Introduction to Municipal Bonds · 2016-10-26 · • Debt service comes from specific revenue source • Utility rates may be subject to approval process (Prop 218) • Example:
46
Introduction to Municipal Bonds Session One: Bond Concepts October 26, 2016 Presenters: Brad Koehn, Finance Director – City of Elk Grove Craig Hill, Municipal Advisor – NHA Advisors, LLC
PresentersBrad Koehn Finance Director ndash City of Elk GroveCraig Hill Municipal Advisor ndash NHA Advisors LLC
Overview of Presentation
1 Introduction to Bondsbull Purpose for issuing
bull Funding Projectsbull Refinancing
bull Key terms
2 Process of Issuingbull Types of Bondsbull Key participantsbull Timing and Processbull Structuring and Pricing Bondsbull Credit Ratingsbull Costs of Issuingbull Debt Policies amp Considerations
3 Basic Bond Mathbull Present Value Calculationsbull Calculating Yield and Yield Curvebull PMT Calculationsbull True Interest Cost Calculations
4 Real Life Example Golden 1 Center Sacramento
2
bull What is a Municipal Bond A Promise of a Borrower (Issuer) to repay a Lender (Bondholder) Issuer receives upfront cash payment and owes annual payments at a fixed interest rate Bondholder receives future repayment with interest
bull Personal Example ndash Home Mortgage Homeowner gets upfront cash from Bank to buy home Bank gets homeownerrsquos promise to make payments with interest
3
Government Bond Issuers Corporate Bond Issuers
Purpose of Municipal Bonds
bull Typically issued for infrastructure (water sewer streets bridges utilities) and capital improvement projects (libraries firepolice stations community centers stadiums parks)
bull Used as an alternative to cash or bank loans
bull Tax-exempt bonds cannot be used to pay for operating expenses 4
Sour
ce M
TCc
ago
v
Sour
ce C
ity o
f San
Dim
asSo
urce
OC
Regi
ster
Sour
ce C
harle
s OrsquoR
ear
Ways to Fund Projects
5
Cash (ldquoPay-As-You-Gordquo)
bull Small and recurring capital projects
bull Projects built slowly over time
bull Future Council flexibility
bull Opportunity cost of funds
bull Easiest source of money
Bond Financing
bull Large capital expenditures
bull Acquisition Projectsbull Future revenues
from Project available for debt service
bull Interest and financing costs
bull Staff resources required for financing
Federal and State Grants or Loans
bull ldquoFreerdquo money with strings attached
bull May require oversight or thorough review
bull Application process can be drawn-out and competitive
to maturity (called)bull If current market interest rates are
lower now than when the bond was issued it may make financial sense to issue new bonds at the lower interest rate to refund the outstanding bonds
bull Responsible practices dictate refunding should result in minimum 3-5 present value savings barring extenuating circumstances
bull Working Capital or Cash Flow Management (short-term notes)
6
Shor
t-te
rm N
otes
Refu
ndR
efin
ance
New
Mon
ey
Capital Improvement Projects
Infrastructure Development
Take advantage of lower interest rates to lower debt repayments
Simplify debt structure
TaxRevenueAnticipationNotes
(TRANs)
BondAnticipationNotes
(BAN)
Tax Exempt Nature of Municipal Bonds
bull Most municipal bonds are tax-exemptbull Bondholders do not pay State of Federal income tax on interest earnings from
municipal bondbull Investors are willing to purchase bond at lower interest ratebull IRS reprieve to help local governments fund projects and compete in the capital market
for investors against corporate bond issuers
bull Issuers are not allowed to earn ldquoArbitragerdquobull General rule ndash Issuers can invest bond proceeds and earn yield no higher than weighted
average cost of funds on bond (known as Arbitrage Yield)bull All excess earnings must be ldquoRebatedrdquo to IRS ndash 100 tax
bull Government gives up income tax revenues from bondholders on the interest of the bond
7
Introductory VocabularyIssuer Legal authority to approve and issue BondPrincipal Total amount borrowed (also known as par value)Coupon Nominal interest rate charged on the PrincipalInterest Additional amount paid on Principal (calculated with Principal times Coupon)Debt Service Annual Principal and Interest payments on the BondMaturity Date Principal is due
8
Interest Payment
Principal Repayment
AnnualDebt
Service
Bond Structuresbull Bonds are secured by different revenue sourcesbull Some require voter approval
9
Bonds Repaid With Dedicated Taxes
bull General Obligation (GO) (Local)
bull Sales Tax Revenuebull Special Taxbull Assessmentbull Tax Allocation
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Overview of Presentation
1 Introduction to Bondsbull Purpose for issuing
bull Funding Projectsbull Refinancing
bull Key terms
2 Process of Issuingbull Types of Bondsbull Key participantsbull Timing and Processbull Structuring and Pricing Bondsbull Credit Ratingsbull Costs of Issuingbull Debt Policies amp Considerations
3 Basic Bond Mathbull Present Value Calculationsbull Calculating Yield and Yield Curvebull PMT Calculationsbull True Interest Cost Calculations
4 Real Life Example Golden 1 Center Sacramento
2
bull What is a Municipal Bond A Promise of a Borrower (Issuer) to repay a Lender (Bondholder) Issuer receives upfront cash payment and owes annual payments at a fixed interest rate Bondholder receives future repayment with interest
bull Personal Example ndash Home Mortgage Homeowner gets upfront cash from Bank to buy home Bank gets homeownerrsquos promise to make payments with interest
3
Government Bond Issuers Corporate Bond Issuers
Purpose of Municipal Bonds
bull Typically issued for infrastructure (water sewer streets bridges utilities) and capital improvement projects (libraries firepolice stations community centers stadiums parks)
bull Used as an alternative to cash or bank loans
bull Tax-exempt bonds cannot be used to pay for operating expenses 4
Sour
ce M
TCc
ago
v
Sour
ce C
ity o
f San
Dim
asSo
urce
OC
Regi
ster
Sour
ce C
harle
s OrsquoR
ear
Ways to Fund Projects
5
Cash (ldquoPay-As-You-Gordquo)
bull Small and recurring capital projects
bull Projects built slowly over time
bull Future Council flexibility
bull Opportunity cost of funds
bull Easiest source of money
Bond Financing
bull Large capital expenditures
bull Acquisition Projectsbull Future revenues
from Project available for debt service
bull Interest and financing costs
bull Staff resources required for financing
Federal and State Grants or Loans
bull ldquoFreerdquo money with strings attached
bull May require oversight or thorough review
bull Application process can be drawn-out and competitive
to maturity (called)bull If current market interest rates are
lower now than when the bond was issued it may make financial sense to issue new bonds at the lower interest rate to refund the outstanding bonds
bull Responsible practices dictate refunding should result in minimum 3-5 present value savings barring extenuating circumstances
bull Working Capital or Cash Flow Management (short-term notes)
6
Shor
t-te
rm N
otes
Refu
ndR
efin
ance
New
Mon
ey
Capital Improvement Projects
Infrastructure Development
Take advantage of lower interest rates to lower debt repayments
Simplify debt structure
TaxRevenueAnticipationNotes
(TRANs)
BondAnticipationNotes
(BAN)
Tax Exempt Nature of Municipal Bonds
bull Most municipal bonds are tax-exemptbull Bondholders do not pay State of Federal income tax on interest earnings from
municipal bondbull Investors are willing to purchase bond at lower interest ratebull IRS reprieve to help local governments fund projects and compete in the capital market
for investors against corporate bond issuers
bull Issuers are not allowed to earn ldquoArbitragerdquobull General rule ndash Issuers can invest bond proceeds and earn yield no higher than weighted
average cost of funds on bond (known as Arbitrage Yield)bull All excess earnings must be ldquoRebatedrdquo to IRS ndash 100 tax
bull Government gives up income tax revenues from bondholders on the interest of the bond
7
Introductory VocabularyIssuer Legal authority to approve and issue BondPrincipal Total amount borrowed (also known as par value)Coupon Nominal interest rate charged on the PrincipalInterest Additional amount paid on Principal (calculated with Principal times Coupon)Debt Service Annual Principal and Interest payments on the BondMaturity Date Principal is due
8
Interest Payment
Principal Repayment
AnnualDebt
Service
Bond Structuresbull Bonds are secured by different revenue sourcesbull Some require voter approval
9
Bonds Repaid With Dedicated Taxes
bull General Obligation (GO) (Local)
bull Sales Tax Revenuebull Special Taxbull Assessmentbull Tax Allocation
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
bull What is a Municipal Bond A Promise of a Borrower (Issuer) to repay a Lender (Bondholder) Issuer receives upfront cash payment and owes annual payments at a fixed interest rate Bondholder receives future repayment with interest
bull Personal Example ndash Home Mortgage Homeowner gets upfront cash from Bank to buy home Bank gets homeownerrsquos promise to make payments with interest
3
Government Bond Issuers Corporate Bond Issuers
Purpose of Municipal Bonds
bull Typically issued for infrastructure (water sewer streets bridges utilities) and capital improvement projects (libraries firepolice stations community centers stadiums parks)
bull Used as an alternative to cash or bank loans
bull Tax-exempt bonds cannot be used to pay for operating expenses 4
Sour
ce M
TCc
ago
v
Sour
ce C
ity o
f San
Dim
asSo
urce
OC
Regi
ster
Sour
ce C
harle
s OrsquoR
ear
Ways to Fund Projects
5
Cash (ldquoPay-As-You-Gordquo)
bull Small and recurring capital projects
bull Projects built slowly over time
bull Future Council flexibility
bull Opportunity cost of funds
bull Easiest source of money
Bond Financing
bull Large capital expenditures
bull Acquisition Projectsbull Future revenues
from Project available for debt service
bull Interest and financing costs
bull Staff resources required for financing
Federal and State Grants or Loans
bull ldquoFreerdquo money with strings attached
bull May require oversight or thorough review
bull Application process can be drawn-out and competitive
to maturity (called)bull If current market interest rates are
lower now than when the bond was issued it may make financial sense to issue new bonds at the lower interest rate to refund the outstanding bonds
bull Responsible practices dictate refunding should result in minimum 3-5 present value savings barring extenuating circumstances
bull Working Capital or Cash Flow Management (short-term notes)
6
Shor
t-te
rm N
otes
Refu
ndR
efin
ance
New
Mon
ey
Capital Improvement Projects
Infrastructure Development
Take advantage of lower interest rates to lower debt repayments
Simplify debt structure
TaxRevenueAnticipationNotes
(TRANs)
BondAnticipationNotes
(BAN)
Tax Exempt Nature of Municipal Bonds
bull Most municipal bonds are tax-exemptbull Bondholders do not pay State of Federal income tax on interest earnings from
municipal bondbull Investors are willing to purchase bond at lower interest ratebull IRS reprieve to help local governments fund projects and compete in the capital market
for investors against corporate bond issuers
bull Issuers are not allowed to earn ldquoArbitragerdquobull General rule ndash Issuers can invest bond proceeds and earn yield no higher than weighted
average cost of funds on bond (known as Arbitrage Yield)bull All excess earnings must be ldquoRebatedrdquo to IRS ndash 100 tax
bull Government gives up income tax revenues from bondholders on the interest of the bond
7
Introductory VocabularyIssuer Legal authority to approve and issue BondPrincipal Total amount borrowed (also known as par value)Coupon Nominal interest rate charged on the PrincipalInterest Additional amount paid on Principal (calculated with Principal times Coupon)Debt Service Annual Principal and Interest payments on the BondMaturity Date Principal is due
8
Interest Payment
Principal Repayment
AnnualDebt
Service
Bond Structuresbull Bonds are secured by different revenue sourcesbull Some require voter approval
9
Bonds Repaid With Dedicated Taxes
bull General Obligation (GO) (Local)
bull Sales Tax Revenuebull Special Taxbull Assessmentbull Tax Allocation
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Purpose of Municipal Bonds
bull Typically issued for infrastructure (water sewer streets bridges utilities) and capital improvement projects (libraries firepolice stations community centers stadiums parks)
bull Used as an alternative to cash or bank loans
bull Tax-exempt bonds cannot be used to pay for operating expenses 4
Sour
ce M
TCc
ago
v
Sour
ce C
ity o
f San
Dim
asSo
urce
OC
Regi
ster
Sour
ce C
harle
s OrsquoR
ear
Ways to Fund Projects
5
Cash (ldquoPay-As-You-Gordquo)
bull Small and recurring capital projects
bull Projects built slowly over time
bull Future Council flexibility
bull Opportunity cost of funds
bull Easiest source of money
Bond Financing
bull Large capital expenditures
bull Acquisition Projectsbull Future revenues
from Project available for debt service
bull Interest and financing costs
bull Staff resources required for financing
Federal and State Grants or Loans
bull ldquoFreerdquo money with strings attached
bull May require oversight or thorough review
bull Application process can be drawn-out and competitive
to maturity (called)bull If current market interest rates are
lower now than when the bond was issued it may make financial sense to issue new bonds at the lower interest rate to refund the outstanding bonds
bull Responsible practices dictate refunding should result in minimum 3-5 present value savings barring extenuating circumstances
bull Working Capital or Cash Flow Management (short-term notes)
6
Shor
t-te
rm N
otes
Refu
ndR
efin
ance
New
Mon
ey
Capital Improvement Projects
Infrastructure Development
Take advantage of lower interest rates to lower debt repayments
Simplify debt structure
TaxRevenueAnticipationNotes
(TRANs)
BondAnticipationNotes
(BAN)
Tax Exempt Nature of Municipal Bonds
bull Most municipal bonds are tax-exemptbull Bondholders do not pay State of Federal income tax on interest earnings from
municipal bondbull Investors are willing to purchase bond at lower interest ratebull IRS reprieve to help local governments fund projects and compete in the capital market
for investors against corporate bond issuers
bull Issuers are not allowed to earn ldquoArbitragerdquobull General rule ndash Issuers can invest bond proceeds and earn yield no higher than weighted
average cost of funds on bond (known as Arbitrage Yield)bull All excess earnings must be ldquoRebatedrdquo to IRS ndash 100 tax
bull Government gives up income tax revenues from bondholders on the interest of the bond
7
Introductory VocabularyIssuer Legal authority to approve and issue BondPrincipal Total amount borrowed (also known as par value)Coupon Nominal interest rate charged on the PrincipalInterest Additional amount paid on Principal (calculated with Principal times Coupon)Debt Service Annual Principal and Interest payments on the BondMaturity Date Principal is due
8
Interest Payment
Principal Repayment
AnnualDebt
Service
Bond Structuresbull Bonds are secured by different revenue sourcesbull Some require voter approval
9
Bonds Repaid With Dedicated Taxes
bull General Obligation (GO) (Local)
bull Sales Tax Revenuebull Special Taxbull Assessmentbull Tax Allocation
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
to maturity (called)bull If current market interest rates are
lower now than when the bond was issued it may make financial sense to issue new bonds at the lower interest rate to refund the outstanding bonds
bull Responsible practices dictate refunding should result in minimum 3-5 present value savings barring extenuating circumstances
bull Working Capital or Cash Flow Management (short-term notes)
6
Shor
t-te
rm N
otes
Refu
ndR
efin
ance
New
Mon
ey
Capital Improvement Projects
Infrastructure Development
Take advantage of lower interest rates to lower debt repayments
Simplify debt structure
TaxRevenueAnticipationNotes
(TRANs)
BondAnticipationNotes
(BAN)
Tax Exempt Nature of Municipal Bonds
bull Most municipal bonds are tax-exemptbull Bondholders do not pay State of Federal income tax on interest earnings from
municipal bondbull Investors are willing to purchase bond at lower interest ratebull IRS reprieve to help local governments fund projects and compete in the capital market
for investors against corporate bond issuers
bull Issuers are not allowed to earn ldquoArbitragerdquobull General rule ndash Issuers can invest bond proceeds and earn yield no higher than weighted
average cost of funds on bond (known as Arbitrage Yield)bull All excess earnings must be ldquoRebatedrdquo to IRS ndash 100 tax
bull Government gives up income tax revenues from bondholders on the interest of the bond
7
Introductory VocabularyIssuer Legal authority to approve and issue BondPrincipal Total amount borrowed (also known as par value)Coupon Nominal interest rate charged on the PrincipalInterest Additional amount paid on Principal (calculated with Principal times Coupon)Debt Service Annual Principal and Interest payments on the BondMaturity Date Principal is due
8
Interest Payment
Principal Repayment
AnnualDebt
Service
Bond Structuresbull Bonds are secured by different revenue sourcesbull Some require voter approval
9
Bonds Repaid With Dedicated Taxes
bull General Obligation (GO) (Local)
bull Sales Tax Revenuebull Special Taxbull Assessmentbull Tax Allocation
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
to maturity (called)bull If current market interest rates are
lower now than when the bond was issued it may make financial sense to issue new bonds at the lower interest rate to refund the outstanding bonds
bull Responsible practices dictate refunding should result in minimum 3-5 present value savings barring extenuating circumstances
bull Working Capital or Cash Flow Management (short-term notes)
6
Shor
t-te
rm N
otes
Refu
ndR
efin
ance
New
Mon
ey
Capital Improvement Projects
Infrastructure Development
Take advantage of lower interest rates to lower debt repayments
Simplify debt structure
TaxRevenueAnticipationNotes
(TRANs)
BondAnticipationNotes
(BAN)
Tax Exempt Nature of Municipal Bonds
bull Most municipal bonds are tax-exemptbull Bondholders do not pay State of Federal income tax on interest earnings from
municipal bondbull Investors are willing to purchase bond at lower interest ratebull IRS reprieve to help local governments fund projects and compete in the capital market
for investors against corporate bond issuers
bull Issuers are not allowed to earn ldquoArbitragerdquobull General rule ndash Issuers can invest bond proceeds and earn yield no higher than weighted
average cost of funds on bond (known as Arbitrage Yield)bull All excess earnings must be ldquoRebatedrdquo to IRS ndash 100 tax
bull Government gives up income tax revenues from bondholders on the interest of the bond
7
Introductory VocabularyIssuer Legal authority to approve and issue BondPrincipal Total amount borrowed (also known as par value)Coupon Nominal interest rate charged on the PrincipalInterest Additional amount paid on Principal (calculated with Principal times Coupon)Debt Service Annual Principal and Interest payments on the BondMaturity Date Principal is due
8
Interest Payment
Principal Repayment
AnnualDebt
Service
Bond Structuresbull Bonds are secured by different revenue sourcesbull Some require voter approval
9
Bonds Repaid With Dedicated Taxes
bull General Obligation (GO) (Local)
bull Sales Tax Revenuebull Special Taxbull Assessmentbull Tax Allocation
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Tax Exempt Nature of Municipal Bonds
bull Most municipal bonds are tax-exemptbull Bondholders do not pay State of Federal income tax on interest earnings from
municipal bondbull Investors are willing to purchase bond at lower interest ratebull IRS reprieve to help local governments fund projects and compete in the capital market
for investors against corporate bond issuers
bull Issuers are not allowed to earn ldquoArbitragerdquobull General rule ndash Issuers can invest bond proceeds and earn yield no higher than weighted
average cost of funds on bond (known as Arbitrage Yield)bull All excess earnings must be ldquoRebatedrdquo to IRS ndash 100 tax
bull Government gives up income tax revenues from bondholders on the interest of the bond
7
Introductory VocabularyIssuer Legal authority to approve and issue BondPrincipal Total amount borrowed (also known as par value)Coupon Nominal interest rate charged on the PrincipalInterest Additional amount paid on Principal (calculated with Principal times Coupon)Debt Service Annual Principal and Interest payments on the BondMaturity Date Principal is due
8
Interest Payment
Principal Repayment
AnnualDebt
Service
Bond Structuresbull Bonds are secured by different revenue sourcesbull Some require voter approval
9
Bonds Repaid With Dedicated Taxes
bull General Obligation (GO) (Local)
bull Sales Tax Revenuebull Special Taxbull Assessmentbull Tax Allocation
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Introductory VocabularyIssuer Legal authority to approve and issue BondPrincipal Total amount borrowed (also known as par value)Coupon Nominal interest rate charged on the PrincipalInterest Additional amount paid on Principal (calculated with Principal times Coupon)Debt Service Annual Principal and Interest payments on the BondMaturity Date Principal is due
8
Interest Payment
Principal Repayment
AnnualDebt
Service
Bond Structuresbull Bonds are secured by different revenue sourcesbull Some require voter approval
9
Bonds Repaid With Dedicated Taxes
bull General Obligation (GO) (Local)
bull Sales Tax Revenuebull Special Taxbull Assessmentbull Tax Allocation
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Voter Approval Required for Certain Types of Bondsbull Once a municipality has decided to issue bonds it may require voter approval to proceedbull Typically includes general obligation bonds or special tax type obligations
10
55 Approval
REQUIRED VOTER APPROVALFOR SCHOOL DISTRICT BONDS
67 Approval
REQUIRED VOTER APPROVALFOR LOCAL AGENCIES
50 Approval
REQUIRED VOTER APPROVAL FOR STATE BONDS
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Major Exceptions to Voter Approval Requirement
1 General Fund Lease Bondsbull Secured by lease payments for use of an assetbull Example Financing Authority leases City Hall to City in exchange for ldquorentrdquo payments which
equal debt service on Bondsbull Similar to equipment or vehicle lease
2 Special Revenue Fundsbull Debt service comes from specific revenue sourcebull Utility rates may be subject to approval process (Prop 218)bull Example Water sewer parking refuse airport convention center and golf course
3 Obligation Imposed by Lawbull Involuntary debt obligations enacted by a courtbull Example Pension Obligation or Bankruptcy
11
Process of Issuing a BondFrom Start to Finish
Financing Plan
13
Identify Project Needs and Cash Flowbull Timing of expenditures
Quantify Available Cash Resources to Apply towards Project
Project Repayment Resources for ongoing Debt Service
Develop Financial Modelbull Sources of Project Funding (Bonds andor Cash)bull Bond Debt Servicebull Available Annual Revenuesbull Coverage (RevenuesDebt Service)
Debt Policy Considerations
bull Essentiality of Projectbull Reserve levels to be maintainedbull Available cash to be applied towards Projectbull Financing structure
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
bull Conservative revenue growth assumptionsbull Drought impact on water revenuesbull Credit rating implications and impact on market interest rates
bull Continuing Disclosure Obligation
14
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
15
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
The Underwriting Process
bull The underwriter has a unique role they act as the middle-man buying bonds wholesale from the issuer and selling them on the market
bull Involved in pricing the bond and determining market-appropriate interest rates
bull Solicits investor interest
16
Mun
icip
al Is
suer Issues Bond
andReceives Proceeds from Underwriter U
nder
writ
er Buys entire Bond issue and reoffers to investors In
vest
ors Purchase Bond
from Underwriter
Receive periodic interest and principal payments
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
The Underwriting SELECTION Process
Competitive Salebull Financing Structure
created with Issuer Bond Counsel and Municipal Advisor
bull Underwriter services bid like construction project
bull Typically traditional Bond structure or higher rated credits
17
Negotiated Salebull Underwriter selected early
to assist in creation of Financing Structure
bull Allows Underwriter to better understand the credit to improve sale of bonds
bull Typically used on weaker rated credits
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Bond Sources and Usesbull Sources
bull PrincipalPar Amount ndash Total obligation amount (face value of Bond)
bull Purchase Premium ndash Amount generated from bondholders when Coupon is higher than market rate for similar maturity
bull Usesbull Project Fund ndash Project requirementbull Capitalized Interest Fund ndash Proceeds used to make interest
payments while Project is being completedbull Debt Service Reserve Fund ndash Proceeds set aside in trust
account to protect bondholders and make debt service payment if Issuer is unable to make payment Typically the lesser of 3 tests
1 Maximum annual debt service2 10 of par value3 125 of average annual debt service
bull Cost of Issuance Financing costs for bond amp disclosure counsel municipal advisor rating agency trustee title or property insurance official statement distribution
bull Underwriterrsquos Discount Fee paid to underwriter to sell Bonds
18
Sources
Bond Principal $10000000
Purchase Premium $500000
Total Proceeds $10500000
Uses of Funds
Project Fund $8000000
Capitalized Interest 1500000
Debt Service Reserve $800000
Costs of Issuance $150000
Underwriter Discount $50000
Total Proceeds $10500000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Serial and Term Bondsbull Bond issue will include multiple
maturities that can be either Serial or Term Bonds
bull Serial Bonds ndash Single bond with one maturity
bull Term Bonds ndash Single Bond with annual redemption of identified portion of Principal prior to final maturity
bull Sinking Fund provision ensures that the municipality pays off portions of the term bond each year
bull Bondholder does not know if their portion of Term Bond will be paid on sinking date or at final maturity (trustee uses lottery to determine who is paid early)
bull Bond amortization similar to mortgage schedule with portion including interest and principal
19
Matures Principal Coupon Interest Debt Service
Serial 6302017 $ - 150 $ 150000 $ 150000
Serial 6302018 $ 500000 175 $ 168966 $ 668966
Serial 6302019 $ 550000 180 $ 167586 $ 717586
Serial 6302020 $ 560000 200 $ 179310 $ 739310
Serial 6302021 $ 575000 225 $ 193966 $ 768966
Serial 6302022 $ 590000 250 $ 206897 $ 796897
Serial 6302023 $ 600000 275 $ 218103 $ 818103
Term 6302026 $ 2000000 400 $ 303448 $ 2303448
Term 6302030 $ 2400000 425 $ 307759 $ 2707759 Mandatory Sinking Fund Prepayment for 6302026 Term Bond
Payment Date Principal Amount
6302024 $ 600000
6302025 $ 650000
6302026 (maturity) $ 750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Determining Debt Service Schedulebull Structure the debt service according to the unique needs and situation of Project
bull Amortization refers to payment of Principal and the Interest due on the outstanding Principal balance each year
bull Level Debt service characterized by increasing Principal payments and decreasing Interest payments over time
bull Current Interest Bonds pay semi-annual Interest throughout the life of the Bondbull Capital Appreciation Bonds pay accrued Interest at maturity (Zero Coupon)bull Part of the financing costs can be defrayed using investment earnings on bond proceeds (with
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
CCC+ Caa1 CCC+CCC Caa2 CCC CCC- Caa3 CCC-CC Ca CC+C CC
CC-D D D
Highest Grade
Upper Mid Grade
Non-Investment Grade
Lower Mid Grade
Highly Speculative
In Default
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Credit Ratings and Yields
bull Currently required yield on a ldquoArdquo rated GO bond with 30 years to maturity is about 055 higher than the required Yield on a ldquoAAArdquo rated GO bond with the same maturity
bull Compensate investors for the higher risk of purchasing a bond with a lower credit rating (ie a higher chance of default)
bull An issuer that pays for bond insurance and effectively increases their rating from an ldquoArdquo rating to an ldquoAArdquo rating can save up to 025 on interest payments
bull From a historical perspective required yields on GO bonds are lower than they have been in the past 30 years
bull Implication is that refinancing done now will save money for the municipality in the long run (ie amount saved is equivalent to the difference in yields multiplied by time)
23
050
100
150
200
250
300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
ds (
)
Years to Maturity
How Credit Rating Affects Yields(2016)
AAA GO Bond AA GO Bond A GO Bond
050
150
250
350
450
550
650
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Yiel
d (
)
Maturity
Historical Yields on AA GO Bonds
2016 2006 1986Sources MMD
Credit Enhancements
bull Bond insurance companies can ldquocredit wraprdquo an Issuerrsquos Bondsbull Guarantees the BondholderInvestor additional protection in the event
Issuer cannot make the paymentbull Issuer pays a one-time premium to Bond Insurance Company for ldquoinsured
Ratingrdquobull Rating agencies assign rating to Bond Insurance Company based on financial
reserves credit exposure
bull Issuer Bond rating becomes rating of Bond Insurance Companybull Could change over time if financial position of Bond Insurance Company improves
or becomes weaker
24
Determine Market Interest Ratesbull Market rates based on Bond rating and Issuer
credit qualitiesbull Principal amount will also determine
bondholder interestbull Too small and institutional investors will ignore
regardless of credit ratingbull Market transparency makes finding
comparable bond issues easy (TM3 database)bull Special Bond Characteristics
bull Green Bonds ndash Special class of investorsbull Bank Qualified ndash Smaller Issuers provide traditional
banks with tax credits if invested in ldquoBank Qualified Bondsrdquo ndash typically under $10000000 in a single year
25
$26165000 $23710000 $95240000
OAKDALE IRRIGATION DISTRICT MADERA IRRIGATION DISTRICT MODESTO CALIF IRR DIST
WATER REVENUE REFUNDING BONDS SERIES 2016
WWATER REVENUE REFUNDING BONDS SERIES 2016
ELECTRIC SYSSTEM REFUNDING REVENEU BONDS SERIES 2016
SampP AA SampP AA (AGM) A (UNDERLYING) SampP A+ FITCH A+
NA AGM NAAugust 1 September 1 October 1
812023 PAR 912026 PAR 1012026 PAR
WELLS FARGO SECURITIES CITIGROUP GLOBAL MARKETS INC
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Pricing the Bondsbull Reoffering Yield Return to Bondholder after
adjusting Coupon for initial purchase premium or discount
bull ldquoReturn on investmentrdquo from the perspective of the investor
bull As price increases yield (return) decreases
bull Premium Bonds have a Coupon higher than the current market rates Purchase price above 100
bull Premium bond prices typically less volatile but have higher risk of being called later
bull Par Bonds have a Coupon rate that matches current market rates Purchase price 100
bull Discount Bonds have a Coupon lower than the current market rates Purchase price below 100
bull Discount Bonds less likely to be called
26
SettlementDate
Maturity Date Coupon
MarketYield Price
1212016 1212021 500 400 104452
1212016 1212021 500 425 103316
1212016 1212021 500 450 102195
1212016 1212021 500 475 101090
1212016 1212021 500 500 100000
1212016 1212021 500 525 98925
1212016 1212021 500 550 97865
1212016 1212021 500 575 96819
1212016 1212021 500 600 95788
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Effect of Price on Bond Size
bull Issuing a premium Bond can decrease need to issue as many Bonds
bull Increasing the coupon by 100 basis points (bps) or 100 has a big effect on bond price
bull In the example both the premium Bonds and the discount Bonds raised the same amount of money
ExampleIssue $10MM in 30-yr bonds Market Yield is 3501 Issue Premium Bonds at
450 price at $11839 Need to issue 8500 bonds to reach $10MM
2 Issue Par Bonds at 350 results in a price of $100 Need to issue 10000 bonds to reach $10MM
3 Issuing Discount Bonds at 250 results in a price of $8161 Need to issue 12250bonds to reach $10MM
27
As price increases
Size of the issue decreases
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Calculating Purchase Premiumsbull Purchase premium is a
function of the difference between the Underwriterrsquos purchase price and the re-offer price to the public
bull It depends on yields bond maturity and coupon rates
bull Total premium is an aggregate of premiums on individual issues
28
Maturity Par Amount Coupon Market YieldUnderwriter
Purchase Price
Reoffering Price Premium
1212017 $10000 500 475 $9900 $10024 $124
1212018 $10000 513 500 $9900 $10023 $123
1212019 $10000 525 513 $9900 $10034 $134
1212020 $10000 525 525 $9900 $10000 $100
1212021 $10000 525 550 $9900 $9893 -$107Total
Premium$474
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
The Official Statementbull Document created by Disclosure Counselbull Securities document required to educate bondholders prior to purchasing Bondbull Preliminary Official Statement (POS) must include
bull Issuer Profile and Legal Authoritybull Tax-Exempt or Taxable Bond Statusbull Principal Amount Maturity Datesbull RedemptionCall Provisionsbull Source of RepaymentSecurity for Bondholdersbull Remedies of Delinquencybull Issuer Credit and Community Demographics and Descriptionbull Credit EnhancementBond insurance information (if applicable)bull Finance team playersbull Continuing Disclosure requirements
bull Final Official Statement (FOS)bull Will include final Principal Amounts and Interest RatesCoupons
29
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Continuing Disclosure Requirementsbull Continuing Disclosure Certificate in the
Official Statement (OS) requires the issuer to
1 Post Financial Information and Operating Data to MSRBrsquos EMMA system annuallybull Generally due 9 months after end of public
agencyrsquos fiscal year
2 Provide notices of significant eventsbull Principal and interest payment delinquenciesbull Unscheduled draws on DSRFbull Unscheduled use of Credit enhancementbull Substitution of creditliquidity providersbull Rating changesbull Adverse tax opinions by IRSbull Bond calls and tender offersbull Defeasancesbull Bankruptcy insolvency receivership
30
bull Continuing Disclosure Certificate is legally binding
bull SEC has heightened scrutiny of Continuing Disclosure compliance
bull Failure to comply could lead to the SEC taking action against an issuer andor underwriter
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Bond Covenants
bull These promises commit the municipality to take action to preserve investor interests
bull Underscores the importance of maintaining documentation at the Issuer level to assure that these covenants are being honored
31
Promise to repay principal and interest
Promise to take necessary action to ensure payment
Promise to maintain tax exempt status
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Basic Bond MathPriceYield
TIC (Total Interest Cost)Debt Service Payments
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Basic Bond Math
bull Municipal Finance Professionals typically use customized financial software or complex Excel spreadsheets to make their calculations
bull Excel functions provide a fairly accurate approximation1 Bond Price2 Yield to Maturity3 Annual Debt Service Payments4 True Interest Cost
33
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Calculating Price on a Bond
bull You can use the equation
C=coupon payments i=interest rate M=payment at maturity n=number of periods
bull Excel function=PRICE(delivery date maturity date coupon yield value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Yield 450Maturity Value $100Coupon Payments per Year 1Day Count Basis 0 (0 = 360 daysyear)
Price
34
$10396
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Calculating Yield to Maturity
bull EquationBack-solves using bond price to determine yield
bull Excel Function=YIELD(delivery date maturity date coupon price value at maturity coupon payments per year day count basis)
ExampleDelivery Date 1212016Maturity Date 1212026Coupon (Interest Rate) 500Purchase Price $11000Maturity Value $10000Coupon Payments per Year 1Day Count Basis 0 (0=360 daysyr)
YTM35
378
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
Calculating Debt Service Payments
bull If public agency needs to issue Bonds to pay for a police station knowing the expected cost of the station how can you approximate the yearly debt service
bull Excel Function=PMT(Rate Number of periods Present Value Future Value when payment due)
Bond Issue Size $25000000PV $25000000FV $000Coupon 3500Years to Maturity 30When Payment Due 0 (0= end of period)
Approximate Yearly Debt Service
36
$1359283
Calculating True Interest Cost
bull Calculation of effective rate representing the present value of payments made on Bond to the NET price from Bond
bull All-inclusive borrowing rate on Bond
Excel function=IRR(values guess)
Values are a series of payments (cash outflows must have negative number cash inflows are positive)Guess gives Excel a place to start solving
Example$10000000 Bond with a 10 year maturity Knowing the Debt Service Schedule what is the TIC
Note Annual Debt Service as negative cash flows(money going out)
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Pre-Existing Debt Structure300000300000300000300000300000300000300000300000300000300000300000300000New Principal Payments003333336666669999991333332166666500000000011999998000000000323333310000000005266666400000000072999997000000000840000345000360000375000390000405000420000435000450000465000480000495000510000525000540000555000570000585000600000Interest3000003000003000002999000001299700000299999962994000005999999729900000099999999298500001499999952979000020999999329720000279999992964000035999998829550000449999986294300004499999862839500044999998627315000449999986261900004499999892502000044999998923805000449999989225450004499999892124000044999998919890000449999989184950004499999891705500044999998915570000449999989140400004499999891246500044999998910845000449999989918000044999998947470000449999989457150004499999901
Years
Bond Pricing Calculations
MMD
How Credit Rating Affects Yields
AAA GO Bond12345678910111213141516171819202122232425262728293007207808609610411499999999999999127139148157166175183188193199204209214218000000000000022212240000000000000222599999999999998227227999999999999982292299999999999999823123199999999999998233AA GO Bond07608509410611499999999999999128143159171819220821321800000000000002224000000000000022292342392430000000000000224624900000000000002250999999999999982522529999999999999825425499999999999998256257258A GO Bond0890991110000000000000112814155171920099999999999998212212319999999999999824124625099999999999998257262267271275277279281282283284285286287288
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Sources
Matures
Principal
Coupon
Interest
Debt Service
Bond Proceeds
63017
$ -
150
$ 150000
$ 150000
Par Amount
$ 1000000000
63018
$ 500000
175
$ 168966
$ 668966
Net Amount of Premium
$ 120000000
63019
$ 550000
180
$ 167586
$ 717586
Total
$ 1120000000
63020
$ 560000
200
$ 179310
$ 739310
63021
$ 575000
225
$ 193966
$ 768966
Uses
63022
$ 590000
250
$ 206897
$ 796897
Project Fund Deposits
63023
$ 600000
275
$ 218103
$ 818103
Project Fund
$ 930000000
Other Fund Deposits
63026
$ 2000000
400
$ 303448
$ 2303448
Capitalized Interest Fund
$ 134000000
Debt Service Reserve Fund
$ 22575550
63030
$ 2400000
425
$ 307759
$ 2707759
Delivery Date Expenses
Costs of Issuance
$ 15000000
Underwriters Discount
$ 18340000
Additional Proceeds
$ 124450
Total
$ 1120040000
SampP
Moodys
Fitch
AAA
Aaa
AAA
Highest Grade
AA+
Aa1
AA+
AA
Aa2
AA
AA-
Aa3
AA-
A+
A1
A+
Upper Medium Grade
A
A2
A
A-
A3
A-
BBB+
Baa1
BBB+
Lower Medium Grade
BBB
Baa2
BBB
BBB-
Baa3
BBB-
BB+
Ba1
BB+
Non-Investment Grade
BB
Ba2
BB
BB-
Ba3
BB-
B+
B1
B+
Highly Speculative
B
B2
B
B-
B3
B-
CCC+
Caa1
CCC+
CCC
Caa2
CCC
CCC-
Caa3
CCC-
CC
Ca
CC+
In Default
C
CC
CC-
D
D
D
AAA GO
AA GO
A GO
92116
92116
92116
1
072
076
089
2
078
085
099
3
086
094
111
4
096
106
128
5
104
115
14
6
115
128
155
7
127
143
17
8
139
159
19
9
148
17
201
10
157
18
21
11
166
19
221
12
175
2
232
13
183
208
241
14
188
213
246
15
193
218
251
16
199
224
257
17
204
229
262
18
209
234
267
19
214
239
271
20
218
243
275
21
221
246
277
22
224
249
279
23
226
251
281
24
227
252
282
25
228
253
283
26
229
254
284
27
23
255
285
28
231
256
286
29
232
257
287
30
233
258
288
AAA GO
AAA GO
AAA GO
92116
92106
92286
1
072
348
425
2
078
348
47
3
086
348
51
4
096
349
53
5
104
351
55
6
115
353
57
7
127
356
59
8
139
36
6
9
148
364
61
10
157
369
62
11
166
374
63
12
175
378
64
13
183
382
65
14
188
386
66
15
193
389
67
16
199
392
675
17
204
395
675
18
209
397
68
19
214
399
68
20
218
401
68
21
221
403
685
22
224
405
685
23
226
407
685
24
227
409
685
25
228
411
685
26
229
413
69
27
23
415
69
28
231
416
69
29
232
417
69
30
233
417
69
Settlement Date
Maturity Date
Coupon
MarketYield
Price
Calculated Yield
12116
12121
500
400
104452
P
004
IRRTIC
R
2 Bonds
12116
12121
500
425
103316
E
00425
Amount
Maturity Date
M
1st Bond
12116
12121
500
450
102195
I
0045
2nd Bond
U
12116
12121
500
475
101090
M
00475
12116
12121
500
500
100000
PAR
005
12116
12121
500
525
98925
D
00525
I
Par Value
100
12116
12121
500
550
97865
S
0055
Coupon
500
C
UW Purchase Price
9998
12116
12121
500
575
96819
O
00575
Re-Offer Price
104452
U
Purchase Premium
4472
12116
12121
500
600
95788
N
006
T
Maturity
Par Amount
Coupon
Market Yield
UnderwriterPurchase Price
Re-Offer Price
Premium
Price and Yield Calcs
PMT Calcs
12116
Prem
12117
$10000
500
475
$9900
$10024
$124
Market Yield
0035
12116
($135928329)
Prem
12118
$10000
513
500
$9900
$10023
$123
Premium
0045
12126
Prem
12119
$10000
525
513
$9900
$10034
$134
Discount
0025
5
Par
12120
$10000
525
525
$9900
$10000
$100
12116
450
110
Disc
12121
$10000
525
550
$9900
$9893
-$007
12146
100
Totals
Total Premium
$474
100
1
0
Premium Price
1183920454114
1039563590886
00378052414
Discount Price
816079545886
Cash FlowDate
Annual Debt Service Amount
12116
$ 10000000
12117
$ (1050000)
12118
$ (1050000)
12119
$ (1050000)
12120
$ (1050000)
12121
$ (1150000)
12122
$ (1150000)
12123
$ (1150000)
12124
$ (1250000)
12125
$ (1250000)
12126
$ (2250000)
3727
Level Debt Service
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
448275878
003
300000
3448275878
2
96551724122
55172415434
003
289655172366
3448275878
3
93103448244
65517243068
003
279310344732
3448275878
4
89655172366
75862070702
003
268965517098
3448275878
5
86206896488
86206898336
003
258620689464
3448275878
6
8275862061
9655172597
003
24827586183
3448275878
7
79310344732
106896553604
003
237931034196
3448275878
8
75862068854
117241381238
003
227586206562
3448275878
9
72413792976
127586208872
003
217241378928
3448275878
10
68965517098
137931036506
003
206896551294
3448275878
11
6551724122
14827586414
003
19655172366
3448275878
12
62068965342
158620691774
003
186206896026
3448275878
13
58620689464
168965519408
003
175862068392
3448275878
14
55172413586
179310347042
003
165517240758
3448275878
15
51724137708
189655174676
003
155172413124
3448275878
16
4827586183
20000000231
003
14482758549
3448275878
17
44827585952
210344829944
003
134482757856
3448275878
18
41379310074
220689657578
003
124137930222
3448275878
19
37931034196
231034485212
003
113793102588
3448275878
20
34482758318
241379312846
003
103448274954
3448275878
21
3103448244
25172414048
003
931034473200001
3448275878
22
27586206562
262068968114
003
827586196860001
3448275878
23
24137930684
272413795748
003
724137920520001
3448275878
24
20689654806
282758623382
003
620689644180001
3448275878
25
17241378928
293103451016
003
517241367840001
3448275878
26
1379310305
30344827865
003
413793091500001
3448275878
27
10344827172
313793106284
003
310344815160001
3448275878
28
689655129400003
324137933918
003
206896538820001
3448275878
29
344827541600003
334482761552
003
103448262480001
3448275878
30
-00461999965
344827589186
003
-000
3448275878
Level Principal
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
1
10000000
33333333
003
300000
63333333
2
966666667
33333333
003
2900000001
6233333301
3
933333334
33333333
003
2800000002
6133333302
4
900000001
33333333
003
2700000003
6033333303
5
866666668
33333333
003
2600000004
5933333304
6
833333335
33333333
003
2500000005
5833333305
7
800000002
33333333
003
2400000006
5733333306
8
766666669
33333333
003
2300000007
5633333307
9
733333336
33333333
003
2200000008
5533333308
10
700000003
33333333
003
2100000009
5433333309
11
66666667
33333333
003
200000001
533333331
12
633333337
33333333
003
1900000011
5233333311
13
600000004
33333333
003
1800000012
5133333312
14
566666671
33333333
003
1700000013
5033333313
15
533333338
33333333
003
1600000014
4933333314
16
500000005
33333333
003
1500000015
4833333315
17
466666672
33333333
003
1400000016
4733333316
18
433333339
33333333
003
1300000017
4633333317
19
400000006
33333333
003
1200000018
4533333318
20
366666673
33333333
003
1100000019
4433333319
21
33333334
33333333
003
100000002
433333332
22
300000007
33333333
003
900000021
4233333321
23
266666674
33333333
003
800000021999999
4133333322
24
233333341
33333333
003
700000022999999
4033333323
25
200000008
33333333
003
600000023999999
3933333324
26
166666675
33333333
003
500000024999999
3833333325
27
133333342
33333333
003
400000025999999
3733333326
28
100000009
33333333
003
300000026999999
3633333327
29
666666759999998
33333333
003
200000027999999
3533333328
30
333333429999998
33333333
003
1000000
3433333329
31
0
33333333
003
000
333333333
Wrap Option
PrincipalOutstanding
Principal Paid
Coupon
Interest
Debt Service
Pre-Existing Debt
1
10000000
0
003
300000
600000
300000
2
10000000
0
003
300000
600000
300000
3
10000000
333333
003
300000
60333333
300000
4
999666667
666666
003
2999000001
6065666601
300000
5
999000001
999999
003
2997000003
6096999903
300000
6
998000002
1333332
003
2994000006
6127333206
300000
7
99666667
1666665
003
299000001
615666651
300000
8
995000005
1999998
003
2985000015
6184999815
300000
9
993000007
2333331
003
2979000021
6212333121
300000
10
990666676
2666664
003
2972000028
6238666428
300000
11
988000012
2999997
003
2964000036
6263999736
300000
12
985000015
40000
003
2955000045
6355000045
300000
13
981000015
345000
003
2943000045
6393000045
14
946500015
360000
003
2839500045
6439500045
15
910500015
375000
003
2731500045
6481500045
16
873000015
390000
003
2619000045
6519000045
17
834000015
405000
003
2502000045
6552000045
18
793500015
420000
003
2380500045
6580500045
19
751500015
435000
003
2254500045
6604500045
20
708000015
450000
003
2124000045
6624000045
21
663000015
465000
003
1989000045
6639000045
22
616500015
480000
003
1849500045
6649500045
23
568500015
495000
003
1705500045
6655500045
24
519000015
510000
003
1557000045
6657000045
25
468000015
525000
003
1404000045
6654000045
26
415500015
540000
003
1246500045
6646500045
27
361500015
555000
003
1084500045
6634500045
28
306000015
570000
003
918000044999999
6618000045
29
249000015
585000
003
747000044999999
6597000045
30
190500015
600000
003
5715000
6571500045
31
130500015
003
3915000
391500044999999
869499985
Principal
Coupon
Interest
Debt Service
Principal
Coupon
Interest
Debt Service
Mandatory Sinking Fund Prepayment
63017
10000000
448275878
003
300000
3448275878
63017
$ -
150
$ 150000
$ 150000
Payment Date
Principal Amount
63018
96551724122
55172415434
003
289655172366
3448275878
63018
$ 500000
175
$ 168966
$ 668966
63024
$ 60000000
63019
93103448244
65517243068
003
279310344732
3448275878
63019
$ 550000
180
$ 167586
$ 717586
63025
$ 65000000
63020
89655172366
75862070702
003
268965517098
3448275878
63020
$ 560000
200
$ 179310
$ 739310
6302026 (maturity)
$ 75000000
63021
86206896488
86206898336
003
258620689464
3448275878
63021
$ 575000
225
$ 193966
$ 768966
63022
8275862061
9655172597
003
24827586183
3448275878
63022
$ 590000
250
$ 206897
$ 796897
63023
79310344732
106896553604
003
237931034196
3448275878
63023
$ 600000
275
$ 218103
$ 818103
63026
75862068854
117241381238
003
227586206562
3448275878
63026
$ 2000000
400
$ 303448
$ 2303448
63030
72413792976
127586208872
003
217241378928
3448275878
63030
$ 2400000
425
$ 307759
$ 2707759
Mandatory Sinking Fund Prepayment
Payment Date
Principal Amount
63024
600000
63025
650000
6302026 (maturity)
750000
What is Arbitrage
bull Internal Revenue Service defines ldquoArbitragerdquo as the earnings on bond proceeds that exceed the allowable yield
bull The Arbitrage Yield is the rate the Issuer is paying for the Bondsbull Includes principal interest and any reoffering premium or discountbull Also includes any credit enhancement premiumbull Does NOT include underwriter discount or costs of issuance
bull Issuer must ldquoRebaterdquo 100 of excess earnings on Bonds back to the Federal Government
bull IRS does not want Issuers making money on the money they borrow
38
Real life ExampleSacramento Golden 1 Center
Recent Example Golden 1 Center FinancingFuture Sports and Entertainment Complex Cost $299995000bull Sacramento Public Financing
Authority issued Lease Revenue Bonds (LRB)
bull Security Lease agreement with the City of Sacramento
bull Repayment Source Net Parking Revenues and Rent Payments from the Kings)
bull Exempt from State income tax Federally taxable
bull Final Maturity 2050bull Serial Bonds 2016-2023bull Term Bonds 2050 (Sinking Fund Provision)
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
41Bond Investors
Rent from Kings Basketball Team
Parking Revenues Collected by City
Double-Barrel Pledge
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Assemble Financing Teambull IssuerBorrower Public agency responsible for approval and repayment obligationbull Municipal Advisor Project manager who develops and implements financing plan
on behalf of issuerbull Bond Counsel legal representation regarding the tax-exempt status and legitimacy
of the Bondsbull Disclosure Counsel legal representation to Issuer amp Bondholders on disclosure of
credit - Official Statement (OS)bull Bond Underwriter serves as a middle-man to aggregate bondholders to sell Issuer Bonds
bull Makes an offer to the Issuer to purchase Bonds and resell to bondholders (individual institutional)bull If Bonds are not all pre-sold underwriter ldquoholdsrdquo the balance for future resale
bull Trustee Administrative duties related to protecting bondholders including collecting payments from Issuer and disbursement to bondholders
bull Rating Agency 3rd party credit review firm responsible for assigning rating based on creditworthiness of Issuer and Bond structure (relied on by Bondholders)
42
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Golden 1 Center Debt Service and Sources and Uses Tables
Level Annual Debt Service
43
Usesbull Project Fundbull Capitalized Interest to make interest
payments until project completion (October 2016)
bull Reserve Fund (MADS)bull COI Fund (costs of financing)
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Golden 1 Center OSbull Par Amount Issuer Issue Type Credit
Rating
bull Date of Issuance
bull Purpose of the Bonds
bull Project DescriptionObligations of Issuer
bull Security for Bonds
bull Tax Status
bull Underwriters44
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Summary of Presentation
bull Understand Bond Basicsbull Develop Financial Plan for Projectbull Adopt Debt Policies and Procedures to Guide Processbull Work with Finance Team to Implement Best Financial Solutionbull Understand and Prepare for ongoing Continuing Disclosure
Requirements once Bonds are issued
45
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
Voter Approval Required for Certain Types of Bonds
Major Exceptions to Voter Approval Requirement
Process of Issuing a Bond
Financing Plan
Debt Policy Considerations
Assemble Financing Team
The Underwriting Process
The Underwriting SELECTION Process
Bond Sources and Uses
Serial and Term Bonds
Determining Debt Service Schedule
Alternative Debt Structures
Credit Rating Agencies
Credit Ratings and Yields
Credit Enhancements
Determine Market Interest Rates
Pricing the Bonds
Effect of Price on Bond Size
Calculating Purchase Premiums
The Official Statement
Continuing Disclosure Requirements
Bond Covenants
Basic Bond Math
Basic Bond Math
Calculating Price on a Bond
Calculating Yield to Maturity
Calculating Debt Service Payments
Calculating True Interest Cost
What is Arbitrage
Real life Example
Recent Example Golden 1 Center Financing
Slide Number 41
Assemble Financing Team
Golden 1 Center Debt Service and Sources and Uses Tables
Golden 1 Center OS
Summary of Presentation
Contact Information
Contact Information
bull Brad Koehn Director of Finance amp Administrative Servicesbull City of Elk Grove (Issuer ndash Public Agency)bull 9166273221bull BkoehnElkGroveCityorg
