Transcript Municipal Bonds – Credit Enhancement: Ratings and Insurance

Linda Loup – Southwest Securities, Inc.
Allen Douthitt – Bott & Douthitt, P.L.L.C.
Jim Binette – Assured Guaranty
Lauren Spalten & Todd Helman– Standard &
Poor’s Corporation


In young districts, the initial installment (or
first few installments) of bonds are usually
issued as non-rated /non-insured bonds.
As the assessed value in the district grows, the
district’s financial health improves and other
criteria are met, a district may qualify for
ratings and/or insurance on subsequent bond
issues (credit enhancement).


The use of the credit of an entity other than the
issuer to provide additional security for the
repayment of a bond.
Most common types of credit enhancements
available to water districts:


Investment Grade Ratings
Bond Insurance



Evaluations of the credit quality of bonds made by
rating agencies.
Intended to measure the probability of the timely
payment of principal and interest on municipal
securities
Ratings are based on certain criteria (total AV,
fund reserves, tax collection %, debt to AV ratio,
etc.)


Ratings often are assigned upon issuance of the
bonds, are periodically reviewed and may be
amended to reflect changes in the issuer’s
credit position.
The ratings may derive from the credit
worthiness of the issuer itself or from a credit
enhancement feature of the security (i.e. the
rating of the bond insurer).

Two major rating agencies for municipal
bonds:


Standard and Poor’s Corporation (“S&P”)
Moody’s Investors Service (“Moody’s”)
Investment Grade Ratings
S&P
Moody's
Description
AAA
Aaa
Minimal Credit Risk
AA+
Aa1
AA
Aa2
AA-
Aa3
A+
A1
A
A2
A-
A3
BBB+
Baa1
BBB
Baa2
BBB-
Baa3
Very Low Credit Risk
Low Credit Risk
Moderate Credit Risk


Purpose of credit enhancement: to reduce the
interest rate on bonds.
Lower interest rates mean reduced interest
costs to the district.
Allows district to issue all bonds necessary to
reimburse the developer faster;
 More M&O allotment of total tax rate;
 May be able to reduce total tax rate sooner.

Water District Bond Sale Results – Week of February 19, 2013
District
Waterwood MUD Harris Co. MUD No.
No. 1
468
East Cedar Creek
FWSD
Fort Bend Co. LID
#15
Par Amount
$2,215,000
$4,630,000
$1,435,000
$6,000,000
Insurance
No Insurance
No Insurance
Yes
No Insurance
Underlying Rating
Non-rated
BBB
A
Non-rated
Insured Rating
N/A
N/A
AA
N/A
Sale Date
2/19/2013
2/20/2013
2/20/2013
2/25/2013
Interest Rate
4.112600%
3.797000%
3.257200%
3.9104%
District Name
Sold
Rated
Insured
Interest Rate
Harris Co. MUD #172
1/22/13
BBB+
Yes
3.2956%
Shasla PUD
1/17/13
BBB+
No
3.6069%
Interest Cost Savings Due to Bond Insurance:*
Total Interest Cost – Non Insured (3.6069%):
$841,489.80
Total Interest Cost – Insured (3.2956%):
764,579.20
Total Savings Due to Bond Insurance:
$79,910.60
Calculation based on 20 year bonds and a bond par amount of $2,000,000 for purposes of illustration.
District Name
Sold
Rated
Insured
Interest Rate
Harris Co. ID #18
2/27/13
BBB-
No
3.5376%
Waterwood MUD #1
2/19/13
No
No
4.1126%
Interest Cost Savings Due to Bond Rating:*
Total Interest Cost – Non Rated (4.1126%):
$972,424.38
Total Interest Cost – Rated BBB- (3.5376%):
822,492.00
Total Savings Due to Rating:
Less Cost of Rating:
Net Savings Due to Rating:
$149,932.38
(9,500.00)
$140,432.38
Calculation based on 20 year bonds and a bond par amount of $2,000,000 for purposes of illustration.

Once district meets minimum criteria for a
rating and/or insurance, the financial advisor
makes application to the rating agency and
insurance companies on behalf of the district.
General Financial Overview
 Preliminary Official Statement
 Past 3 Years Audited Financial Statements
 Finance Plan
 Budget / Bookkeeping Report


An important criteria in the assignment of a
rating and/or bond insurance is the district’s
financial strength
Large tax base (high assessed valuation)
 No developer advances
 Sufficient fund reserves
 High % of taxes collected
 Overall debt burden and overlapping debt %


Linda Loup: [email protected]


Allen Douthitt: [email protected]


512-733-0700
Jim Binette: [email protected]


512-320-5859
212-408-6005
Lauren Spalten: [email protected]

214-871-1421