FGFOA

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FGFOA
The Bond Rating Process Municipal Credit
AnalysisPresented by Betsy Hedden,
Associate Director
November 12, 2007
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Understanding and Optimizing Rating Results

• The underwriter or financial advisor on a
  transaction will have specific expertise to lend
  in the ratings process.
• Their primary functions include assisting in the
  following areas
• Consideration of rating alternatives
• Communication and scheduling
• Material compilation presentation assistance
• Financial ratios and credit comparisons
• Negotiation and future planning
• Evaluation of pricing related factors
• Most importantly, the underwriter will assist an
  issuer to determine how to optimally utilize
  ratings to provide for a lower cost of financing
  both today and in the future.

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Consideration of Rating Alternatives

• Depending on the category of the underlying
  rating, most investors prefer (some require) that
  issuers have both underlying ratings and bond
  insurance.
• Although a rating from one of the three rating
  agencies (Fitch/Moodys/SP) is usually
  acceptable, investors prefer that an issuer carry
  at least two ratings.
• Possible exceptions include
• Issuers with ratings in the non-investment grade
  categories
• Issuers with ratings in the triple-A or high
  double-A categories
• Non-traditional rating alternatives

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Scheduling Considerations

• Timing Constraints
• Issuer preparation (3-4 weeks)
• Completion of draft documents
• Information compilation
• Presentation preparation
• Review process (minimum of 3 weeks)
• Insurance bids
• Marketing requirements
• Retail advertisements

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Material Compilation and Presentation Assistance

• Minimum information required (usually submitted
  prior to presentation)
• Distribution list and schedule of transaction
• Financial statements for past three fiscal years
• Authorizing and draft series ordinance /
  resolution
• Current year operating budget
• Draft preliminary official statement
• Any other transaction documents (engineering
  reports, consultants report, etc.)
• Letter summarizing transaction and timing for
  rating review
• Approximate par amount and deal structure

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Financial Ratios and Credit Comparisons

• Comparisons of certain financial ratios can help
  provide evidence for an upgrade or assist to hold
  off a downgrade in certain situations.

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Negotiation and Future Planning

• Negotiate your way to a better rating
• Legal provisions
• Debt service coverage targets
• Growth rates
• Financing Structure
• Plan for the Future
• Utilize feedback for future financings
• Set goals and timelines
• Be proactive with on-going communication

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Analyzing the Potential Benefits

• Cost of credit enhancement
• Although insurers will perform their own credit
  review, a higher underlying rating can reduce the
  cost associated with credit enhancement.
• Example 100 million over 30 years at 5 with
  insurance cost reduced from 40 bps to 35 bps
  equals present value savings of approximately
  100,000.
• Buyers and competition
• In general, issuers with investment grade
  underlying ratings have a wider variety of
  investors which can purchase their bonds.
• Specifically, retail buyers, as well as bank
  trust departments and investment advisors who buy
  on the behalf of retail, will shy away from
  securities which do not carry an underlying
  rating.
• Increased participation leads to increased
  competition resulting in reduced interest cost.
• Example 100 million over 30 years with interest
  cost reduced from 5.00 to 4.95 equals present
  value savings of approximately 575,000.