Bond IssuancePresented by
Public School AcademiesPublic School Academies
Ann Fillingham, Esq. Kathy O’Keefe Danie LynchDykema Gossett PLLC Michigan Department of Treasury
Bureau of Bond Finance
Bonding ProcessBonding Process
Authority/State
Underwriters Bondholders
Borrower
Bonds Bonds
$$ $
LoanAgreement
Negotiated Sale
Select the TeamSelect the Team
Underwriters: sell/place the bonds with investors
Bond counsel: provides legal advice as well as opinions on the legality and taxability of bonds
Trustee: manages the flow of funds
Financial Advisor: independent third party that advises the borrower regarding the terms and structure of the deal
Finance Team MembersFinance Team Members
Issuer Issuer’s Counsel Financial Advisor Bond Counsel Underwriter Underwriter’s Counsel Trustee Rating Agencies Credit Enhancement Providers
Timing is Everything!Timing is Everything!
Find out when the borrower needs the money
Work with team members to develop a schedule to ensure the borrower receives the money when needed
Schedule of Events
Completed Event ParticipantsJune 19 Yes Bank approves letter of credit. LOC & BOR
July 15 Yes Conference call with Working Group to describe theProject, plan of finance, and schedule of meetings.
All
Aug - firsthalf of month
yes Borrowers Board of Trustees’ adopts Bond AuthorizingResolution.
BOR & CC
Aug 8th yes Bond Counsel distributes 1st draft of bond and trustdocuments, and TEFRA Notice.
BC
Aug 8th yes First draft of front portion of the Preliminary OfficialStatement (POS) circulated
BC
Aug 18th yes 1:00 pm – First Working Group session at Bond Counsel’soffice, Lansing, MI.
All
Aug 25th
(week of)Distribute 1st draft of Reimbursement Agreement, and formof Letter of Credit.
CB
Aug 22nd yes Circulate 2nd draft of documents to Working Group BC, AG,
Aug 27th 11:00 am Second Working Group session; dial-in conf call. All
Sept 1st
(Week of)Attorney General circulates 1st draft of the Authority’sResolution – 2 weeks in advance
AG
Sept 1st
(Week of)Circulate revised 2nd draft of documents to Moody’s. BC & BC
Sept 3rd Publish TEFRA notice (14-days min. prior to meeting.) AU
Sept Corporate Counsel circulates form of Approving Opinion. CC
Sept 18th TEFRA public hearing – Lansing. AU
Sept 19th Receive rating confirmations UW
Sept 29th
(Week of)Due diligence BC, CC & BOR
Sept 29th
(Week of)If necessary, conference call regarding final form ofdocuments.
All
Sept 23rd 3:00 pm –Authority public meeting - Lansing - adoptParameters Resolution.
BOR, BC, AG, &UW
Oct 2nd Final comments taken for the POS. BC
Oct 3rd Print and mail Preliminary Official Statement BC
Oct 14th 4:30 pm preliminary pricing conference call UW, BOR, AU
Oct 15th 9:00 am pricing conference call10:00 am open order period for the Bonds
UW, BOR, AU
Oct 16th Sign Bond Purchase Agreement BOR, AG, & UW
Oct 22nd Pre-closing @ Bond Counsel All
Oct 23rd Closing & delivery UW, BC, TRU, &AG
Participants:AG Office of the Attorney GeneralBC Bond CounselCC Corporate Counsel -UW UnderwriterBOR BorrowerAU Issuer/AuthorityTRU TrusteeCB Counsel to the BankLOC Letter of Credit Provider
““Size” the DealSize” the Deal
Define the project needs Find out how much money
the borrower needs
““Structure” the DealStructure” the Deal
Determine the maturity of the bonds - When the investor is repaid the principal on their investment
Determine the security for the bonds - The strength of the security will affect the interest rate on the bonds
Ascertain the most cost effective interest rate mode, income tax status, and terms of re-payment
Debt InstrumentsDebt Instruments
BONDS (Long-Term Financing)
NOTES (Short-Term Financing)A note is essentially the same as a bond except that the debt must be repaid within one year
A bond is written evidence of a borrower’s obligation to pay principal and interest at specified times and dates on money borrowed
Types of BondsTypes of Bonds
Municipal Bonds (when issued for a public purpose project) are exempt from federal and state income taxes.
General Obligation (G.O.) Bonds are secured by the “full faith and credit” of the issuer. Full Faith and Credit Bonds are payable as a first budget obligation.
Revenue Bonds are payable from specific sources of revenues, other than property taxes, and are not backed by the “full faith and credit” of the issuer.
Forms of Bonds & NotesForms of Bonds & Notes
Serial Bonds - Repayment of principal on an annual basis.
Term Bonds - Single repayment (maturity) of principal.
Fixed Rate Bonds - Bond with an interest rate that remains constant or fixed during the life of the bond.
Variable Rate Demand Bonds (VDRO’s) - Bonds issued with a variable interest rate. Investors have the right to ‘put’ the bonds back to the issuer. VDRO’s require liquidity in the form of a letter of credit.
State Aid Anticipation Notes (SANs) - are issued in anticipation of state aid payments.
Additional SecurityAdditional Security
Rating - Obtain a credit rating from an independent third party to verify the credit worthiness of the borrower
Insurance - Guaranteed payment of the bonds from a third party
Letter of Credit - Guaranteed payment from a bank
Credit StructureCredit Structure
Moody’s Investors ServiceStandard and Poor’s (S&P)Fitch Ratings
Credit RatingsA credit rating agency evaluates the “credit worthiness” of the borrower or credit support and the ability to repay the debt.
Three independent companies publish credit ratings upon request for both corporate and municipal debt. They are:
Short-Term Credit RatingsShort-Term Credit Ratings
Category S & P Moody’s FitchVery Strong S&P-1 MIG-1 F-1
Satisfactory S&P-2 MIG-2 F-2
Satisfactory but susceptible MIG-3 F-3
Speculative S&P-3 MIG-4 F-4
Long-Term Credit RatingsLong-Term Credit Ratings
Category S & P/Fitch Moody’s Highest AAA Aaa
Very Strong AA+ / AA / AA- Aa1 / Aa2 / Aa3
Strong but susceptible A+ / A / A- A1 / A2 / A3
Adequate BBB+ / BBB / BBB- Baa1 / Baa2 / Baa3
Vulnerable - “Junk” Status BB+ / BB / BB- Ba1 / Ba2 / Ba3
B+ / B / B- B1/ B2 / B3
CCC+ / CCC / CCC- Caa1 / Caa2 / Caa3
Lowest Grades CC / C / D Ca / C
Draft the DocumentsDraft the Documents
Board Resolutions
Official Statement
The Bonds or Notes
Internal Revenue Service Documents
Sell the DealSell the Deal
Distribute offering document (Official Statement)
Underwriters market to banks, funds, and individuals
State (Authority) signs the purchase agreement
Sale of the BondsSale of the Bonds
Competitive Sale: the issuer sets a date for the sale and accepts sealed bids from potential buyers. At a specified date/time the issuer opens the bids and awards the bond sale to the lowest interest cost bidder.
Negotiated Sale: the issuer selects an underwriter who then structures and sells the bond issue.
Competitive vs. Negotiated Sale
Who Buys Municipal Bonds?Who Buys Municipal Bonds?
Mutual Funds
Insurance Companies
Commercial Banks
Individual Investors commonly called “retail” investors
Holders of Municipal DebtHolders of Municipal Debt
35%
16%
11%
5%
16%7%
10%
Individuals
Mutual Funds
Insurance Companies
Bank Personal Trusts
Money Market Funds
Commercial Banks
All Others
Close the DealClose the Deal
Sign bond purchase agreement
Obtain legal opinions
Finalize offering document
Show Me The MoneyShow Me The Money
Once the documents have been signed and the deal has been closed, the funds (money) is sent via wire transfer
Release bonds to the investors
Bond Issuance ProcessBond Issuance Process
Action includesborrower
Action includesbondholder
Borrower submits loanapplication to issuing
Authority
Authority staff, lawyers(bond counsels), bankers,
and the borrower and/orthe borrower's counselhave conference calls todevelop all the necessary
legal documents
Authority directs a banker(underwriter), who
specializes in bonds, tosell the bonds on the
market
Underwriter markets thebonds to people or
organizations, who want aninvestment (bondholders),and agree on a purchase
price (pricing)
Borrower signs a contract(known as the Purchase
Contract) with the Authorityand the authority signs one
with the underwriteragreeing to the price and
committing to the sale (loan)
Authority, borrower,underwriter and legal
counsels meet to sign thelegal documents (closing)
Trustee (fund custodianrepresenting bondholders)
receives funds
Trustee transfers funds toBorrower
Borrower makes scheduledpayments to the Authoritythrough the paying agent
(often the trustee)
Paying agent makesscheduled payments to
bondholders
Innovative Financing for School Facilities
MPEFA
Michigan Public Educational Facilities Authority
The Michigan Public Educational Facilities Authority is dedicated to providing opportunities for low cost financing and technical assistance for (i) qualified public educational facilities and (ii) public school academies through its bonding and loan programs.
MISSION STATEMENTMISSION STATEMENT
MPEFA
Innovative Financing for School Facilities
Long-Term Facilities FinancingLong-Term Facilities Financing
MPEFA
Financing is a challenge to most public schools, for public school academies there are additional challenges to securing financing without access to local property tax.
This program is designed to provide public school academies with a low cost alternative for the purpose of financing land, facilities, equipment, or refinancing existing debt.
State Aid Note for PSAsState Aid Note for PSAs
The State Aid Note for Public School Academies (PSAs) a short-term financing option for cash flow needs for operating purposes prior to the receipt of October State Aid payments.
MPEFA
The State Aid Note (SAN) Program for PSAs offers a simplified low-cost borrowing process, equivalent to the program available for public school districts. However, this is a program designed specifically for PSAs with their particular needs in mind.
Qualified Public Educational Facilities BondsQualified Public Educational Facilities Bonds
The Qualified Public Educational Facilities (QPEF) Bonds can be used to construct, rehabilitate, refurbish or equip a public school facility.
A public-private partnership agreement needs to be entered into between the public school and a private, for-profit corporation (developer) .
The bond proceeds are loaned to the developer who owns the school facility and leases it to a public school.
The public school leases the school facility from the developer and at the end of the lease term, the facility is transferred to the public school for no additional consideration.
MPEFA
MPEFA Credit DefinitionsMPEFA Credit Definitions
Institutional Investor: A firm that purchases large volumes of municipal securities, including mutual funds, banks, insurance and finance companies.
Investment Grade Rating: Minimum rating of BBB- or Baa3
Investor Letter: A letter signed by each Institutional Investor acknowledging the risks associated with the securities being purchased and a representation of its financial ability to take such risks, its access to information on the securities and its intent to hold the securities for investment purposes. The letter must state that the Institutional Investors have not relied on information provided by the Authority.
Nationally Recognized Agency: Fitch Ratings, Standard & Poor's Ratings Services, or Moody’s Investors Service
Underwriter: A registered broker-dealer of municipal securities
MPEFA
MPEFA Credit PolicyMPEFA Credit Policy
1. Investment Grade Rating from a Nationally Recognized Agency; or
2. Letter of credit, bond insurance, or guarantee from an organization with an Investment Grade Rating; or
3. Privately placed with Institutional Investors, in minimum denominations of $100,000, which provide an Investor Letter; or
4. Limited offering to Institutional Investors, in minimum denominations of $100,000. The bonds will be sold through an Underwriter with an acceptable disclosure document and legal opinion.
MPEFA
Bonds issued by the Authority should contain at least one of the following attributes:
The Authority reserves the right to grant exceptions to the foregoing upon its determination through a preliminary resolution that the bond transaction does not create unnecessary exposure or risk to the Authority.
MPEFA Issue ListMPEFA Issue ListMPEFA
CLOSING DATE COLLEGE NAME
AMOUNT ISSUEDINTEREST
RATE
SERIES RATING STATUS
1 8/21/2003 State Aid Note (14 PSAs) 2003 $14,750,000 1.40% SP-1+ Fixed
2 12/10/2003
West Michigan Academy of Environmental Science 2003 $2,615,000 1.04% variable
3 8/20/2004 State Aid Note (14 PSAs) 2004 $16,385,000 2.07% SP-1+ Fixed
4 10/28/2004 Holly Academy 2004 $3,800,000 1.77% variable
5 8/19/2005 State Aid Note (24 PSAs) 2005 $20,325,000 4.25% SP-1+ Fixed
6 11/1/2005 Woodland Park Academy 2005 $3,750,000 2.66% Variable
7
12/13/2005
C.R. Smith Foundation on behalf of Old Redford Academy
2005 A $10,865,000 multiple BBB-
Fixed
2005 B $245,000 6.50% Fixed
8 2/14/2006 Michigan Technical Academy 2006 $6,950,000 multiple BB Fixed
$79,685,000
Letter of Credit/UnderwritersLetter of Credit/Underwriters
MPEFA
Fifth Third BankMichigan Public Finance
2501 Coolidge Road, Suite 203
East Lansing, MI 48823
Brian LeflerVice President and Manager
(517) 324-4058
Stacy TruaxAssistant Vice President
(517) 324-4040
National City BankOne Woodward Plaza 16th Floor
Locator R-J65-4P
Detroit, MI 48226
Bill RocheManaging Director
(313) 230-1625
Winta Tedla(313) 230-1628
Paul Harris(313) 230-1627
Standard Federal Bank2600 West Big Beaver Road
Troy, Michigan 48084
Rick Van Dresser Vice President
(248) 637-2729
Oppenheimer & Co.Public Finance Department
300 River Place, Suite 4000
Detroit, Michigan 48207
Kelli J. LambrixVice President
(313) 566-2330
Jack BrusewitzVice President and Co-Manager
(313) 566-2373
MPEFA
Contact InformationContact Information
Ann Fillingham [email protected]
(517) 374-9146
Kathy O’[email protected]
517-373-8885
Danie [email protected]
517-241-1765
Dykema Gossett PLLC Michigan Public Educational Facilities Authority
124 West Allegan Street800 Michigan National Tower
Lansing, MI 48933-1707
Location: Austin Building, 1st Floor(Formerly Treasury Building)
430 W. AlleganLansing, MI 48922
Mail: P.O. Box 15128Lansing, MI 48901
Phone: (517) 335-0994
www.dykema.com/corporate [email protected]
www.michigan.gov/mpefa