemed,
together with the interest accrued thereon to the date fixed for redemption:
Period During Which Redeemed
(Both dates are inclusive)
November 1, 2010 through October 31, 2011
November 1, 2011 through October 31, 2012
November 1, 2012 and thereafter
Public Financial Management , Inc.
Redemption
Price
101.0%
100.5
100
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Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
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What do the rating agencies need to know?
PFM
► Work with FA and underwriter to prepare presentation for meeting with the rating
agencies
•
•
•
•
•
•
•
Organization and management
Financial condition
- Debt service coverage, fixed charge coverage, liquidity
Service area
Rate competitiveness
Top power purchasers
Specifics of upcoming deal
Other changes?
► Meeting can take place on-site, in NYC, or via conference call
► Rating process typically takes 3-4 weeks
38
Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
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Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
40
Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
41
Pre-marketing of the bonds
PFM
► Posting of the POS
•
•
Typically 1 – 2 weeks prior to pricing
Allows potential investors to do their “homework” on the credit
► Underwriter communication to investors
•
Internet Roadshow
- Issuer summarizes their current financial position and the transaction via conference
call and webcast to potential investors
- Gives investors the opportunity to ask questions
- Puts the deal on the calendars
► Local newspaper, bond buyer advertisements
► Time is more important than ever
42
PFM
Who buys tax-exempt bonds?
► Three classes of investors
dominate the municipal
market.
Lif e insurance
companies, 1.46%
State & local gov't retirement
f unds, 0.03%
Brokers & dealers, 2.06%
Savings institutions, 0.40%
Property & casualty
insurance, 13.43%
Rest of the world, 1.26%
1.
2.
3.
Households, consisting of
individuals acting directly or
through investment counsel
Household proxies – bond
funds such as mutual funds,
money market funds, bank
personal trusts and
investment trusts
Institutions, particularly
commercial banks and
property and casualty
insurance companies.
State & local gov't general
f unds, 0.21%
Government-sponsored
enterprises, 1.27%
Nonf arm noncorporate
businesses, 0.22%
Commercial banks,
7.35%
Nonf inancial corporate
businesses, 1.53%
Households, 34.99%
Closed-end f unds, 3.50%
Money market f unds, 18.09%
Mutual f unds, 14.20%
Source: The Bond Buyer Yearbook 2007
43
PFM
Investor Preferences
6.0%
Maturities of 1 Year or Less
Individuals
Corporations
Tax-Exempt Money Market
Funds
5.0%
Yield
4.0%
20 to 30 Year Maturities:
Open-end Mutual Funds
Closed-end Mutual Funds
10 to 20 Year Maturities:
Intermediate Mutual Funds
Insurance Companies
3.0%
5 to 10 Year Maturities:
Individuals
Investment Advisors
Intermediate Mutual Funds
Insurance Companies
2.0%
1.0%
1 to 5 Year Maturities:
Individuals
Investment Advisors
Bank Trusts
Insurance Companies
0.0%
0
Public Financial Management , Inc.
5
10
15
Years to Maturity
20
25
30
44
Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
45
PFM
Pre-Pricing Call
► Market update
► Initial price views from underwriters
ACME Power
Series 2009
2 Price Views
3
1
Maturity
2010
2011
2012
2013
2014
2015
2016
2017
Senior
Manager
75
80
85
85
85
95
98
98
Co #1
80
85
90
90
90
95
100
100
Co #2
75
80
85
90
90
100
105
105
Co #3
63
70
75
80
85
90
95
95
4
Co #4
175
180
185
185
185
195
198
198
Min
63
70
75
80
85
90
95
95
Max
175
180
185
185
185
195
198
198
Avg
94
99
104
106
107
115
119
119
► Internal discussion with FA
► Decisions made regarding designation and liabilities
46
Day of Pricing
PFM
► Pricing: Where the Fun Part Begins
► Pricing Is a Function of Everything
•
•
•
•
•
•
•
•
•
•
•
•
Underwriters canvas the market and develop a recommended scale
Provide the consensus views of the other underwriting group member
FA provides market comparables that are an essential tool (just use the favorable ones)
Other supply in the market is important
Market tone and economic announcements come into play
Some bonds have narrow pricing expectations, others are more of a fishing expedition
Release a Preliminary Pricing Wire to Investors (9-10AM)
Investors place orders (9-12 Noon)
Issuer, Underwriter, FA review the order book (Noon-1PM)
Adjustments to rates to reflect either strength or weakness of demand
Upon agreement, underwriter makes formal offer to buy bonds on behalf of the group
FA takes credit for success or blames underwriter for any problems (Ongoing)
47
Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
48
Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
49
What do you do at closing?
►
PFM
Pre-closing/Closing Includes:
•
•
•
Documentation requiring Client signatures
POS/OS
Closing memorandum
- Wiring Funds: Underwriter to Trustee, Escrow Agent, Insurer (up-front premium), Client (costs of
issuance)
•
•
•
•
•
•
•
•
Indenture
Supplemental Indenture
Bond Purchase Agreement
Verification Agent Report
Escrow Report
8038 Form (Arbitrage yield)
Final numbers
Costs of Issuance
50
Timeline of a Bond Issuance
Date
Prior to Week 1
Week 1
Week 2
Week 3-12
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10
Week 12
Post-Pricing
PFM
Action
● Determine Type of Sale and Select Financing Team
● Kickoff meeting to discuss timing ,structure and drafting of disclosure documents
● Draft bond documents circulated: POS, Resolutions
● Continuous review and revisions to bond documents
● Credit Packages prepared and distributed to Rating Agencies
● Rating agency meetings on-site or in NYC
● Financing approved by Board/Commission
● Receive ratings
● Finalize, print and mail POS
● Pre-marketing of bonds
● Pre-pricing call
● Retail order period
● Bond pricing
● Final cash flows distributed
● Bond Purchase Agreement signed
● Bond Closing - Proceeds delivered
● Investment of Bond Proceeds
Public Financial Management , Inc.
51