Nova Scotia Municipal Finance Corporation Overview, Programs, Debenture Process, Fact/Fiction Village Presentation at Bible Hill September 24, 2010.

Nova Scotia Municipal Finance Corporation

Overview, Programs, Debenture Process, Fact/Fiction

Village Presentation at Bible Hill

September 24, 2010.

Outline of Presentation MFC and its Role Role of the MFC in Financing How the MFC fulfils its’ role Programs Offered by the MFC Why come to the MFC

Role of SNS&MR in the Debenture Process MFC Debenture Process

– Two stage process Fact or Fiction about the MFC Debentures Your Thoughts

MFC and its Role Provincial Crown Corporation incorporated under the

Municipal Finance Corporation Act in 1979. Governed by a Board of Directors, 40% of whom must

be appointed by the UNSM (2 members – & added AMA member).

100% funded by municipalities through their participation in a debenture issue (Reserve charge).

“The Corporation’s objective is to provide financial assistance for municipalities, municipal enterprises, school boards, and hospitals through a central borrowing authority.” (Municipal Finance Corporation Act, s. 7)

MFC and its Role “To provide financing to its clients for approved capital

projects at competitive rates, within acceptable risk parameters, and to provide advice and assistance to clients regarding financial management” (MFC Corporate Business Plan).

Expanded our role to include financial management capacity building for municipalities – 32 Best Practices

– http://www.gov.ns.ca/nsmfc/programs.htm– Budgeting and Financial Reporting / Cash Management / Accounting & Auditing / IT / Policy

Development of long-term planning models– Debt Affordability Model (Municipal, & Water/Wastewater versions)

Role of the MFC in Financing

Mandate – to provide low cost financing to our clients for approved capital projects and to build financial management capacity (low interest rates by using the provincial

guarantee).

Advice and assistance – work with clients on debt policies, capital improvement plans, financing structures, and financial estimates of financing scenarios.

Historical trend analysis, and technical support on costing of alternatives (ie. Pro-forma repayment schedules).

How the MFC fulfils its’ role. Issuance of pooled debentures –pooled debentures

allow for a critical mass that is attractive to investors. Municipalities save administrative, legal, accounting and

issuing fees through the use of the MFC. Development of various programs – short term loan

program, and the FCM Green Fund. Development of financial best practices and models in

partnership with the AMA and SNS&MR.

Programs Offered by the MFC

Short term financing – Up to a one year period to bridge the gap between when the project is completed until long-term financing is put in place

– (MFC uses its reserve and lends at a rate of BMO prime less 1%).

Long-term debt through debentures: Serial Issues (equal

annual principle repayments), Bullet issues (principle due at maturity), and Blended issues (equal annual P&I repayment – same as bank loan).

Special Issues: FCM Green Fund (6 loans), or Single Placements (Lake Major water project in 1998; Harbour Solutions in 2003)

Programs offered by the MFC

Building financial management capacity:– Of interest to both SNS&MR and the MFC as both want

healthy and viable municipalities. (Mun. to have a long-term vision)

– Sponsorship of a finance professional to attend the GFOA annual conference. (networking, and “others” have/solved same issues)

– Fund joint AMA/MFC committee developing GFOA adopted best practices for Nova Scotia municipalities.

Development of long range planning tools and models through either municipal requests, AMA, SNS&MR, or client survey feedback.

Why come to the MFC Municipalities are legislated to (MGA S91.2), but a better answer

is that the MFC offer’s the lowest cost of funds available for capital financing.

The MFC can offer advice and assistance on financing options.

MFC staff work with the municipality and its municipal advisor to develop what would be the best option for the municipality.

MFC staff have the expertise in municipal capital financing. Financing options to meet your needs: serial, blended, from

3 to 15 years. Payment schedules that matches annual cash flows. MFC supports the AMA through joint committees and

sponsorships.

Role of SNS&MR in the Debenture Process Minister of SNS&MR must approve all capital

borrowings for municipalities (MGA S87 – Capital Budget).

Municipal advisors make recommendations to the Minister for his approval:

– Is there a capital budget in place?– Is the borrowing a capital purpose?– Is the municipal units debt service ratio acceptable?

Municipal advisors guide the borrowing resolution through the system

Once the borrowing resolution is approved advisors are kept informed of the debenture process

MFC Debenture Process MFC, CEO sends out letters asking units if they are

interested in participating in the upcoming debenture issue (Usually middle of February, and middle of July)

A positive response to this letter binds the council to participating in the debenture issue

At this time council should have an approved borrowing resolution for the project in place

Council passes a resolution approving the pre-approval of issuance of debentures. The signed pre-approval is returned with the commitment letter to the MFC.

Summary of Documents required: 1) Commitment Letter; 2) TBR (SNS&MR); and 3) Pre-Approval (MFC).

MFC Debenture Process MFC compiles the requests - $ amount and term MFC Board passes a resolution authorizing the CEO to

negotiate the sale of debentures for the MFC – its a pre-approval to issue debentures (up until here, Mun can make changes)

CEO asks MFC lead manager to price the issue Pricing is based on a set $ amount per debenture, a

specified term, and a settlement date Pricing term and annual repayment amounts determine a

municipality’s debenture issue expenses (ie. Commission, Issue

Expenses, Reserve Charge – municipality should budget ¾ of 1%)

MFC Debenture Process

Pricing is based off the Province of NS credit rating – spread - with a number of basis points added for the MFC Hierarchy: 1) National govt, 2) state/provincial govt, 3) Corporations

Once the CEO accepts the price from the lead manager there is no option to change

The MFC has agreed to sell its debentures in the amount and for the term specified on the settlement date

MFC acceptance of pricing is why changes to capital financing requests can not be accommodated after the commitment letter comes in

MFC Debenture Process At the time of the pricing the interest rates for each

serial debenture is set and agreed to The MFC then produces all of the debenture

documents for each municipality and sends them out for signature

On the settlement day – the MFC sells its debentures to either the Province or in the public market

The MFC then takes the money from the sale of its debentures and off lends that money to the municipalities

Provided all of the paper work is in place on the settlement date the MFC transfers the funds electronically to the municipality’s bank account

Fact or Fiction about the MFC A municipality can borrow more cheaply at the bank

than with the MFC.

Fiction – the MFC borrows on the credit of the Province plus a number of basis points (100 basis point = 1.00%). This means that the cost of issuing debentures through the MFC is the lowest cost of funds available to a municipality.

Interest Rate ComparisonDebenture Date Oct 27, 2009 June 29, 2010

Floating Prime Rate 2.250% 2.500%

Serial Rates

Year 1 0.900% 1.510%

Year 2 1.679% 2.175%

Year 3 2.330% 2.760%

Year 4 2.797% 3.150%

Year 5 3.128% 3.430%

Year 6 3.387% 3.730%

Year 7 3.649% 3.965%

Year 8 3.902% 4.175%

Year 9 4.124% 4.360%

Year 10 4.329% 4.500%

All in Cost 10 yr $ 3.668% 3.960%

Fact or Fiction about the MFC

Prime rates are a better source of capital financing than the MFC.

Fiction – bank prime rates are floating short term rates, because they are a floating rate they are volatile. The MFC is locked in financing over the life of the project there is certainty with the cost of funds and the associated principal and interest payments.

Better financing method for setting long-term residential and commercial tax rates.

Changes in Prime Interest RatesDate Prime Rate Number of Days MFC 1 Year Rate

July 20 2010 2.75% 50 1.51%

June 1 2010 2.50% 49 0.90%

April 21 2009 2.25% 406 3.10%

March 3 2009 2.50% 49 3.10%

Jan 20 2009 3.00% 42 3.10%

Dec 9 2008 3.50% 42 3.10%

Oct 24 2008 4.00% 49 3.10%

Oct 8 2008 4.25% 13 3.75%

April 22 2008 4.75% 169 4.65%

March 4 2008 5.25% 49 4.65%

Jan 22 2008 5.75% 42 4.65%

=>MFC debenture issues are normally priced 3-4 weeks prior to the Settlement Date.

=> Since November 2000, prime has averaged 4.77% (7.50% high; 2.25% low) and changing every 83 days (high of 412 days; low of 13 days)

Fact or Fiction about the MFC The MFC is inflexible.

Fiction – the MFC can structure long term capital financing over the term that you want 3, 5, 8 or 15 years. It can provide blended payments, serial payments, gross proceeds or net proceeds.

The MFC also has a short term borrowing program available to municipalities.

It is up to the municipality to do their cash flow projections that best suits their financing needs (not MFC’s responsibility). The MFC mirrors the information provided by the municipality when it borrows.

Fact or Fiction about the MFC The MFC does not allow for early repayment of

debentures.

Fact - The MFC issues debentures in its own name in order to lend to municipalities. An early repayment by a client would put the MFC “offside” and would result in increased costs for municipalities. The MFC can arrange debentures with different terms and amortization periods. As an example, a 10 year amortization period with a 3 year term would give a municipality the option to completely pay the loan off at 3 years or refinance for the remaining 7 years.

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