New Clerk Academy Key West, Florida. OVERVIEW DEBT MANAGEMENT.

New Clerk Academy

Key West, Florida

OVERVIEW

DEBT MANAGEMENT

Objectives

Provide Overview of Debt Management Issues

Overview of Bond Progress

What is a Bond?• Similar to a home mortgage; long-term liability• Debt repaid from pledged revenues• Usually has maturity from 1-30 years• Many states issue primarily general obligation

bonds(full faith and credit)

• In Florida, general obligation bonds must be approved by voter referendum

• Florida governments issue mostly revenue bonds (secured by a specific tax or enterprise fund revenue)

Characteristics of Municipal Bonds

Exempt from Federal (and in some cases state) income taxes.Lower interest rates than corporate securitiesGenerally sold as serial bonds as opposed to term or bullet maturitiesExempt from SEC regulations (Tower Amendment)Dealers regulated by MSRB (Municipal Securities Rulemaking Board

Types of Municipal Debt

Bonds classified by source of securityYou can not pledge assets as security-only revenuesGeneral obligation (full faith and credit)Revenue bonds• Limited tax bonds• Enterprise bonds• Special assessment bonds

Housing BondsSpecial Assessment BondsIndustrial Revenue BondsLease/Purchase

Sources of Security

State Revenue SharingGuaranteed EntitlementSecond Guaranteed EntitlementAdditional State Revenue Sharing Funds

Local Government Half Cent Shared Sales TaxGas TaxesOne Cent Optional Sales TaxToursit Development TaxUtility RevenuesCovenent to Budet and AppropropriateUtility Tax Revenues

Overview of Bond Process

Bond History• Florida used to issue more general obligation

bonds• Florida Constitution requires referendum due to

bond defaults during the depression• As a state with many retirees, voters not inclined

to vote for debt due to fixed incomes and lack of community ties

• Florida governments needed to issue bonds to finance capital projects and began to use more revenue bonds to avoid referendum

• Credits became more complex, and bond buyers began favoring the use of bond insurance

Clerk’s Role

Varies county to county based upon tradition, knowledge, skills and personalities. Know your role and ensure there is agreement with BoardPart of financing teamMay prepare financing plan and participate in selection of external financing teamResponsible for financial disclosureSigns bond documents at closingSigns a statement of no omission of material facts

Finance Team

Principal Players• Staff• Bond Counsel• Financial Advisor• Underwriter• Disclosure Counsel/Underwriter’s Counsel• Rating Agencies• Consulting Engineer/Rate Consultant

Finance Team

Staff• Finance• Attorney• Administration• Operating department director

Role of Staff• Protect government’s interests• Obtain lowest borrowing cost (consistent

with risk) • Liaison with board members

Finance Team

Bond Counsel• Prepares legal documents• Opines on validity of bonds• Opines on tax exemption• Helps develop structure of debt• Adequate disclosure is the responsibility

of the issurer not bond counsel

Finance Team

Financial Advisor• Helps develop structure of debt

Variable vs. Fixed RateLevel debt service for each issue or level for all outstanding debtCoverageMaximum maturity of bonds

• Provides recommendation on economic feasibility of refunding

• Helps with selection of finance team• Conducts document review• Coordinates ratings and bond insurance• Advises on fairness of pricing, terms and bond

ratings

Finance Team

Underwriter• Purchases bonds from issuer for resale to

investors• Underwriters represents the buyers, not the

issurer• Based upon market demands, provide input

into the structure of financing• Monitors outstanding debt for refunding

opportunities• Conducts document review• Assists with ratings and bond insurance

Finance Team

Disclosure Counsel/Underwriter’s Counsel and Difference Between the Two• Assists with preparation of POS and OS• Provides knowledge of disclosure

requirements (including continuing disclosure)

Finance Team

Rating Agencies• Objective and expert evaluation of credit

Insured Ratings – Based on rating of bond issuerUnderlying Ratings – Based on rating of issuer and source of repayment of bonds

• Provide feedback on bond structure• Improve efficiency of market• Additional source of information for

investors on suitability of investment• Investment grade ratings enhance sale of

bonds

Finance Team

Consulting Engineer/Rate Consultant• Necessary for certain construction projects• Provides information on construction cost

and rate implications• Enhances credibility of project• Helps develop structure of debt

Finance Team

Paying Agent/Escrow Agent• Invoices issuer when debt payment is due• Makes payment to bondholders• Holds refunding escrow on behalf of

bondholders• Sends redemption notice to bondholders

for refunding

Finance Team

Other Participants• Accountants and Auditors• Credit Enhancers (Insurance, Letters of

Credit)• Verification agents (refunding)

Finance Plan

Topics• Debt Management Plan• Capital Improvement Plan• Pledged Revenue• Debt Structure• Method of Sale

Finance Plan

Debt Management Plan• Recommended practices by GFOA and

rating agencies• Parameters for issuing debt and refunding• Protects credit quality• Provides basis for making decisions• Demonstrates a commitment to long-term

financial planning

Finance Plan

Capital Improvement Plan• Considerations

Match projects with revenue sourcesIncreased operating expenses from new projectsDeferred maintenance itemsPrioritized and fully funded capital plansDebt service costs as percent of budgetBalance financing sources

• Fund balancesLevels, policies – formal vs. informal

Finance Plan

Pledged revenue depends on …• Type of project• Availability of revenues to pledge

Impact of debt service on operational fundingCash flow flexibility

• Bond CovenantsNew debt may be constrained by existing covenantsMaximize future flexibility with new covenantsBalance between flexibility and ratings. (The more flexibile your documents the more potential risk will be perceived by markets.)

Finance Plan

Debt Analysis• Review outstanding debt• Identify any refunding candidates • Debt service pattern and revenue cash flow• Consider existing and future debt

structures• Term of the debt (1-30 years)

Match life of the assetMatch duration of the pledged revenues

Finance Plan

Sale Process• Competitive• Negotiated• Private placement

Types of Debt• Fixed rate vs. variable rate• Rate swaps (fixed to variable or variable to

fixed)• Tax-exempt vs. taxable

Bond Ratings

What is a Bond Rating?• Measure of risk to bondholders• Agencies: S & P, Moody’s and Fitch• Reflects issuer’s ability and willingness to repay

debt on time and in full (who, how, what)• Denotes credit quality by rating level• Independent opinion (subjective process)• Forward looking projection• Each credit is unique

Bond Ratings

Bond rating is not…• …an audit• …a recommendation to buy, sell or hold a

security • …static or permanent• …an opinion of a community’s quality of

life• …a performance evaluation of current

political leadership• …a judgment of quality of service delivery

Bond Ratings

Value of Bond Ratings• Lower interest rates on bonds if

insurance purchased• Access to market for lesser known

credits• More efficient secondary market trading• Increased investor demand

Some institutional investors can only purchase certain rated securities

Bond Ratings

Rating Process• Send bond documents to rating agencies• Analysis• Have conference call or meeting• Complete analysis• Rating committee• Rating released• Surveillance

Bond Documents

Bond Resolution or IndentureOfficial StatementBond Purchase AgreementCompetitive Sale DocumentsContinuing Disclosure CertificateOther Documents

Bond Documents

Official Statement• Prepared by Disclosure Counsel or

Underwriter’s Counsel• Not a sales document• Disclosure standard

No untrue statementNo material omission

• Issuer is responsible for disclosure• Certificates and Opinions

Bond Documents

Bond Purchase Agreement• Contract between issuer and underwriter

for negotiated sales• Prepared by underwriter’s counsel• Executed after pre-marketing period• Includes

Transaction termsResponsibilitiesDocument requirements“Outs”

Bond Documents

Competitive Sale Documents• Notice of sale• Summary notice of sale• Bid forms• Prepared by bond counsel and financial

advisor

Bond Documents

Continuing Disclosure Certificate• Annual financial information• Material event notices• Electronic Municipal Market Access (EMMA)• Not required for private placements and

variable rate debt

Bond Documents

Other Documents• Closing Documents• Escrow Deposit Agreement• Insurance Agreements• Reserve Sureties• Investment Agreements

Pricing and Sale

Topics• Bond insurance

History and Current Status• Underlying ratings• Call features• Method of sale• Bond sale process

Pricing and Sale

Ratings• Investment grade ratings affect pricing

(lower yields)• Create more demand for and interest in

bonds• Greater universe of potential bond buyers• Assist in attracting more bidders at

competitive sale• Rating upgrades signal positive trend to

underwriters and investors

Pricing and Sale

Call Features• Optional redemption

Issuer’s right to prepay after a stated date at specific price

- Call Date – typically 8 to 10 years from date of issuance

- Call Premium – typically 100 at par (100 percent)

Pricing and Sale

Method of Sale• Competitive Sale

Underwriters bid against each other- Specific bid date and time- Sealed or electronic bid- Awarded by lowest true interest cost

• Negotiated SaleUnderwriter chosen prior to saleAssists with structuring and pre-marketingGreater market timing flexibilityPrivate Placement

Pricing and Sale

Negotiated Bond Sale Process• Establish target sale date• Monitor market for favorable conditions• Pre-marketing

POS mailed and emailedMarketing circular for sales peopleCommunication with potential buyers

- Conference calls- Direct mailings

Pricing and Sale

Negotiated Bond Sale Process (continued)• Day prior to sale have pricing call

Underwriter and financial advisorPreliminary yields

• Establish pricing structure (“scale”)Sale at parOriginal issue discountOriginal issue premiums

• Retail order periodDay prior to institutional order periodCommitted entirely to retail ordersPriority for local or Florida residents

Pricing and Sale

Negotiated Sale Day of pricing• Underwriter and FA confirm initial pricing• Underwriter “goes into market” around 9

a.m.• Receives retail and institutional orders

Individual investorsBond mutual fundsInsurance companiesBanks – own portfolios, trust departments

Pricing and Sale

Negotiated Sale--Day of pricing (continued)• Repricing

Changes in market conditionsSignificantly more or less orders than bondsYields may be decreased or increased based on orders

• Underwriter makes offer to underwrite to issuer• Issuer gives verbal award• Underwriter prepares final numbers• Bond purchase agreement finalized and signed

that afternoon or next day

Post Closing

Topics• Managing rating and rating agency

relationships• Maintenance of funds and accounts• Other resolution requirements• Arbitrage• Investment of proceeds

Ongoing Requirements

Maintenance of Funds and Accounts• Construction Fund• Revenue Fund• Debt Service Fund

Principal AccountInterest AccountAmortization AccountDebt Service Reserve Account

• Rebate Fund• Other accounts for enterprise activities

Ongoing Requirements

Other Resolution Requirements• Rate covenant• Additional bonds (parity) test• Permitted investments• Restriction on asset sales• Insurance or inspection requirements• Audited financial statements

Secondary Market Disclosure

Undertaking requirements is contact between you and bond holderEvent disclosure

OnGoing Requirements

Arbitrage• Bonds issued tax-exempt• If bonds proceeds invested taxable, interest

earnings may exceed interest expense on bonds

• Creates positive interest gain (arbitrage)• Interest in excess of bond yield must be

rebated to IRS every five years

Ongoing Requirements

Investments• Tax-exempt vs. taxable returns• Resolution restrictions• Integrate bond investment restrictions into

investment policies• Legal restrictions and arbitrage• Types of investments• Purchasing investments

Conclusion

Understand your role in the financing processUnderstand the bond documents and your ongoing responsibilitiesDefine who speaks to the market on behalf of your government.