may 25, 2011 presentation to the michigan association of school administrators overview of qzab...

May 25, 2011

Presentation to the Michigan Association of School Administrators Overview of QZAB Funding for Energy Conservation Projects

Stephen D. FlahertyDirectorRBC Capital Markets2101 Oregon PikeLancaster, PA 17601Tel: (717) 519-6052E-mail: [email protected]

2

Royal Bank of Canada: Snapshot

DiversifiedBusiness MixQ1 2011

Financial Stability and Strong Results

Q1 2011Total Revenue: $7.4 billion

Net Income: $1.8 billion

Assets: $720 billion

Tier 1 Capital Ratio: 13.2%

Market Capitalization(1): $86 billion5th largest in North America

Credit Ratings (Moody’s / S&P): Aa1 / AA-One of the highest ratings among financial institutions

Broad FootprintQ1 2011

Countries of Operations: 5840% of Revenue Generated Outside of Canada

Employees Worldwide: 79,000Clients Worldwide: 18 million

Retail Banking37%

Capital Markets27%

Insurance 12%

Wealth Management

16%

International Banking

8%

C$/US$ period average conversion rate of 0.992 per Royal Bank of Canada First Quarter 2011 Report to Shareholders

C$/US$ period-end conversion rate of 0.999 per Royal Bank of Canada First Quarter 2011 Report to Shareholders

(1) Source: Bloomberg as of 05/16/2011

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› Joint bookrunner for the largest linked rate issue

› Sole manager for one of the largest competitive deals

› Senior manager for three Bond Buyer Deal of the Year nominations

RBC – A Leader in U.S. Municipal Finance

Municipal Product Offerings

Credit products and balance sheet solutions Commodity risk management and financing Interest rate derivatives Tax-exempt direct purchase program

Access to a global distribution network Tax credit distribution Dedicated municipal research team Creative bond financing

Specialty Sectors

Healthcare Higher Education K-12 Education Charter Schools

Public Power Infrastructure / P3 Student Loans Transportation

Core Services

Credit services such as liquidity facilities, letters of credit and tax-exempt direct lending

Financial advisory Global Public Private Partnerships

Investment banking Full range of derivative products for issuer & investor

clients Full range of investment & cash management products

Notable Achievements in 2010

› Joint bookrunner for the largest long-term municipal bond issue

› Sole manager for the two largest VRDN transactions

Year Lead Co- Financial # of Manager Manager Adviser Total deals

(US$ Bils.) (US$ Bils.) (US$ Bils.) (US$ Bils.)

2009 $17.4 $71.0 $ 9.6 $97.9 1,0192008 $14.7 $55.3 $14.7 $84.7 9132007 $15.2 $83.1 $11.4 $109.7 1,2432006 $16.9 $58.4 $11.5 $86.8 1,3092005 $20.2 $54.0 $84.2 1,403

2010 $19.1 $76.5 $9.2 $104.8 1,290

$10.0

Key Municipal Origination Statistics

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K-12 Historical Rankings(source – Thompson Financial)

2010 National K-12 Lead Manager League TableNegotiated: Full Credit to Book Runner

Par Amount (US$ mil) Rank Number of

Issues

RBC Capital Markets $4,027.6 1 270

Bank of America Merrill Lynch 3,630.4 2 26

Citi 2,953.2 3 34

Stifel Nicolaus & Company Inc 2,141.5 4 172

Piper Jaffray & Co 2,094.8 5 168

Morgan Keegan & Co Inc 1,789.6 6 72

Robert W Baird & Co Inc 1,662.7 7 251

D A Davidson & Co 1,587.2 8 187

George K Baum & Company Inc 1,436.9 9 133

Stone & Youngberg 1,348.8 10 101

Industry Total $40,728.4 2,752



Issues


Banc of America Merrill Lynch 3,821.3 2 37

Citi 3,115.7 3 23

Piper Jaffray & Co. 2,523.4 4 145

Goldman Sachs & Co. 2,245.4 5 13

George K Baum & Company 2,171.5 6 109

Morgan Keegan & Co. Inc. 1,332.5 7 52

Barclays Capital 1,210.1 8 4

Robert W. Baird & Co. 1,171.2 9 163

Wells Fargo & Co. 1,158.8 10 29




Issues


Banc of America Merrill Lynch 3,942.9 2 54

Wells Fargo & Co. 2,259.2 3 106

UBS Securities LLC 1,831.3 4 17

JP Morgan Securities Inc. 1,649.5 5 15

First Southwest Securities 1,515.8 6 49

Southwest Securities 1,400.0 7 41







Issues


UBS Securities LLC 4,367.2 2 113

Merrill Lynch & Co. 3,619.9 3 17

Citigroup 3,512.8 4 33

Wachovia Securities 2,706.9 5 126

Bear Stearns & Co. 1,777.6 6 9


City Securities Corporation 1,582.8 8 52




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QZAB Benefits

Low to zero interest rates

Interest on bonds is taxable at market rates

Issuer receives direct reimbursement/subsidy from U. S. Treasury for lessor of bond rate or published rate (updated daily)

Example :

Bond rate equals 5.00% and published rate equals 5.25%, issuer pays zero (5.00% - 5.00% = 0.00%)

Bond rate equals 5.50% and published rate equals 4.75%, issuer pays 0.75% (5.50% - 4.75% = 0.75%)

Current indicative market rate is 6.20% and published rate equals 5.01% for a net rate of 1.19%

Ability to invest sinking fund payments to further reduce interest cost and possibly even principal cost

Debt is typically marketed as a single “bullet” maturity due at end of term (15 year term with 14 years of interest only payments and one single payment of principal for full amount borrowed

District will make annual sinking fund payments of principal to bond trustee to ensure funds available at maturity to pay full amount of bullet due

IRS rules allow interest earnings on sinking fund deposits which are above net rate of borrowing, rate is established monthly

Sinking fund earnings effectively reduce interest cost an depending on market conditions may allow District to repay less than actual amount borrowed

Current permitted earnings in sinking fund is 4.68%

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QZAB Combined with Energy Savings Project

Energy project produces annual ongoing savings from higher efficiency and conservation resulting in less annual cost for utilities

Savings used to fund costs of project; thereby requiring no out of pocket expenditure for District to upgrade facilities and conserve energy

The lower the cost of the funding for the energy project, the larger a project the energy savings can support

Combination of energy project with low to no cost QZAB funding is “best of both worlds” outcome for District resulting in being able to fund larger project at no out of pocket cost to District

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Example

Example makes the following assumptions:

1) QZAB bond interest rate equal to current rate of 6.20% for “A” rated credits

2) Treasury subsidy rate equal to current 5.01%

3) Sinking fund earnings invested at rate of 3.50%

4) $5,000,000 Total Borrowing

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Example

( A ) ( B ) ( C ) ( D) ( F) ( G) ( H ) ( I )

Date

Principal -- deposited in

Sinking FundInterest Total Payment

Federal Interest Subsidy

Sinking Fund Balance

Sinking Fund Earnings

Net PaymentAnnual Net

Payment

12/01/11 103,333 103,333 -83,504 19,83006/01/12 155,000 155,000 -125,256 29,745 49,57412/01/12 155,000 155,000 -125,256 29,74506/01/13 357,143 155,000 512,143 -125,256 386,887 416,63212/01/13 155,000 155,000 -125,256 29,74506/01/14 357,143 155,000 512,143 -125,256 12,500 374,387 404,13212/01/14 155,000 155,000 -125,256 29,74506/01/15 357,143 155,000 512,143 -125,256 25,000 361,887 391,63212/01/15 155,000 155,000 -125,256 29,74506/01/16 357,143 155,000 512,143 -125,256 37,500 349,387 379,13212/01/16 155,000 155,000 -125,256 29,74506/01/17 357,143 155,000 512,143 -125,256 50,000 336,887 366,63212/01/17 155,000 155,000 -125,256 29,74506/01/18 357,143 155,000 512,143 -125,256 62,500 324,387 354,13212/01/18 155,000 155,000 -125,256 29,74506/01/19 357,143 155,000 512,143 -125,256 75,000 311,887 341,63212/01/19 155,000 155,000 -125,256 29,74506/01/20 357,143 155,000 512,143 -125,256 87,500 299,387 329,13212/01/20 155,000 155,000 -125,256 29,74506/01/21 357,143 155,000 512,143 -125,256 100,000 286,887 316,63212/01/21 155,000 155,000 -125,256 29,74506/01/22 357,143 155,000 512,143 -125,256 112,500 274,387 304,13212/01/22 155,000 155,000 -125,256 29,74506/01/23 357,143 155,000 512,143 -125,256 125,000 261,887 291,63212/01/23 155,000 155,000 -125,256 29,74506/01/24 357,143 155,000 512,143 -125,256 137,500 249,387 279,13212/01/24 155,000 155,000 -125,256 29,74506/01/25 357,143 155,000 512,143 -125,256 150,000 236,887 266,63212/01/25 155,000 155,000 -125,256 29,74506/01/26 357,143 155,000 512,143 -125,256 162,500 224,388 254,132

5,000,000 4,598,333 9,598,333 -3,715,913 1,137,500 4,744,920 4,744,920

( A ) Principal component of each payment, will aggregate to pay $5,000,000 prinicipal due at maturity. Will be deposited into interest earning sinking fund.( B ) Semi - annual interest expense based on $5,000,000 payment at maturity using current interest rate of 6.20 % determined by 10 yr Treasury rate plus credit spread( C ) Equals A + B( D) Federal QZAB direct pay subsidy determined by lessor of bond rate of 6.20% or federal published rate of 5.01%. Changes daily as IRS updates federal published rate( F) Total of principal component deposited into sinking fund to date.( G) Earming on sinking fund balance at 3.50%. Current permitted yield of 4.68% as published by IRS. Will change monthly as IRS adjust maximum permitted yield.( H ) Total semi-annual payment due( I ) Total annual payment due.

Payment ExampleSeries of 2011 - QZAB w/ sinking fund offset -- assumes issuance date of 6/1/11

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Historical Reimbursement and Permitted Sinking Fund Rates

(source – Treasurydirect.gov)

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Apr

il-09

May

-09

June

-09

July

-09

Aug

ust-

09

Sep

tem

ber-

09

Oct

ober

-09

Nov

embe

r-09

Dec

embe

r-09

Janu

ary-

10

Feb

ruar

y-10

Mar

ch-1

0

Apr

il-10

May

-10

June

-10

July

-10

Aug

ust-

10

Sep

tem

ber-

10

Oct

ober

-10

Nov

embe

r-10

Dec

embe

r-10

Janu

ary-

11

Feb

ruar

y-11

Mar

ch-1

1

Apr

il-11

Reimbursement Rate

Permitted Sinking Fund Yield

10

Historical Maximum Maturity (source – Treasurydirect.gov)

12

13

14

15

16

17

18

19

20

April-0

9

May-

09

Jun

e-0

9

July

-09

August

-09

Septe

mb

er-

09

Oct

ob

er-

09

Nove

mb

er-

09

Dece

mb

er-

09

Jan

uary

-10

Feb

ruary

-10

Marc

h-1

0

April-1

0

May-

10

Jun

e-1

0

July

-10

August

-10

Septe

mb

er-

10

Oct

ob

er-

10

Nove

mb

er-

10

Dece

mb

er-

10

Jan

uary

-11

Feb

ruary

-11

Marc

h-1

1

April-1

1

Maximum Maturity

11

Disclosure

All information contained in this communication constitutes RBC Capital Markets’ judgment as of the date of this communication, and is subject to change without notice and is provided in good faith but without legal responsibility. The information contained in this communication has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness.

The material contained herein is not a product of any research department of RBC Capital Markets or any of its affiliates. Nothing herein constitutes a recommendation of any security or regarding any issuer; nor is it intended to provide information sufficient to make an investment decision.

RBC Capital Markets is not acting as a fiduciary or as a financial, commodity or investment adviser. Nothing in this communication constitutes legal, accounting or tax advice or individually tailored investment advice. This material has been prepared without regard to the individual financial circumstances and objectives of persons who receive it and such investments or services may not be suitable for all investors. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Potential investors are advised to consult with their own legal, accounting, tax, financial and other advisors, as applicable, to the extent appropriate.

This document may not be reproduced, disclosed, distributed or summarized, whole or in part, to any third party without the prior consent of RBC Capital Markets. To the fullest extent permitted by law neither RBC Capital Markets, nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this communication or the information contained herein.

RBC Capital Markets is a registered trademark of Royal Bank of Canada. RBC Capital Markets is the global brand name for the capital markets business of Royal Bank of Canada and its affiliates, including RBC Capital Markets, LLC (member FINRA, NYSE and SIPC); RBC Dominion Securities Inc. (member IIROC and CIPF) and Royal Bank of Canada Europe Limited (authorized and regulated by FSA). ® Registered trademark of Royal Bank of Canada. Used under license. © Copyright 2011. All rights reserved.

may 25, 2011 presentation to the michigan association of school administrators overview of qzab...

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