debt financing 101 - cgfoacolorado government finance officer’s association –debt financing 101....

Debt Financing 1012020 CGFOA Webinar Presentation

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ISSUING PUBLIC DEBT:A matter of WHEN, not IF

• Know the players• Understand the process• Protect public resources

Pay as you go means saving money to complete the project.

Why do Municipalities issue debt?

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Pay as you use means borrowing for the project and paying over time.

You either pay as you go or pay as you use.

Colorado Government Finance Officer’s Association – Debt Financing 101

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Your Presenters

Ehlers: Municipal Advisors

James Mann, Senior Municipal

Advisor

Melissa Buck, Municipal Advisor

Sherry Villafane, Municipal Advisor

Stifel, Nicolaus & Co. Inc.:

Debt Underwriter

Lisa May, Director

Kutak Rock: Bond Counsel

Matthias Edrich, Partner

BOKF: Paying Agent/Trustee

Keith Papantonio, Vice

President


Webinar Topics

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Day One: July 7, 2020 (10AM – 12PM): 1. What are Municipal Bonds?2. Roles of Transaction Professionals3. Disclosure and Post Issuance Compliance4. GFOA Best Practices

Day Two: July 9, 2020 (10AM – 12PM): 1. Planning for Debt Issuance 2. Tax and Regulatory Compliance3. Market Trends & Pricing - Underwriter


Types of Municipal Debt Products

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General Obligation

Revenue Bonds

Moral Obligation

Tax Credits

Green & Social Impact Bonds

Derivatives & Swaps

Certificates of Participation Bank Loans

Variable RateCash Flow

BondsMunicipal

Notes

Major Types of Municipal Bonds

General Obligation Bonds

In Colorado • Voter-approved

Issued by Governmental Entities• Not Backed by Revenues from a Specific Project

• Some GO Bonds backed by dedicated taxes on real property, and on occasion, other taxes

• Other General Obligation Bonds are payable from General Funds (Full-faith and credit)

• Unlimited authority to tax residents to pay bondholders VS Limited or no taxing Authority


Revenue Bonds

Issued by Governmental Entities• Backed by Revenues from a Specific

Project

• Diverse types of revenue bonds, each with unique credit characteristicsq Conduit Borrowers

§ Typically repays the issuer, who pays the Interest and Principal P&I solely from the “Revenue” provided by the conduit borrower

Bank Loans

q Direct, Private Placements

q Common Type of Financing in Colorado

q Cost of Issuance Savings• No Rating Agency Expenses• No Printing of Official Statement (OS) expenses

q May not be the lowest rate

q Additional banking relationship commonly requested


• Retail Investors• Institutional Investors

• States, cities, and counties• Other governmental

entities

Bond Delivery Process

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Issuer Underwriter Investor• Institutional Banks• Local Banks


Who Buys Municipal Bonds

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Retail Investors:§ Individuals (including trusts)

Institutional Investors:§ Community Banks§ Trust Departments§ Insurance Companies§ Pension Funds § Bond Funds§ Hedge Funds§ Arbitrage firms§ General institutional investors


The Players

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Coordinate internal team membersFinance staffLocal attorneysProject managers

Work with partner agenciesDirectionLeadershipOversight & guidance

Select & assign tasks to external participants

Accountability & performanceGFOA best practices

Structure Financing State & local statutesLegislatively adopted policies

Finance Director

The Players

The Players

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Municipal Advisor§ Represents the government entity with

other transaction participants

§ Fiduciary Duty: Duty of Loyalty & Duty of Care

§ Ensures deals are fairly structured


Bond Counsel§ Engaged by issuer

§ Opinion as to tax-exemption relied upon by bondholders

§ “Red Book” first are relied upon in the market

The Players


Underwriter§ Broker/Dealer firm Investment Bank

§ Bank

§ Other State/Federal Agency

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The Players


Trustee§ Ensures that proceeds are spent on the appropriate project(s)

§ Hold and invests debt proceeds on behalf of issuer

§ Fees generally paid at issuance

The Players


Paying Agent§ Facilitates delivery of payment to bond holders

§ Usually a trust company, but can be the issuer

§ Initial set-up fee paid from debt issuance§ Annual fee paid from debt service funds

The Players


Rating Agencies§ Three primary firms§ Higher ratings = lower interest costs

The Players


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Post Issuance

Investments

• Maximize return on bond proceeds

Arbitrage

• Monitor investment return & proceeds spend-down

• Submit required reporting, rebates if necessary

• Take advantage of exemptions

• IRS = regulatory body

Continuing disclosure

• Submit timely updates & material events (EMMA)

• SEC = regulatory body


• Selecting and Managing the Method of Sale of Municipal Bonds

• Selecting and Managing the Municipal Advisors• Selecting Bond Counsel• Selecting Underwriters for Negotiated Bond Sales• Pricing Bonds in a Negotiated Sale

GFOA – Series of 5 Key BPs


From Accounting, to budgeting and capital planning to the issuance of Debt, GFOA has your guide

https://www.gfoa.org/best-practices

Other GFOA BPs

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https://www.gfoa.org/best-practices

1) Planning for Debt IssuanceØ Legal Background

2) Market Trends & PricingØ Example of deal

ü Process Detailü Most expensive part of the deal

PREVIEW FOR DAY 2

237/6/20 Colorado Government Finance Officer’s Association – Debt Financing 101

DAY 2Debt Financing 101

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2020 CGFOA Webinar Presentation

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Day 2 Presenters

Ehlers: Municipal Advisors

James Mann, Senior Municipal

Advisor

Melissa Buck, Municipal Advisor

Sherry Villafane, Municipal Advisor

Stifel, Nicolaus & Co. Inc.:

Debt Underwriter

Lisa May, Director

Kutak Rock: Bond Counsel

Matthias Edrich, Partner

BOKF: Paying Agent/Trustee

Keith Papantonio, Vice

President



Day 2 Agenda

Today (10:00am – 12:00pm)

• Day One Recap• Regulatory requirements impacting debt issuance• Planning & executing debt issuance• Market trends & pricing discussion

DAY 1 RECAP


The Players


The Transaction

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• Low cost financing

• Liberal call provisions

Issuer

• Balances Issuer/Investor

• Duty of care to INVESTOR

Purchaser• Highest return on

investment• Conservative call

provisions

Investor


• Selecting and Managing the Method of Sale of Municipal Bonds

• Selecting and Managing the Municipal Advisors• Selecting Bond Counsel• Selecting Underwriters for Negotiated Bond Sales• Pricing Bonds in a Negotiated Sale

GFOA – Series of 5 Key BPs


Placeholder for Kutak Presentation


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Debt Issuance Planning

Debt issuance & management only works well when you understand:

• Financing options• Implications of decisioning • Regulations & rules• The players, their roles & for whom each

works• How bonds are marketed and sold• How to plan for current & potential future

borrowing


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Debt Issuance Process

Election(if necessary)

Approve reimbursement

resolution (if required)

Complete due diligence for

offering documentDraft bond documents

Market Bond Issue

Close the transaction

Invest & spend down bond proceeds


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Debt Issuance & Management Details

•Select type of obligation•Choose bond counsel, trustees, etc.•Develop structure & repayment options•Determine method of sale

Planning & Structuring

•Prepare offering documents•Facilitate credit rating•Conduct sale•Coordinate & complete closing

Issuance

•Invest proceeds•Monitor arbitrage rebate & track spend-down (Report accordingly)•Complete timely, accurate debt payment•Report material events, financials per SEC regulations•Manage calls & defeasances, monitor for refunding opportunities

Management


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Debt Structure considerations?Why structure debt?

ü Align with budgetü Can reduce short-term tax levy impact for G.O. issues ü Can reduce utility rate impact for utilities projectsü Match revenues to debt service

Well-structured debt can help ensure project success.


• Lower principal in early years to accommodate current debt

• Equal principal payments

Structure

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Uniform Level Wrap-around

• Equal annual debt service(Principal + Interest)


Uniform vs Level

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- 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

1,000,000

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

Uniform Structure

Principal Interest

- 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

1,000,000

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

Level Structure

Principal Interest


$10 Million Par Value

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Redemption & Call Features• Optional

ü 10-year (common)

ü Make-whole provision

ü Premiums

• Mandatory

• Extraordinary

• Acceleration


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Type of Sale: Competitive

• Open, easy-to-understand process

• Underwriters compete for sale based on total interest cost

• Active secondary market

• Debt backed by issuer’s “full faith & credit”


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Type of Sale: Negotiated• Issuer negotiates sale with single purchaser

ü “Story” bond

ü Bank relationship preference

ü Unusual call feature or structure

• GFOA recommends working with a municipal advisor to represent your best interest


• Credit rating

• Issue size

• Debt features

• Market conditions

• Unique local circumstances

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Considerations When Choosing Sale Type


Placeholder for Stifel


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ISSUING PUBLIC DEBT:A matter of WHEN, not IF

• Know the players• Understand the process• Ask questions• Leverage GFOA best practices• Protect public resources

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Thank You!For questions, or further discussion, contact:

Melissa Buck Municipal [email protected]

James Mann, CIPMASenior Municipal Advisor/[email protected]

Sherry VillafaneMunicipal [email protected]

Keith PapantonioVice President, Corporate [email protected]

Matthias M. [email protected]

Mario T. TrimblePartner [email protected]

Lisa May Director [email protected]

Kutak Rock LLPEhlers, Inc.

BOK Financial

Stifel, Nicolaus & Co. Inc.


http://ehlers-inc.com



http://bokf.com

http://kutakrock.com

http://kutakrock.com

http://stifel.com

debt financing 101 - cgfoacolorado government finance officer’s association –debt financing 101....

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