Issuing Municipal Debt

Why issue debt?

• Capital Project FundingBecause of the high cost of acquiring or replacing capital assets governments are generally not able to accumulate enough cash from current receipts to pay for necessary improvements.

• Short Term NeedsGovernments borrow in anticipation of future revenue streams.

• Refund BondsRefunding bonds are used to re-finance a prior issue or issues to achieve lower interest rates

Types of Municipal Bonds

• General Obligation BondsIssuer pledges to levy the necessary taxes on all assessable property within its jurisdiction to provide timely repayment of the debt, usually ad valorem tax or sales tax.

Typically issued to finance government improvements benefitting the community as a whole.

General Obligation Bond

• AdvantagesReadily accepted in the marketplace due to the strength of the security pledge (“full faith & credit”)Usually have lower interest rates than revenue bondsNo reserve fund requiredLower costs of issuance

General Obligation Bond

• DisadvantagesTax limitationsRequire voter approval Difficult to enter the market quickly

Type of Municipal Bonds

• Revenue BondsIssuer pledges a specific source of funds, either from the operations of the project being financed or from a dedicated revenue stream such as utility revenues, ticket sales etc. Issuer may also pledge tax revenue in addition to the specific revenues.

Revenue Bonds

• AdvantagesVoter approval usually not requiredEnter the market quicklyDebt secured by system users

Revenue Bonds

• DisadvantagesConsidered less secure than GO BondsCredit enhancement may be neededReserve fund requiredIssuer subject to bond indenture requirementsHigher costs of issuance than GO bonds

Financing TeamInternal Team

• Administrative – City Manager, Administrative Team, Mayor

• Finance staff• Development Services staff, Utility staff, other

enterprise fund staff• Legal

Financing TeamExternal Team

• Financial Advisor Assists in evaluating alternatives for fundingAssists in producing and reviewing documentsDesigns debt structureRecommends timing of saleAssists with rating presentationObtains credit enhancement if warrantedConducts pre-marketing of issue (Competitive Sale) Evaluates Bids (Competitive Sale)Oversees pricing and allocation of bonds in a negotiated sale

Financing TeamExternal Team

• Bond Counsel/Tax CounselCertify that issuer has legal authority to issueEnsure compliance with state and local lawsDraft legal documentsReview documents prepared by other counselProvide legal opinion on exemption from federal and if applicable, state and local income tax

Financing TeamExternal Team

• UnderwriterPurchase bonds from issuer and remarket to investorsPrepare structure alternativesAssist in preparation of financing packageCoordinates meetings and document reviewOversees application for credit enhancementConduct premarketing activities with issuer

Financing TeamExternal Team

• Underwriter’s counselPrepares the disclosure document (Preliminary Official Statement, Official Statement)Prepares the bond purchase agreementNegotiates on behalf of the underwriterEnsures compliance with securities lawConducts “due diligence”

• Credit Enhancement ProviderGuarantees the timely payment of debt service

• Credit rating agencies: Standard and Poors, Fitch, MoodysEvaluate and publish opinion of the credit quality of the debt

Financing TeamExternal Team

• Paying agent/RegistrarReceives funds from issuers and makes payments to bondholdersIssues new bond certificates when the bonds are traded in the secondary marketResponsible for tax reporting to the Federal government regarding the amount of interest paid to the investors

Financing TeamExternal Team

• Other possible vendors include:• Arbitrage agent – computes arbitrage liability• Refunding verification agent – verifies funds in

escrow for refunding• Printers – print bond documents

Bond Documents• Ordinances/ResolutionsCouncil/Trustees Authorize Referendum and/or borrowing; approve bond sale• Disclosure Documents-Official StatementsSatisfy full disclosure requirements and avoid antifraud liabilities of securities lawUsed as a selling documentPreliminary Official Statement will include descriptions of the issuers organization and management, project details, financial information, details the financing team, describes underlying security for the issue, details continuing disclosure requirementsFinal Official Statement will include elements from the preliminary statement but will also include all final details such as interest rates, maturity dates, etc.

Bond Documents

• Bond Purchase AgreementContract between issuer and underwriterRepresentations and warrantiesCertificates and opinions – closing conditions• Tax Document – determines tax status and

events which may change tax status

Bond Documents

• Bond IndentureContract between the issuer and the bondholdersSpecifies interest rates, maturity dates, timing of interest payments, callable featuresFinancial covenants and formulas for calculating compliance with the convents

Credit Enhancements

• Bond insurance• Additional security pledge

Ratings

Credit ratings affect the degree of investor receptivity for an issuers bonds and therefore the cost of borrowing.

A credit rating provides and easily understandable measure of the degree of risk of an issuer’s securities. These ratings are used by investors as a substitute for or to enhance their own research when making a decision to purchase bonds.

Ratings

• Standard and Poors and FitchAAA highest quality, ratings below BBB are below investment grade• MoodysAaa highest quality, ratings below Baa are below investment grade

It is recommended that more than one rating be obtained so that issuer is not dependent on the philosophy of only one firm.

Rating Factors• Debt Management – an assessment of the issuer’s ability to support existing and

planned debt obligations• Administrative Issues – a review of the organization and powers of the

government’s administration and the services for which it is directly responsible• Financial Performance – an analysis of revenue and expenditure trends and the

adequacy, dependability and scope of revenues, adequate reserve funds• Economic Base – an evaluation of the economic outlook for the issuer, focusing

on income, population, employment, diversity and composition of employers and real estate values

• Review of specific issue features – an evaluation of contracts and/or agreements specific to the funding, rate covenants, and or feasibility studies

• Bond Insurance used as a credit enhancement will attach a rating that is the underlying rating of the insurer.

Process• Establish authority to issue (council/trustee action and/or affirmed by

referendum• Financing team selected• Issuer works with the financing team to create and review all documents,

secure ratings or credit enhancement and market the bonds• Underwriter buys the bonds from the issuer and all final documents are signed

and payment is made for all costs of issuance. The remaining proceeds are forwarded to the issuer

• Underwriter sells bonds in the secondary market to investors• Issuer makes required principle and interest payments to the paying agent who

makes payment to the bondholders at each maturity for the life of the issue• Issuer complies with continuing disclosure requirements for the life of the issue• Ratings may be reaffirmed during the life of the issue

• Chief Financial OfficerMarcy Lamb

mlamb@stillwater.org

City of Stillwater723 S. Lewis StStillwater, Oklahoma

Sept. 23, 2013