bond issuance 101 · bond issuance 101 pima county community college district june 4, 2018 2325 e....

BOND ISSUANCE 101

Pima County Community College District

June 4, 2018

2325 E. Camelback Road Suite 750 Phoenix, AZ 85016

ERIKA COOMBS Director

Phone: (602) 794-4030 Fax: (602) 794-4046 [email protected]


MARK READER Managing Director



RANDIE STEIN Director


Disclosure

2

Stifel, Nicolaus & Company, Incorporated (“Stifel”) has prepared the attached materials. Stifel is providing the information for discussion purposes and is declaring that it has done so within the regulatory framework of MSRB Rule G-23 as a financial advisor, as defined therein, and not an underwriter to the issuer for this proposed issuance of municipal securities. A “financial advisory relationship” shall be deemed to exist when a firm enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters. Accordingly, any services provided by Stifel as they relate to our role as financial advisor should not be construed as those of an underwriter or placement agent. These materials have been prepared by Stifel for the client or potential client to whom such materials are directly addressed and delivered for discussion purposes only. All terms and conditions are subject to further discussion and negotiation. Stifel does not express any view as to whether financing options presented in these materials are achievable or will be available at the time of any contemplated transaction. These materials do not constitute an offer or solicitation to sell or purchase any securities and are not a commitment by Stifel to provide or arrange any financing for any transaction or to purchase any security in connection therewith and may not relied upon as an indication that such an offer will be provided in the future. Where indicated, this presentation may contain information derived from sources other than Stifel. While we believe such information to be accurate and complete, Stifel does not guarantee the accuracy of this information. This material is based on information currently available to Stifel or its sources and are subject to change without notice. Stifel does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and /or counsel as you deem appropriate.

This presentation may not be distributed or duplicated without the permission of Stifel. Stifel invests significant time and effort in preparing these materials and requests that you respect our prerogative to limit distribution to our clients and as we deem consistent with our business plan.

Table of Contents

3

Section Description Page

I Municipal Market Overview 5

II Bond Process

A. Overview 12

B. Key Documents 17

C. Rating & Pricing 20

D. Closing & Post Closing 26

Glossary

SECTION I: Municipal Market Overview

MUNI MARKET OVERVIEW: What is a Municipal Bond?

5

• Mechanism for obtaining money today

–Conversion of expected future revenue stream of income (whether from tax receipts, general fund revenues or other sources) into currently available funds for capital projects

• Promise to repay money:

–On a date certain

–With interest at a specific rate

From specific revenues

• Issued by a “governmental” Issuer

• Generally tax-exempt

6

MUNI MARKET OVERVIEW: Tax Exemption

• Sixteenth Amendment to the U.S. Constitution created an income tax

• Because Municipal Bonds are generally tax-exempt, investors are willing to accept lower interest rates on tax-exempt debt

• It’s not what you earn, it’s what you get to keep!

• Concept of the “taxable yield equivalent”

Example: 3.00% tax-exempt interest rate = 3.75% equivalent taxable yield for investor in 20% tax bracket

7

MUNI MARKET OVERVIEW: U.S. Debt Markets

_______________________ (a) Data through April 2018. Source: Thomson Reuters (SIFMA) and The Bond Buyer.

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0

$450.0

$500.0

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018(a)

Nu

mb

er

of

Issu

es

Bill

ion

s

Municipal Issuance: 2008 to 2018 (a)

Total GO and Revenue Issuance Number of Issues

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

40,000.0

45,000.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017B

illio

ns

Outstanding U.S. Debt Market: 2007 to 2017

Municipal TreasuryMortgage Related Corporate DebtFederal Agency Securities Money MarketsAsset-Backed

8

MUNI MARKET OVERVIEW: Holders

_______________________ (a) Includes mutual funds, money market funds, closed-end

funds and exchange traded funds. (b) Includes U.S. chartered depository institutions, foreign

banking offices in the U.S., banks in U.S. affiliated areas, credit unions, and broker dealers.

(c) Includes property-casualty and life insurance companies. (d) Includes nonfinancial corporate business, nonfinancial

noncorporate business, state and local governments and retirement funds, government-sponsored enterprises and foreign holders.

Source: Federal Reserve System (SIFMA).

Investors

Retail Investors

• High net-worth individuals Often older high tax

bracket

Institutional Investors

• Bond funds, mutual funds • Investment advisors • Commercial banks • Bank trust departments • Insurance companies

Individuals 41%

Mutual Funds (a) 25%

Banking Institutions (b)

15%

Insurance Companies (c)

14%

Other (d) 5%

Holders of U.S. Municipal Securities (2017)

Sample: Investor ParticipationYears to Maturity

Investor Type 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Money Market Funds

Money ManagersMunicipalities

Individual Retail

Bank Trusts

Bank Portfolios

Professional Retail

Large Investment Advisors (looking for larger block sizes)Short Bond Funds

Intermediate Bond Funds

Hedge Funds (looking for block sizes with liquidity)

Property & Casualty

Trading Accounts (across the curve)

9

MUNI MARKET OVERVIEW: Why Do Investors Buy Municipal Bonds?

• Generate tax-free income stream

• Wealth preservation (high credit quality)

• Predictable stream of income

• Diversification with a wide variety of choices

– Investment quality, maturity ranges

– Issuers, bond type, geography

• Liquidity

• Generally attractive to risk-averse investors

MUNI MARKET OVERVIEW: AZ Bond Issuance

10

$4,546 $4,369

$6,191 $6,059

$7,014

$5,488

$44 $200

$63

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2012 2013 2014 2015 2016 2017

(Mill

ion

s)

Arizona Bond Issuance

Long-Term Short-Term

$293

2017 Long-Term, Negotiated Arizona Issuance

Category Par Amount ($M) %

1 Education 2,029 37%

2 Transportation 972 18%

3 Healthcare 813 15%

4 Electric Power 735 13%

5 General Purpose 393 7%

6 Utilities 302 6%

7 Public Facilities 93 2%

8 Environmental Facilities 53 1%

9 Development 52 1%

10 Housing 47 1%

5,488

II. Bond Process – A. Overview

12

BOND PROCESS: Overview

Key Steps in Preparing for a Financing

Step 1: Develop Financing Program

• Engage financing team members

• Identify funding needs, repayment sources and appropriate bond structure

Step 2: Determine Financing Terms

• Bond documents outline security pledge and flow of funds

• Preliminary Official Statement (“POS”) describes security, issuer, project and any potential risks

Step 3: Rating agency and bond insurance conversations

• Introduce rating agency to issuer’s credit

• Secure rating(s) and solicit bond insurance pricing quotes, if applicable

Step 4: Board approvals

• Approve financing terms and related documents

• Formally appoint financing team and delegates authority to administration to execute final documents

• Send financing information to JCCR

Step 5: Bond marketing, pricing and closing

• Distribute POS to prospective investors

•

Establish interest rates and final principal amounts on day of pricing

• Execute documents and deliver funds at closing, typically two weeks after pricing

Step 6: Post closing

• Continuing disclosure, arbitrage rebate, budget setting, debt reports

Post Closing – Ongoing Items

Bond Marketing,

Pricing &Closing

Approvals

Rating Agency & Bond Insurer

Conversations

Determine Financing Terms

Develop Financing Program

13

BOND PROCESS: Structuring Considerations

Size of Financing

How much in bond proceeds is needed

When are proceeds needed

Federal tax law considerations: • 3 year reasonable expenditure

expectations • $15 million rebate exemption • Bank Qualified status for issuing less than

$10 million in calendar year

Bond capacity (GO Bonds)

Assessed value growth (GO Bonds)

Tax rate policy parameters

Principal repayment

Outstanding debt

Debt Payment Structure

Pace of bond funding needs

Level or escalating payments

Term of financing

Prepayment Options/Call Features

Add issuer flexibility

May impact pricing

Refinancing Existing Bonds

Savings

Modify structure and/or terms

14

BOND PROCESS: Overview – Participants (Public Sale)

• Advises Issuer on all matters regarding bond issuance

• Fiduciary duty to the Issuer

• Typically assembles Official Statement on behalf of Issuer

Financial Advisor

• Drafts Authorizing Resolution, Legal Opinion and closing documents

• Provides legal advice to issuer based on existing federal, State and local legislation and arbitrage/tax law

Bond Counsel

• Securities dealer; markets bonds, sets prices, sells bonds to investors

Underwriter

• Provides credit rating on Issuer’s bonds and existing obligations

Rating Agency

• Selects financing team

• Determines borrowing needs and key parameters of debt

• Authorizes issuance of bonds

Issuer

• Lend higher credit quality for a fee and guarantee debt service payment to bondholders, if applicable

Bond Insurance/Credit Enhancement

• Financial institution with trust powers; fiduciary capacity to facilitate the collection and distribution of funds for the benefit of the bondholder

• Maintains list of bondholders

Trustee, Bond Registrar and

Paying Agent

• Manages Due Diligence call and prepares Bond Purchase Agreement

• Advises Underwriter on legal issues

Underwriter’s Counsel

BOND PROCESS: Type of Bond Sales N

ego

tiat

ed

• Underwriter(s) selected up front

• Additional flexibility with sale date/timing

• Underwriter assists with structuring, pre-marketing and sale timing

• Broaden investor base/competition among investors

• Preferred with volatile markets, story bonds and less credits

• Gross spread negotiated

Pri

vate

Pla

cem

ent

• Typically one buyer

• Subject to negotiations with purchaser

• Potential purchaser may include banks with banking relationship with the Issuer

• Typically shorter amortization and smaller deal size than public sales

• Limited competition for bonds (limited number of banks depending on financing parameters)

Co

mp

etit

ive

• Financial Advisor provides comprehensive services to prepare the sale (ratings, structuring, terms, timing, etc.)

• Sealed bid submitted by underwriters - parameters set for bid & date chosen for sale

• Very limited ability to control who purchases the bonds (i.e. local residents)

• Utilized less often than negotiated sale method

• Works best with highest credit quality and stable markets

• Gross spread difference between price underwriter pays issuer and the price underwriter sells bonds to investors

Method of Sale is Selected in Light of Financial, Market, Transaction-Specific and Issuer-Related Conditions

15

Bond Process – B. Key Documents

17

BOND PROCESS: Key Documents

• Authorized by Governing Board

Debt Policies and Procedures

• Post Issuance Compliance • Tax Exemption Status • Continuing Disclosure

Authorizing Resolution

• Sets terms and parameters under which bonds can be issued, flow of funds, pledge of revenues

• Authorizes issuance • Formally appoints financing team participants • Delegates authority to administration to execute final documents

Draft Financing Documents

• Preliminary Official Statement Governing Board should review the POS, especially information

related to the District and the community • Continuing Disclosure Certificate • Registrar Contract • Depository Trust Agreement (if applicable) • Bond Purchase Agreement

Agenda Language • Provided by Bond Counsel

18

BOND PROCESS: Key Documents

Legal Opinion

Bond Counsel attesting to the validity of the bonds

Bond issuance consistent with applicable state and federal laws

Voter authorization to issue

Bond Counsel attesting to the tax status of the bonds

Bond Purchase Agreement

Contract between the underwriter and the issuer setting forth the final terms, prices and conditions of the underwriter’s purchase of the issuer’s bonds

Signature from Board Chair or Board Member

Continuing Disclosure Undertaking (“CDU”)

Issuer’s promise to keep investors informed about specific information/events and annual financial information and operating data

Preliminary Official Statement (“POS”)

S.E.C. Rule 15c2-12 = ISSUER’S DOCUMENT

Includes all material information needed to make an informed investment decision

S.E.C. Rule 10b-5

Does not include any untrue or misleading statements nor does it omit any material information

POS Deemed Final Certificate

Bond Process – C. Rating & Pricing

20

BOND PROCESS: Credit Quality

Decreasing

Credit Quality,

Increasing

Yields

LONG-TERM CREDIT RATING SCALE RISK GRADE

Aaa AAA AAA Highest quality

Inve

stm

ent Aa

1

AA

+

AA

+

Highest quality 2

3 - -

A

1

A

+

A

+

Highest quality 2

3 - -

Baa

1

BBB

+

BBB

+

Highest quality 2

3 - -

Ba, B BB, B BB, B Speculative

Jun

k

Caa, Ca CCC, CC, C CCC, CC, C Highly speculative

C D D Default

21


• Vary based on security type – all rating agencies provide information on their Rating Criteria

Credit Rating

Demand Analysis

(Geographic, competition)

Finances (revenues, expenditures, risk

management)

Liquidity

(Cash & Investments, unrestricted resources,

expendable resources)

Management & Governance

(Tenure, strategic plan & policies, Board

composition, track record)

Debt Load

(Debt Coverage, % annual operating

expenses, expendable resources to total

debt service)

Bond Provisions

(Security pledge, rate covenant, additional

bonds test)

22


Community College General Obligation Ratings (as of May 2018)

AAA 7%

AA+ 12%

AA- 26% AA

30%

A+ 18%

A- 2% A

4%

BBB 1%

Standard & Poor’s

Aaa 12%

Aa3 14%

Aa2 38%

Aa1 22%

A3 1% A1

13%

Moody’s

Internal Marketing

Distribute POS, rating report, maturity structure

internally

Receive feedback from underwriting / trading / sales teams on structure

Internal distributions to institutional and retail sales

teams

Distribute POS, rating reports, maturity structure

to investors

Credit Approval

Schedule individual meetings or calls with credit

analysts

Answer questions and receive feedback from

investors

Receive credit approvals for the transaction

Pricing Process

Review overall market conditions and municipal

flows

Review recent comparables and trading levels

Develop “price thoughts”

Pre-pricing call with Issuer and Underwriting Desk

Hold order period -- review order book with Issuer and

make adjustments as necessary

Obtain approval on final interest rate scale and

confirm orders with investors

BOND PROCESS: Negotiated Pricing

23

Underwriter

Underwriter takes orders from investors and work with the Issuer to adjust terms to react to their demands while still meeting objectives for the financing.

Institutional & Retail Investors

Issuer

Feedback

Decisions

Issuer can see the orders from investors. This allows them to time the sale and react to orders received from investors in real time.

• Underwriter evaluates market conditions at the open

• Order period commences, pricing wire(s) sent out

• Online Order Entry System – allows issuer to view orders as they are entered

• At conclusion of order period, a “pricing call” is typically held

– Conference call between issuer, banker and underwriter to discuss sale status

• Re-pricing Considerations

– Depending on investor demand, the Underwriter may propose slight adjustments to yields or coupons

• Concluding the Pricing

– When a significant number of bonds have been sold, the underwriter will commit to purchase all unsold bonds at proposed rates

– If the underwriter and issuer reach agreement on the final structure, interest rates (coupons) and yields of the bonds, then the terms are entered on a bond purchase agreement (BPA) presented for approval to the issuer

– The BPA is executed by the Issuer (authorized in Resolution) and the underwriter the day of the sale

– Investor orders are confirmed

BOND PROCESS: Negotiated Sale - Day of Pricing

Bond Process D. Closing & Post Closing

Day of Closing

Bond proceeds delivered to Trustee

BOND PROCESS: Closing

26

Example: Flow of Funds Closing Preparation (2-3 Weeks after pricing)

Official Statement electronically distributed to buyers with final pricing information

Closing documents reviewed Signatures obtained by Bond Counsel

(for those parties not physically attending the closing)

Closing memorandum prepared: • Location and date of closing • Final pricing numbers • Wire transfer instructions • Flow of funds

Underwriter

Bond Proceeds

Trustee

Acquisition Fund Costs of Issuance Fund

BOND PROCESS: Post Closing

27

Bond Issuance

Continuing Disclosure

Annual Hearings

and Forms

Surveillance

Tax Levy / Tax Rate Setting

Spending Exceptions / Private Use

Investment Earnings / Arbitrage


28

Documents to come by or after closing

• Summary of Sale booklet

• Transcript CD from Bond Counsel

Arizona Department of Administration – Bonded Indebtedness Report

• Due in August

Continuing Disclosure Filings

• Issuer’s responsibility

IRS Tax Regulations, Arbitrage, Yield Restriction and Rebate

• IRS Form 8038-G filed at closing indicating existence of adopted federal tax compliance policies

• Federal tax laws generally restrict the ability to earn arbitrage in connection with tax-exempt bonds

• Certain exemptions and rebate requirements

• Use a qualified arbitrage rebate consultant to determine liability Documentation of appropriate interest earnings on bond proceeds Remittance of excess interest earnings on bond proceeds

• Violations can lead to IRS deeming the bonds taxable or sizable fines and restrictions


29

Credit Rating Surveillance Calls

• Provide updates on economic, financial, etc. information, as requested

Private Placements

• Send transcript of lease agreements to rating agencies

Monitor Tax Levy and Tax Rate

Refinancing Opportunities

Adoption of Policies and Procedures Related to Debt Management

Record Retention / Assigned Responsibilities

Glossary

31

GLOSSARY: Useful Terminology

• Tax-Exempt Bond – Interest on most municipal securities is exempt from federal income taxes and income taxes for the state of the issuer.

Taxable Equivalent Yield: The yield on a theoretical taxable investment that, after subtracting income taxes, results in the tax exempt bond yield.

Taxable Equivalent Yield = Yield on the tax exempt bond ÷ (100% - Income Tax Bracket)

Example: Taxable Equivalent Yield for a 4.00% Tax-Exempt Bond Yield = 4.00% ÷ (100% - 30% Income Tax Bracket) = 4.00% ÷ 70% = 5.71%

• Taxable Bond – A security where the interest is not exempt from federal income taxes. However, state income taxes may or may not still apply. The IRS can declare original issue tax-exempt bonds to be taxable if federal tax laws are violated.

• New Money Bonds – Bonds issued for financing new capital, not refunding outstanding bonds.

• Refunding Bonds – Issuance of a new bond for the purpose of retiring an already outstanding bond issue, usually to reduce interest costs, restructure the amortization schedule or remove a restrictive covenants.

• Defeasance – Using available monies to provide for debt repayment prior to their stated maturity.

GLOSSARY: Pricing

32

Yield Curve

• Compilation of interest rates paid for different maturities

• Varying investor interest • Short term versus long term

rate

Yield – Market Return

• Varies over time • Shape of the yield curve • Short term versus long term

borrowing • Taxable versus tax-exempt

borrowing • Level of risk • Market supply and demand • Comparative prices

Call Features

• Allow bonds to be retired before scheduled maturity

• Specify period of call protection and prepayment penalty

Credit rating • Indicates credit quality • Allows price/rate comparison • Underlying and/or insured

Par/Annual Principal Amount

• Principal or face amount of borrowing

• Size matters (i.e. $1MM versus $55,000 maturity)

Coupon

• Rate at which interest is paid • Fixed rate: set at time of

pricing • Variable rate: may be reset

daily, weekly, monthly… • Interest is usually paid semi-

annually

Maturity

• Date at which principal is repaid

• Serial bond: principal is due on a particular date

• Term bond: principal is amortized over several years, may have sinking fund

GLOSSARY: Pricing

33

Principal

x

Price

= Issue Price

Maturity Dates

Final Maturity

Rate Issuer Pays

= Coupon

Investor’s Rate

of Return

Investor Pays

Premium Bond

Yield to

Maturity

Yield to Call

Par Bond

Discount Bond

Maturity Dates

Final Maturity

Rate Issuer Pays

= Coupon

Investor’s Rate

of Return

Investor Pays

Premium Bond

Yield to

Maturity

Yield to Call

Par Bond

Discount Bond

GLOSSARY: Basis Point

34

What does a basis point mean to you?

• Interest rates (and yields) are expressed in Basis Points (bp)

• 1 bp = 1/100 * 1.0% = 0.0001

– Difference between 4.50% and 4.49% = 0.01% = 1 Basis Point

• The dollar impact of 1 basis point is approximately $8,800 over the life of a 15-year, $10 million issue and $6,880 on a present value basis (i.e., change in price of the securities to investors)

35

GLOSSARY: Pricing

Comparable “AAA” MMD

Rate

Additional Interest Rate

Credit Spread

Tax-Exempt Bond Yield

Municipal Market Data (MMD) Thomson Reuters Municipal Market Data. A daily, generic, “AAA” rated general obligation benchmark yield curve for tax-exempt trading. • Benchmark interest rate for tax-exempt, generic “AAA” rated municipal bonds • Comparative sales shown during pricing will normally show a spread to MMD comparison

‘AAA’ Municipal Market Data Yields

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

30-Year MMD

10-Year MMD

2-Year MMD

Source: Thomson Reuters. As of 5/17/18

GLOSSARY: Day of Pricing – Desk Speak

36

Bump Lower yield, higher dollar price.

Cheap Yields higher (dollar price lower) than reasonable for specific credit.

Rally Decreasing yields in market.

Tightening Delta of spreads diminishing between credit categories.

MMD Thomson Reuters Municipal Market Data. A daily, generic, “AAA” rated general obligation benchmark yield curve for tax-exempt trading.

Over-Subscribed

Number of orders exceeds the bonds available for a certain maturity

Cut Higher yield, lower dollar price.

Rich Opposite of cheap. Yields lower (dollar price higher) than reasonable for specific credit.

Selling Off Opposite of rally. Increasing yields in market.

Widening Opposite of tightening. Delta of spreads increasing between credit categories

Spreads Delta between different categories or between an index and specific bond yield. Most often quoted as spread to “AAA” MMD index.

Inventory Underwriter takes in unsold bonds

• Takedown ($/$1,000) – compensation to the underwriter for selling the securities (generally largest

component)

• Management fee – fee for structuring or could be fee paid to lead manager of a syndicate

• Underwriter’s Counsel

• DTC - Industry formula – utilized for settlement and clearance services of the Depository Trust and Clearing Corporation

• CUSIP (Committee on Uniform Security Identification Procedures) - Industry formula – paid to obtain the unique identifiers for securities (9-digit alphanumeric)

• Wire fees – Industry formula - syndicate wires platform fee

• Electronic Order Entry/Order Monitor - Portion industry formula, portion investment bank formula

• Day Loan -Investment bank formula – funds to cover the period between the early morning transfer of funds and settlement on the day of closing)

• Marketing expenses – Investment bank formula – could include investor road show expenses

• Other/Miscellaneous - Some states have other industry standard fees (i.e. municipal advisory council)

GLOSSARY: Components of Underwriter’s Discount

Gross Spread (Underwriter’s Discount)