technical discussion of: debt financing alternatives for private water utilities (infrastructure,...
TRANSCRIPT
Technical Discussion of: Debt Financing Alternatives for Private Water Utilities (Infrastructure, Refinancings, Acquisitions & Raising Capital)
Monday, October 31, 201111:45 A.M. – 1:00 P.M.
Presented by:Mark Reader, Managing Director, Phoenix [email protected]; (602) 794-4011Bryan Lundberg, Managing Director, [email protected]; (602) 794-4007
2555 East Camelback Road, Suite 280 Phoenix, Arizona 85016 (602) 794-4000
2
Disclosure
Pursuant to revised Municipal Securities Rulemaking Board (“MSRB”) Rule G-23 (the “Rule”), in connection with new issues for which the Time of Formal Award occurs after November 27, 2011, a broker, dealer, or municipal securities dealer (“dealer”) is prohibited from acting as a Financial Advisor or Municipal Advisor, as defined in Section 15B of the Exchange Act of 1934 (as amended), to an issuer for a particular issue sold on a negotiated or competitive bid basis and subsequently switching roles to act as underwriter or placement agent with respect to the same issue. In compliance with the rules set forth by the MSRB, Stifel, Nicolaus & Company, Inc. (“Stifel”) may act as an underwriter or placement agent and not a Financial Advisor or Municipal Advisor in connection with all services proposed and/or provided. MSRB Notice 2011-29 (the “Notice”) defines as “underwritings” both (i) the acquisition of all or any portion of an issue, directly or indirectly, from the issuer as principal, either alone or as a participant in a syndicate or other similar account formed for that purpose and (ii) acting as an agent for the issuer in arranging the placement of an issue. Additionally, the MSRB defines the role of an underwriter in the Notice, which states, “the primary role of an underwriter is to purchase securities in an arm’s-length commercial transaction between the issuer and the underwriter” and, “the underwriter has financial and other interests that differ from those of the issuer.” Furthermore, the Rule states that an underwriter may provide advice concerning the structure, timing, terms, and other similar matters related to the issuance of municipal securities to the extent the underwriter discloses that such advice is provided with respect to the underwriting and not in relation to a financial advisory relationship, as specifically defined in the Rule. Accordingly, any such services provided by Stifel as they relate to our role as underwriter or placement agent should not be construed as those of a Financial Advisor or Municipal Advisor and such notice, as described above, is hereby provided as set forth in the Rule.
Additional information is available upon requestStifel, Nicolaus & Company, Inc., 501 N. Broadway, St. Louis, MO 63102
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Table of Contents
1. Purpose of Presentation
2. Executive Summary
3. U.S. Tax Exempt Capital Markets
4. U.S. Debt Securities Markets
5. Private Water and Wastewater Utility Credit Rating Criteria
6. Financing Alternatives for Private Water Companies (Water & Wastewater Infrastructure Improvements)
• Summary• Water Infrastructure Finance Authority of Arizona (WIFA)• Private Activity (Tax-Exempt) Bonds [Public Offering or Private Placement]• Sample $10 Million Financing• Sample Refunding Case Study: ABC Water Company Revenue Bonds-Refunding
Analysis
7. Financing Alternatives Utilized by Arizona Governments to Fund Water & Wastewater Acquisition & Infrastructure Improvements
8. Role of Underwriter/Private Placement Agent or Financial Advisor
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Table of Contents
APPENDIX (Included as Separate handout)
A. Water & Wastewater Utility Credit Rating Criteria & Reports
B. Sample IDA Policies and Procedures and Application Guidelines
C. Arizona Commerce Authority Program Summary and Private Activity Bonds & Volume Cap Application Procedures
D. WIFA Policies & Procedures
E. Utility Bond Experience Since January 2006
Purpose of Presentation
6
Purpose of Presentation
Educate WUAA members on how to access tax-exempt, low cost, debt financing options available in Arizona, including Private Activity Tax-Exempt Utility Revenue Bonds (Public Offering or Private Placement) and the Water Infrastructure Finance Authority of Arizona (WIFA)
~ Taxable obligations can also be issued for raising equity capital
Review utility revenue bond refinancing mechanics and current opportunities
Educate WUAA members on how Arizona cities/towns/counties and special districts finance their public infrastructure improvements (if desired)
Introduce S&Y – a premier investment banking firm that specializes in water & wastewater utility revenue & tax secured financings
~ Underwriter (UW)/Private Placement Agent (PPA)~ Financial Advisor (FA)
Executive Summary
8
Executive Summary Tax exempt markets are a viable source of low cost debt capital
Equity market remains volatile Treasury yields plummet; approach all-time lows; tax exempt market
follows Demand for tax exempt rated utility system credits has been elevated in
today’s market
Industrial Development Authorities provide access for private utility companies Federal tax exempt borrowing authority given to each state, for annual
capacity allocation Entities eager to provide capacity for viable projects
Project Finance Approach de linked from corporate guarantees Debt is issued leveraging the credit of the customer rate base of individual
water systems Rate setting covenant to maintain minimum debt service coverage ratio Anti dilution covenant via additional bonds test Pledge of net revenues and not balance sheet assets No corporate cross collateral pledges
Arizona Corporation Commission Oversight Review of rate setting process Cost of capital calculations included in rate process
U.S. Tax-Exempt Capital Markets
10
Municipal Tax-Exempt Interest Rates
Tax-exempt revenue bond rates remain near historic lows
Source: The Bond Buyer. Tax-Exempt Bonds maturing in 30 years with average rating of A1/A+. As of 10/24/2011.
1111
Municipal Tax-Exempt Interest Rates
Percentage of the Time RBI Has Been Below the Current Level Since 1980
Source: The Bond Buyer. Tax-Exempt Bonds maturing in 30 years with average rating of A1/A+. As of 10/24/2011.
Historical RBI Levels (January 1980 to Present)
Tax-exempt revenue bond rates remain near historic lows
4.0
6.0
8.0
10.0
12.0
14.0
1980 1985 1990 1995 2000 2005 2010
(%)
Average = 6.90%
Current Level = 5.07%
4.58%
7.78%
10.97%
14.35%
18.08%
23.75%
28.33%
32.43%
36.05%
39.60%
42.50%
-30 bps
-20 bps
-10 bps
5.07% (Current)
+10 bps
+20 bps
+30 bps
+40 bps
+50 bps
+60 bps
+70 bps
(+)
(-)
12
Municipal market sells off over the past few weeks Yields remain historically low following recent Treasury rally Recent correction brings rates just above 2010 lows but still well below January 2011
highs Yield curve particularly steep inside of 10 years
Municipal Market Overview
Source: Thomson Financial.
Positive market tone cools, but rates remain low
Municipal Market Data (MMD) Yield Curves
30-Year MMD Yield (1/1/2010-10/24/2011)
3.0%
3.3%
3.6%
3.9%
4.2%
4.5%
4.8%
5.1%
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
1 4 7 10 13 16 19 22 25 28Maturity
January 2011 Yield Highs (1/14/11 'AAA' MMD)
Summer 2010 Rally Lows (8/26/10 'AAA' MMD)
Current (10/24/11 'AAA' MMD)
1313
Financial markets
Equity markets rebound slightly after enduring heavy losses in September; Q3 2011 finished as worst quarter in previous 3 years
Treasury rates remain historically low amid European debt fears and economic uncertainty
Economic indicators
Payrolls increased by 103,000 in September (forecast: 60,000), lowering fears of recession
Q2 2011 GDP abysmal at 1.3%
Unemployment rate holds at 9.1%
Eyes on the Fed
Federal Reserve announces operation “twist”; to be completed by June 2012
Will buy $400 billion of UST securities with maturities in 6- to 30-year range, sell equivalent amount of securities with maturities of 3 years or less
Fed Funds rate to remain “exceptionally low” at least through mid-2013 (Fed)
10-Year and 30-Year U.S. Treasuries (1/1/11-10/24/11)
Financial Markets Overview
Source: Bloomberg.
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan
-11
Feb
-11
Mar
-11
Ap
r-11
May
-11
Jun
-11
Jul-
11
Aug
-11
Sep
-11
Oct
-11
(%)
10-year UST
30-year UST
Market-Surveyed Forecasts1 (%)
10/24/11 Current
Q4 '11 Forecast
Q1 '12 Forecast
Q2 '12 Forecast
Q3 '12 Forecast
Fed Funds Target2 0.25 0.25 0.25 0.25 0.25
2-Year T-note 0.28 0.25 0.30 0.40 0.45
10-Year T-note 2.23 2.10 2.25 2.40 2.60
30-Year Bond 3.25 3.25 3.29 3.50 3.65
Current Rates3 (%)
Securities Industry and Financial Markets Association (SIFMA) Index 0.14
1-Month LIBOR 0.24
Bond Buyer 20 – Bond Index GO 4.08
Bond Buyer Revenue Bond Index 5.07
Economic Data4 (%)
Q2 '11Actual
Q3 '11 Forecast
Q4 '11 Forecast
Q1 '12 Forecast
Q2 '12 Forecast
Real GDP 1.30 1.95 2.00 2.00 2.20
Consumer P rices 3.47 3.70 3.30 2.50 2.10
Unemployment (%) 9.10 9.10 9.10 9.00 8.901 Bloomberg Surveys as of October 12, 2011.2 On December 16, 2008, the Fed lowered its target rate to a range of 0.00% - 0.25%.3 Market data as of October 24, 2011.4 Bloomberg Surveys as of October 12, 2011.
U.S. Debt Securities Markets
15
Debt Issuance in the U.S. Securities Markets
(a) Includes all non-convertible debt, MTNs and Yankee bonds, but excludes CDs and federal agency debt.
(b) Includes GNMA, FNMA, and FHLMC mortgage-backed securities and CMOs and private-label MBS/CMOs.
(c) Interest bearing marketable coupon public debt.
Source: Federal Reserve System and Securities Industry and Financial Markets Association (SIFMA)
Debt Issuance in the U.S. Securities Markets
$0.0 $250.0 $500.0 $750.0 $1,000.0 $1,250.0 $1,500.0 $1,750.0 $2,000.0
Municipal
Treasury (c)
Mortgage-Related (b)
Corporate Debt (a)
Federal Agency Securities
Asset-Backed
Typ
e of Sec
uri
ty
Amount ($ Billions)
2009 2010
16
Outstanding U.S. Debt Securities (2nd Quarter 2011)
(a) Interest bearing marketable public debt.(b) Includes GNMA, FNMA and FHLMC mortgage-backed securities and CMOs and private-label MBS/CMOs.(c) Estimates by the Securities Industry and Financial Markets Association.(d) Includes commercial paper, bankers acceptances and large time deposits.Source: Federal Reserve System and Securities Industry and Financial Markets Association (SIFMA)
2nd Qtr 2011
Total = $35,227.3
2nd Qtr 2011
Total = $35,227.3
Outstanding U.S. Debt Securities
(as of June 30, 2011)
($s in Billions)
Corporate Debt (c)
$7,666.5
21.8%Mortgage-Related (b)
$8,327.7
23.6%
Treasury (a)
$9,191.6
26.1%
Municipal
$2,886.0
8.2%
Asset-Backed (c)
$1,877.9
5.3%Money Markets (d)
$2,897.0
8.2%Federal Agency Securities
$2,380.6
6.8%
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Holders of Municipal Securities and Loans (Debt) 2nd Q 2011
(a) Includes nonfinancial corporate business, nonfarm noncorporate business, state and local governments and retirement funds and government-sponsored enterprises.(b) Includes property-casualty and life insurance companies.(c) Includes commercial banks, savings institutions and brokers and dealers.(d) Includes mutual funds, money market funds and close-end funds.Source: Federal Reserve System.
2nd Qtr 2011
Total = $2,886.0
2nd Qtr 2011
Total = $2,886.0
Holders of Municipal Securities and Loans (Debt)
(as of June 30, 2011)
($s in Billions)
Insurance Companies (b)
$464.3
16.1%
Banking Institutions (c)
$310.5
10.8%
Mutual Funds (d)
$913.1
31.6%
Individuals
$1,066.2
36.9%
Other (a)
$131.9
4.6%
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Amount of Arizona Municipal Financings by Purpose
(a)Includes issues sold for primary and secondary education, higher education, student loan programs and miscellaneous education projects.
Source: Thomson Financial.
Amount of Arizona Municipal Financings by Purpose
(2005-2010)
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 2010
Fiscal Year
By
Pur
pose
General Purpose
Utilities
Transportation
Public Facilities
Housing
Health Care
Environmental Facilities
Electric Power
Education (a)
Development
Purpose 2005 2006 2007 2008 2009 2010
General Purpose 1,400.6 1,158.8 1,987.8 1,465.3 1,486.0 1,928.1
Utilities 887.3 775.9 938.2 789.4 919.8 611.6
Transportation 412.0 535.4 654.2 909.4 671.9 233.9
Public Facilities 1,067.0 105.0 118.5 573.4 200.8 714.3
Housing 311.4 460.5 640.4 146.2 0.0 0.0
Health Care 1,626.5 597.8 1,463.6 2,327.1 390.8 110.3
Environmental Facilities 330.6 180.2 10.0 239.3 565.4 197.0
Electric Power 352.7 296.0 1,179.7 834.1 1,045.0 716.8
Education (a) 2,478.1 1,357.4 1,854.3 2,284.3 1,261.1 1,522.2
Development 389.9 2.5 136.5 36.0 0.0 196.6Totals (millions) $9,256 $5,470 $8,983 $9,605 $6,541 $6,231
Private Water Utility Credit Rating Criteria
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Credit Rating Criteria Regulated Water and Wastewater Utility Companies Credit rating agencies active in the regulated water & wastewater utility sector
include S&P and Moody’s Fitch is not active in the sector S&Y would assist issuer with carefully managing the credit rating agency process Recent S&P report: U.S. investor owned water utilities continue to display rating
stability Credit rating gradation system as follows:
Moody's S&P / Fitch Risk Grade
Aaa AAA Highest QualityAa AA High QualityA A Strong
Baa BBB Medium Grade
Ba,B BB,B SpeculativeCaa, Ca CCC,CC,C Highly SpeculativeCaa, Ca D Default
Investment
Junk
U.S. Credit Ratings Comparison Company S&P Credit Rating Moody’s Credit Rating
American Water Works Co., Inc. BBB+ (stable) Baa2 (stable)
Long Island Water Corp. AA- (watch dev) -
New Jersey-American Water Co. BBB+ (stable) Baa1 (stable)
Pennsylvania-American Water Co. BBB+ (stable) Baa1 (stable)
Missouri-American Water Co., Inc. AA+ (stable) -
Middlesex Water Co. A- (stable) -
The York Water Co. A- (stable -
Golden State Water Company - A2 (stable)
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Regulatory Environment & Asset Ownership Model
Operational Characteristics & Asset Risk
Stability of Business Model & Financial Structure
Key Credit Metrics
Credit Rating Criteria Regulated Water and Wastewater Utility Companies
22
Strengths: A diverse geographic and regulatory environment Largely residential and commercial customer base, enabling cashflow stability Relatively low operating risk of nonregulated operations Above-average service territory
Weaknesses: Acquisition-based growth strategy High expected capital expenses of over $1 billion for each of the next three years
Rationale: Company’s reliance on acquisitions to provide growth partly offset above
strengths Average ROE (in AWW’s seven largest jurisdictions) approximates 10.3% AWW recovers replacement capital spending up to a stated percentage Certain states allow for surcharges related to the cost of power, chemicals and
purchased water $75 million of rate increases granted in 2010 Funds from Operations (FFO) total $830 million; FFO/Debt: 13%; debt to capital:
60.5% Uncertainties associated with the timing of the rate cases and the substantially
higher capital plans are significant risks
Credit Rating Criteria Sample S&P Credit Rating Report Summary: American Water Works Company, BBB+ (stable)
Financing Alternatives for Private Water Companies (Water and Wastewater Infrastructure Improvements)
24
Financing Alternatives Summary
Type of DebtTax-Exempt
BondsTaxable Bonds WIFA
Bank Loan (Tax-Exempt or Taxable)
(d)
New Money (a) (d) (e)
Refunding (b) (c) (f)
Equity [Conversion to
Debt]
(a) Private Activity Bond (PAB) volume cap required. Financing required to be issued through an IDA. (b) No PAB volume cap required if par-to-par maintained (expected). Financing required to be issued through an IDA.(c) Does not require PAB cap approval. Economics are based on market conditions of tax-exempt versus taxable.(d) S&Y would serve as Financial Advisor to assist with all aspects of the WIFA financing program.(e) Could be tax-exempt (similar to bond transaction) if PAB volume cap is obtained. Financing required to be issued through an IDA.(f) No PAB volume cap required if par-to-par maintained.
25
Water Infrastructure Finance Authority of Arizona (WIFA)General Program Overview State Revolving Loan Fund to assist cities/towns, counties, special districts,
Indian tribes, non- profits and private water companies with low cost financing programs
Programs subsidized by Federal Government (EPA) with State of Arizona matching funds
Separate programs for water (DW) and wastewater (CW)
Private company financial assistance policies outlined in Appendix, Section D
Private company interest rate setting methodology and annual fees outlined in WIFA Policy #III.3 Interest Rate: Prime rate (currently 3.25%) plus adjustment based on amortization period 20-year amortization: 2.00% over prime or 5.25% 15-year amortization: 1.00% over prime or 4.25% 10-year amortization: prime or 3.25% 5-year amortization: prime – 1.00% - 2.25%
Other WIFA rules: Amortization periods generally limited to 20-years Davis-Bacon wage requirements apply which could increase costs Credit approval required by staff and WIFA Board of Directors (including financing covenants)
26
Private Activity (Tax-Exempt Water & Wastewater Revenue Bonds) Industrial Development Authority Bonds
Government lends tax-exempt status to private corporation (pursuant to Internal Revenue Code 141 et. Seq.)
Conduit financing - Issued by governmental entity for private facility (i.e., IDA)
Bonds paid by loan repayments from private corporation from revenue of utility system
Used previously in Arizona by Chaparral City Water Company, Liberty Water Company, Arizona Water & Global Water
Eligible exempt facilities include water and sewer facilities, airports, docks, parking garage and certain rental housing
Volume cap allocated by Federal Government to each State based on population: Arizona 2011 Allocation: $600 million ($593,241,615 available) New Mexico 2011 Allocation: $277 million ($215,820,000 available)
27
Private Activity (Tax-Exempt) Bonds Steps in Issuance1) IDA selected by issuer. Several in AZ, but cost varies significantly
2) Application is made to an IDA for preliminary approval
3) A preliminary resolution (or inducement resolution) is considered by the IDA
4) Borrower submits application/request to Arizona Commerce Authority Includes preliminary resolution (or inducement resolution) from IDA
Application for Volume Cap Maximum allocation of $35 million until December 17, 2011 Thereafter at Director’s discretion (currently $593 million available in AZ and $215.8 million in NM)
5) If required under Section 147, a notice of public hearing is published-TEFRA Hearing (Tax Equity and Fiscal Responsibility Act of 1982)
6) Public TEFRA hearing is held (at least 14 days after publication notice)
7) If necessary under Section 147, approval is obtained from entity that formed the IDA and entities having jurisdiction over location at facilities financed (“host approval”)
8) Timing
28
Private Activity (Tax-Exempt Bonds) Application Deadlines for Issuance Under $35 Million
Applications received in 2011, are on a first come, first serve basis. If the application is received in 2011, the deal will need to close by 12/16 unless extended until 12/26.
Applications received in 2012 are on a first come first serve basis. If an application is received between January 1 and April 1, 2012, it will need to close within 90 days or by June 30th, whichever is first.
Application fees due with application and all other fees are due prior to receiving a confirmation
29
Loan
Rep
aym
en
ts
$ Received from
Bondholders
Fin
an
ce P
roje
ct
Underwriter (S&Y)(Public Offering or PP Agent)
Project
Industrial DevelopmentAuthority (IDA)(b)
Sells Bonds
Principal and Interest Payment on
Bonds
Trustee (pursuant toTrust Indenture)
Loan
s B
on
d P
roce
ed
sPrivate Utility
Reven
ues G
en
era
ted
by U
tility
Paym
ents
Assig
ned
by
Issue
r to
Trus
tee
Bondholders (d)Principal and
Interest Payments
New Money, Acquisi-tion, Refunding (c)
Private Activity (Tax-Exempt) Bonds (a)Summary of Private Activity Bond Transaction
(a) Arizona Commerce Authority administers allocation of Private Activity Bonds through application process summarized herein.
(b) An IDA serves as the conduit issuer. IDAs have authority under U.S. tax law to issue, on behalf of private companies tax-exempt bonds for eligible public infrastructure projects.
(c) U.S. tax laws limit the amount of bonds that can be issued for acquisition. (Further discussion with bond counsel required)
(d) Could include marketing bonds to utility customer base.
30
Sample $10 Million Tax-Exempt FinancingDraft Sources & Uses of Funds
Assumes a bond sale or private placement in March 2012
Assumes AZ Commerce Authority approval of requested volume cap in the amount of $10 million
Assumes 15-year amortization, level debt service structure (Annual debt service of approximately $980,650 per year-subject to change)
All-in true interest cost: 4.93%
Assumes debt service reserve fund with bondproceeds (subject to change)
Assumes ‘A+’ underlying credit rating
Does not assume credit enhancement (subjectto be further discussed)
Bond Proceeds $10,000,000
TOTAL: $100,000,000
Project Fund $8,869,312
Debt Service Reserve Fund1 983,188
Estimated Costs of Issuance2 147,500
TOTAL: $10,000,000
2 2% limit on the amount of COI paid from tax-exempt bond proceeds
SOURCES
USES
1 Approximates one-year debt service. Asset of borrower. Used to make final debt service payment. Possible opportunity to secure surety policy.
31
Sample $10 Million Tax-Exempt Financing Estimated Costs of Issuance
Will endeavor to keep costs as lowas possible
Select IDA which is most efficient forissuer
IDA Fees:Application (Non-refundable) $3,000
Annual Administrative Fee2 7,000
Commerce Fees:Application $750
Confirmation Fee ($320/million) 3,200
Issuance Costs:IDA Counsel $7,500
Bond Counsel 10,000Issuer Counsel 2,500
Trustee/Bond Registrar & Paying Agent 3,000
Trustee's Counsel3 0
Disclosure Counsel4 5,000
Credit Rating4 12,000
OS preparation & printing4 5,000
DTC/CUSIP4 1,000
Underwriter's Discount4 85,000Miscellaneous 2,550
TOTAL: $147,500
1 2% limit on the amount of COI paid from tax-exempt bond proceeds.2 Payable in advance semi-annually, 7 basis points of outstanding par, subject to possible
negotiation with the chosen IDA.3 To be determined
Estimated Tax-Exempt Costs of Issuance1
4 Disclosure, credit analysis, registration and profit are made transparent in public bond sales through required disclosures, but most often paid internally through the interest rate and not transparent to the issuer in private bank or lender transactions. The amount of such costs above translate into approximately 0.16% annual interest rate. Expenses may vary.
32
Sample $10 Million Financing Estimated Cost of Capital to Sample Issuer1
¹ Based on estimated rates as of 10/26/2011 which includes AMT adjustment. Yields subject to change based on final credit structure, rating(s) and bond market conditions at time of sale. Assumes “A+” underlying credit rating (to be determined).
Municipal Market Data (MMD) - benchmark index for high grade national AAA/Aaa General Obligation municipal bonds
Spread assumes 230 basis points over natural AAA index (includes AMT adjustment of approximately 75 basis points)
All-in true interest cost: 4.93%
Average weighted life: 8.287 years
Alternative Minimum Tax (AMT) is a separate tax computation under the Internal Revenue Code that, in effect, eliminates some
deductions and credits and creates a tax liability for an individual who would otherwise pay little or not tax.
Year MMD Spread Yield2012 0.25% 2.30% 2.55%2013 0.45% 2.30% 2.75%2014 0.66% 2.30% 2.96%2015 0.97% 2.30% 3.27%2016 1.27% 2.30% 3.57%2017 1.50% 2.30% 3.80%2018 1.75% 2.30% 4.05%2019 2.03% 2.30% 4.33%2020 2.27% 2.30% 4.57%2021 2.39% 2.30% 4.69%2022 2.51% 2.30% 4.81%2023 2.65% 2.30% 4.95%2024 2.79% 2.30% 5.09%2025 2.91% 2.30% 5.21%2026 3.02% 2.30% 5.32%2027 3.13% 2.30% 5.43%2028 3.23% 2.30% 5.53%2029 3.33% 2.30% 5.63%2030 3.40% 2.30% 5.70%2031 3.47% 2.30% 5.77%
AMT SCALE
33
Tax-Exempt Refunding OpportunityABC Water Company
Outstanding Debt:
Callable in whole any date or in part on any interest payment date without a premium
All maturities merit consideration (sinking fund installments 2013-2022)
$10,000,000 The Industrial Development Authority of the County of XYZ Water System Improvement Revenue Bonds (ABC Water Company Project), Series 1997A (AMT)Year Maturity Amount Coupon Status2012 12/1/2012 450,000$ 5.40% Callable2013 12/1/20132014 12/1/20142015 12/1/20152016 12/1/20162017 12/1/20172018 12/1/20182019 12/1/20192020 12/1/20202021 12/1/20212022 12/1/2022T 9,550,000 5.40% Callable
Totals: 10,000,000$
T: Term Bond
Series 1997A (AMT) Bonds
34
Tax-Exempt Refunding OpportunityABC Water Company
Spread to MMD¹
¹Based on rates as of 10/26/2011; subject to change. Assumes “AA-” underlying credit rating.
Year MMD Spread Yield2012 0.25% 1.95% 2.20%2013 0.45% 1.95% 2.40%2014 0.66% 1.95% 2.61%2015 0.97% 1.95% 2.92%2016 1.27% 1.95% 3.22%2017 1.50% 1.95% 3.45%2018 1.75% 1.95% 3.70%2019 2.03% 1.95% 3.98%2020 2.27% 1.95% 4.22%2021 2.39% 1.95% 4.34%2022 2.51% 1.95% 4.46%
Series 1997A (AMT) Bonds
35
Net Present Value Savings1:
¹Based on rates as of 10/26/2011; subject to change.
2Debt service reserve fund amount from refunded bond issue.
3Refunding funds on hand consist of debt service reserve funds and additional proceeds for refunding bonds.
Tax-Exempt Refunding OpportunityABC Water Company
Savings can be
structured to achieve
issuer’s Operational
and Rate Structure
objectives
For example:
1) Up-front cash flow
savings
2) Tail-end savings
(payoff debt early)
with no cash flow
implications in early
years
Tail End Level Up FrontPrior Bonds Nominal Nominal Nominal
Debt Service Savings Savings Savings2012 1,260,000 1,138$ 118,225$ 876,563$ 2013 1,280,700 4,338 118,175 152,263 2014 1,299,390 3,878 114,140 1,440 2015 1,209,840 1,415 118,103 2,603 2016 1,177,720 4,358 116,495 3,758 2017 1,295,060 1,598 114,185 4,210 2018 1,293,760 423 117,573 785 2019 1,264,760 823 116,773 3,785 2020 1,234,410 3,285 117,435 3,485 2021 1,302,710 377,885 114,610 5,160 2022 1,254,260 1,254,260 115,210 260
Totals 13,872,610$ 1,653,398$ 1,280,923$ 1,054,310$
Present Value Savings: 1,141,327$ 1,045,697$ 1,054,310$
Less: Contribution2 (1,317,070) (1,317,070) (1,317,070)
Plus: Refunding Funds on Hand3 1,018,591 1,009,719 1,017,094 NET PRESENT VALUE SAVINGS 842,848$ 738,346$ 754,334$
% Savings of Refunded Bonds: 8.42% 7.38% 7.20%All-in True Interest Cost: 3.97% 4.11% 4.12%
Period End. Dec. 1
Financing Alternatives Utilized by Arizona Governments to Fund Water & Wastewater Acquisition & Infrastructure Improvements
37
Financing Alternatives Utilized by Arizona Governments to Fund Water & Wastewater Acquisition & Infrastructure Improvements
Governmental Issuers: Arizona, Cities, Towns, Counties & Special Tax Districts
Additional Information included in the Appendix Most issue bonds in the capital markets or through WIFA
State of AZ & Federal Bond/Loan Programs
Type of Infrastructure
General Obligation
BondsUtility Rev.
Bonds
Excise Tax Rev. Bonds
Comm. Facilities Districts (CFDs)
Special Assessment
Bonds
Water Infra.
Finance Authority
(WIFA)
Greater AZ. Develop. Authority (GADA)
USDA-RUS
North American Develop.
Bank
Water & Wastewater
Role of Underwriter/Private Placement Agentor Financial Advisor
Role of Underwriter/Private Placement Agent or Financial Advisor
Type of Role
Sell/Underwrit
eBonds
OfferingBonds toCustome
rBase
Assist with
Selecting
Another
UW
Assist withReviewingInvestor/
Bank Proposals
Assist with
Credit RatingProces
s
Assist to Negotiate Covenant
s,Call
Features & Costs
Assist withSecuring PABVolume Cap
(Tax-Exemption)
(c)
Assist with
TechnicalRefundin
gProcess
(d)
Assist withWIFAAltern
.
Assist With
ACC (e)
UW/PPA (a)
Yes Yes No Yes Yes Yes Yes Yes No Yes
FA (b) No No Yes Yes Yes Yes Yes Yes Yes Yes
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(a) Decision made by the borrower to retain an Underwriter such as S&Y to issue bonds in the public securities/bond market or privately place the bonds with a bank / financial institution (depending up their preference). Public sale allows investors to bid on bonds across the yield curve (each maturity).
(b) Decision made by the borrower to retain a Financial Advisor such as S&Y (not to underwrite bonds). Financial Advisor would advise on all aspects of financing transaction with the selected financial institution (see above services) .
(c) Private Activity Bond Volume Cap required for tax-exempt new money and refunding (if not par to par).
(d) Significant expertise required to comply with federal tax laws, notice to bondholders’, possible escrow cash verification requirements and disclosure details. Note: most banks don’t routinely provide this expertise.
(e) Technical debt structuring assistance and communications to aide in ACC communications and approval.
Summary of Responsibilities