Contacts
February 12, 2012
CITY OF PALM COAST, FLORIDA
Mark Galvin
Senior Vice President
450 S. Orange Avenue
Suite 460
Orlando, FL 32801
407.426.9611
407.426.7835 Fax
Utility System Workshop
Preliminary Financing Plan
Member FINRA & SIPC
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Credit Considerations – Importance of Bond Ratings
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City has an opportunity to refinance their Series 2003 Utility Revenue Bonds and save approximately
$500,000 per year and $11 million over the life.
As part of the refunding the City will prepare an official statement that describes the Utility System
financial position, the condition of the Utility System, its Capital Improvement Plan, regulatory
issues, legal covenants, its financial position and its outstanding and projected utility rates along
with estimated debt service coverage. This part of the document includes the engineering and
feasibility study currently be prepared by and PRMG.
Since the City has identified significant capital improvements the City has the opportunity to finance
a portion of these CIP improvements at today’s historical low interest rates
Goal is to keep debt service as low as possible while maintain flexibility in order to lessen the impact
to water and sewer rate payers.
As part of this refinancing the City will need to update the existing Utility bond ratings.
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Credit Considerations – Importance of Bond Ratings
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Outstanding Utility System ratings: The City’s current unenhanced / underlying rating is
“A1” from Moody’s Investors Service (Moody’s),” A+” from Fitch Ratings (Fitch) and
“A” from Standard & Poor’s Rating Services (S&P).
The Series 2003 Bonds originally had underlying ratings of A3, A-, A- from Moody’s,
Fitch, and S&P respectively. To improve the marketability (interest rates) of the
Bonds the City also purchased a bond Insurance policy (credit enhancement) from
MBIA to increase the bond ratings to “AAA” from all three rating agencies.
The City issued the Series 2007 Bonds with the underlying ratings being upgraded to
A2, A, A by Moody’s, Fitch and S&P respectively. The City also purchased bond
insurance from MBIA for the Series 2007 Bonds increasing the bond rating to “AAA”.
In 2008 Moody’s and Fitch recalibrated / upgraded the City’s ratings to Aa3 and AA-
respectively.
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Credit Considerations – Importance of Bond Ratings
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In 2008 the Credit Crisis and Bond Insurance Meltdown
Since 2007 there were six (6) “AAA” rated municipal bond insurance companies – today none are rated “AAA” by any of the rating agencies.
Only two bond insurers are actively issuing new policies.
– Assured Guaranty Municipal Corp. “A2” Moody’s and “AA” S&P (January 18, 2013 downgraded by Moody to A2 from Aa3)
– Build America Mutual Assurance Company “AA” S&P only – Start up bond insurer that is presently not licensed in Florida.
The Series 2003 and 2007 Bond Insurer : MBIA now known as National Public Finance is now rated “Baa2” and “BBB” from Moody’s and S&P respectively. The Fitch rating has been pulled.
MBIA downgrade required the City to fund with cash its DSR Accounts requiring the City to transfer from reserves and project funds $9.4 million.
The collapse of the bond insurers means:
– Issuer’s underlying ratings are extremely important.
– Institutional Investors now do their own credit analysis prior to purchasing any bonds.
– At the City’s current ratings bond insurance is currently not cost effective.
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As of January 18, 2013
Municipal Bond Insurers Rating Summary
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Stable Negative Outlook Positive Outlook
Insurer Moody's Standard & Poor's Fitch
Aa1 / Stable Outlook AA+ / Negative Outlook
(as of 7/22/10) (as of 8/08/11)
AA / Stable Outlook
(as of 7/23/12)
A3 / Stable Outlook AA- / Stable Outlook Ratings Withdrawn
(as of 1/17/13) (as of 11/30/11) (as of 2/24/10)
Assured Guaranty Municipal A2 / Stable Outlook AA- / Stable Outlook Ratings Withdrawn
(formerly FSA) (as of 1/17/13) (as of 11/30/11) (as of 2/24/10)
National Public Finance Baa2 / Negative Outlook BBB / Developing Ratings Withdrawn
(formerly MBIA Illinois) (as of 12/19/11) (as of 06/21/12) (as of 6/26/08)
Ba1 / Negative Outlook B+ / Negative Outlook Ratings Withdrawn
(as of 4/17/12) (as of 8/2/12) (as of 5/02/08)
Caa2 / Developing B / Negative Outlook Ratings Withdrawn
(as of 11/19/12) (as of 6/21/12) (as of 6/26/08)
Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn
(as of 11/8/12) (as of 7/28/10) (as of 9/05/08)
Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn
(as of 4/7/11) (as of 11/30/10) (as of 6/26/08)
FGIC Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn
(Certain Policies Covered by National) (as of 3/24/09) (as of 4/22/09) (as of 11/24/08)
Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn
(as of 11/11/09) (as of 02/16/10) (as of 10/21/08)
Ratings Withdrawn
(as of 12/15/08)
MBIA
Disclosure : This is a summary of the current outstanding ratings and outlooks of monoline bond insurers as reported by Moody's Investors Service (Moody's), Standard and Poor's Corporation (S&P), and Fitch Ratings (Fitch) as of the approximate date and time set forth on this summary. FirstSouthwest does not guarantee the accuracy or completeness of the data set forth herein. For the most accurate and current information, contact Moody's, S&P, and Fitch. Certain of the insurers' parent companies are currently operating under Chapter 11 of the US Bankruptcy code or other plans of reorganization under applicable insurance regulators. In addition there maybe relationships among insurers that could also affect credit quality.
ACA No Rating No Rating
Syncora
CIFG
Ambac
Legend
Watch Negative / Review for Possible Downgrade / R (Regulatory Intervention)
Significant Recent Actions: On January 17, 2013, Moody's downgraded Assured Guaranty Municipal and Assured Guaranty's ratings to "A2" and "A3," respectively, from "Aa3;" rating was removed from "Review for a Possible Downgrade" and a "Stable" oulook was assigned. On July 23, 2012, S&P assigned an "AA" rating and "Stable" outlook to Build America Mutual.
Radian
Developing Watch / Review With Direction Uncertain
Assured Guaranty
Watch Positive / On Review for Possible Upgrade
Berkshire Hathaway (Columbia and
National Insurance Co. "NICO")No Rating
Build America Mutual No Rating No Rating
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On March 30, 2011 Fitch downgraded the City’s Utility Bonds to A+ from AA-
Rationale
– “Rating reflects system's very low debt service coverage margins in fiscal
2010 and expectations for below-average financial metrics and liquidity
for the near to intermediate term….”
– “The system remains highly leveraged”
What Could Make the Ratings Go Down?
– “Further declines in system liquidity may lead to lower overall financial
flexibility and could cause additional downward rating pressure”
Credit Considerations – Importance of Bond Ratings
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On August 26, 2011 Moody’s downgraded the City’s Utility Bonds to A1 from Aa3
Rationale
– “The downgrade to A1 from Aa3 reflects the system's diminished debt service
coverage levels and liquidity position.”
– “The rating also incorporates the system's stable customer base with average
wealth levels, a high debt ratio, adequate system capacity, and standard legal
covenants.”
– “Challenges include: diminished debt service coverage, new growth is limited,
system is highly leveraged”
What Could Make the Ratings Go Down
– Sustained decline in debt service coverage
– Failure to implement timely rate increases
– Further deterioration of reserves
– Significantly increase debt burden
Credit Considerations – Importance of Bond Ratings
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Credit Considerations – Importance of Bond Ratings
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Why maintaining your rating is so important: The higher the rating the lower the interest rate / yield and lower the interest
cost. The rating comes out just prior to the issuance of bonds. A downgrade just prior to
pricing has a more profound impact on the City’s rates. Strong ratings translate into lower rates not only on the Series 2013 Bonds but future
Bonds (Series 2014/15 Bonds) as well. Highly rated Utility Issues are now issued without a funded Debt Service Reserve
Account (DSR)
– Series 2003 DSR Requirement: $6.2 million Cash Funded
– Series 2007 DSR Requirement: $3.1 million Cash Funded Part of the financing plan includes a transfer of $6.2 million from the Series 2003
DSR fund to the Series 2013 Project Fund. The plan also includes not funding a
new DSR for the Series 2013 bonds. Not funding a DSR will save approximately $10 million in total debt service
over the life of the financing and $400,000 annually
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Credit Considerations – Importance of Bond Ratings
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Utility Ratings are subjective and based on some of the following criteria
Economics and Demographic of the Area: income indicators and growth potential,
residential and commercial and industrial, foreclosures, etc.
Legal and Financial Covenants – rate covenant, additional bonds test, funded debt
service reserve (DSR), renewal and replacement covenants, etc.
The City’s Financial Position: Liquidity position, cash reserves and cash policies,
current and future debt service coverage
Condition of the System: CIP requirements, future capital needs, renewal and
replacement
Management considerations: stability of the elected officials and their willing to raise
rates if necessary to maintain the system, the experience of the City’s staff and
Utility Staff.
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Financial Impact of ratings downgrades: If either Moody’s or Fitch lowers their bond ratings to A2 from A1 (Moody’s) or A
from A+ (Fitch)
– The City should still be able to transfer $6.2 million from the Series 2003 DSR
and not fund a new DSR on the Series 2013 Bonds
– Interest rates/ Yields will increase by approximately 5 basis points
o translates into approximately $ 45,000 increase in annual debt service
o $950,000 over the life of the financing. If both Moody’s and Fitch or if S&P alone (S&P has the lowest rating A) lowers their
rating
– The City will need to fund the DSR on the new Series 2013 Bonds and increase
the bond size by over $6.3 million to fund the $21 million project fund.
– Interest rates / yields will increase by approximately 15 basis pointso Translates into approximately $ 530,000 increase in annual debt service o $11.3 million over the life of the financing*
Credit Considerations – Importance of Bond Ratings
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* Excludes the DSR and investment earnings
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Credit Considerations – Importance of Bond Ratings
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MFRAMoody's Investors Service
Boynton Beach, FL
Cap Coral, FL
Citrus County, FL
Davie, FL Deltona, FLLake City,
FLPalm Coast,
FLPort St.
Lucie, FL
St. Augustine,
FLStuart, FL
2011 2011 2011 2011 2011 2011 2011 2011 2011 2011
General Entity Information
Current Senior Most Rating* A1 A1 A1 A1 A1 A1 A1 A1 A1 A1
Revenue Backed Rating Description LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV
Financial Data : Key Financial Ratios
Total Annual Senior Lien Debt Service Coverage (x) 3.19 2.81 2.88 2.56 1.76 4.15 1.51 1.30 1.89 2.61
Total Annual Debt Service Coverage (x) 3.19 2.36 2.63 2.56 1.76 2.66 1.25 1.30 1.89 2.61
* The Rating displayed in MFRA is the most recent derived underlying rating issued by Moody's I nvestors Service, I nc.
Selected Financials and other Datapoints
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In 2011 both Moody’s and Fitch downgraded the Utility Bonds.
Both Moody’s and Fitch have stated they are concerned about Utility's debt service coverage, it’s liquidity / reserves position and it’s debt load.
S&P has not reviewed the credit since 2009.
In order to lessen the impact to water and sewer rate payers our financing plan reduces the amount of debt to be issued by using the existing debt service reserve and not funding a new one.
By not funding a DSR we are reducing the overall security to the rating agencies and bond holders therefore the need to make sure other credit factors remain strong.
A downgrade by any two rating agencies or by S&P alone will require the City to fund a new debt service reserve.
This will increase interest rates / yields by approximately 15 basis points increasing debt service by $530,000 annually and $11.3 million* over the life
At current ratings purchasing bond insurance is currently not cost effective
If downgraded, purchasing municipal bond insurance may reduce the interest rates, but a DSR will need to be funded requiring selling $6.3 million more bonds.
Conclusions
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* Excludes the DSR and investment earnings
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Even if the City enacts the proposed rates there is no guarantee the City’s ratings
will not be downgraded.
Increasing the rates as proposed by PRMG increases the chance the City’s bond
ratings will not be downgraded.
If the City is downgraded it will still be able to sell it’s bonds and fund it’s capital
improvement plan. It will simply cost more - Issue more debt at higher interest rates
and more debt more often.
If actual future financial performance is better than the projected, the City has the
option when reviewing their rates to make future adjustments.
Conclusions
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