Utah League of Cities and Towns

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Utah League of Cities and Towns
After the Bonds are Issued

• Jon Bronson and Johnathan Ward
• Zions Bank Public Finance
• September 14, 2006

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Spending Tests
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Spending Tests

• 3 Year Hedge Bond Test
• You must have a reasonable expectation to spend
  all of the bond proceeds within 3 years
• If you dont spend the money in 3 years, the
  bonds can be deemed taxable
• Spend Down Tests
• 24 month
• 18 month
• Each 6 month test must be met to keep arbitrage
  earnings

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Pop Quiz 1
Name this man.
Ben Bernake Federal Reserve Chairman
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Bond Payments
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The Nuts and Bolts

• Q Will someone send the City a bill for the bond
  payments?
• A Yes if the City uses a Trustee or a Paying
  Agent.
• Q When are the payments due?
• A When the Bond Resolution or the Indenture says
  they are due. (Usually 15 days before the payment
  must be made to the bond holder.)

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The Paying Agent

• Q What does a Paying Agent do?
• A Keeps a tickler file to remind the City when a
  payment is due, collects the payment, and sends
  that payment on to the bond owners.
• Q Does the Paying Agent charge a fee?
• A Yes Usually 500 per year.

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Trustee

• Q What does a Trustee do?
• A Whatever the Indenture directs the Trustee to
  do.
• Holds funds in segregated accounts for the
  benefit of the City and bondholders
• Invests those funds at the direction of the City
  and in accordance with the Indenture
• Provides periodic statements to the City
  regarding those funds
• Acts as Paying Agent and Bond Registrar

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Trustee

• Q Is there anything else the Trustee does?
• A Yes.
• Ensures bond covenants are kept
• Makes calculations for interest rate changes on
  variable rate debt
• Protects the bondholders rights and assets in a
  default.

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Pop Quiz 2
Who is the worlds wealthiest woman?
Alice Walton - 7
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Bond Covenants
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Bond Covenants

• Coverage calculations on revenue bonds
• Maintenance of funds
• Debt Service (1/6th and 1/12th)
• Debt Service Reserve
• Repair and Replacement
• Rate Stabilization
• Compliance with tax-exemption covenants
• Private Use Test

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Reinvestment of Proceeds
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What do I do with all this cash?
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The Interest Rate Environment
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Reinvestment Options
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Guaranteed Investment Contracts

• Agreement to deliver a specified amount of money
  for investment at a specified interest rate
• Governed by the Money Management Act of Utah
• Required by law to solicit at least three bids
• Must know your draw down schedule for proceeds

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Pop Quiz 3
Name the U.S. Secretary of the Treasury.
Henry Paulson
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Arbitrage Compliance
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Arbitrage

• DefinitionArbitrage is the difference between
  the yield on tax-exempt debt and yields on
  investments of bond proceeds.

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Arbitrage Regulations

• The IRS requires tax exempt issuers (with a few
  exceptions) to calculate their arbitrage rebate
  liability every 5 years and at the final maturity
  of the debt
• If during the 5 years, a cumulative positive
  arbitrage has been earned, the positive amount
  must be rebated to the IRS

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Arbitrage Regulations

• Bond documents may dictate that you submit a
  calculation to the Trustee
• If you are not sure, pay for the calculation. If
  you are sure you havent had positive arbitrage,
  do the calculation yourself.

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Arbitrage Example
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Arbitrage Exemptions

• Small Issuers
• Remember the 2 Year Spend Down Test
• 10 in 6 months
• 45 in 12 months
• 75 in 18 months
• 100 in 24 months
• Earnings in Debt Service Fund

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The Penalties

• Loss of tax exemption (increased interest
  expense)
• IRS and/or SEC fines

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Pop Quiz 4
Name the actor who played this character.
Charles Laughton Hunchback of Notre Dame
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Disclosure
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Continuing Disclosure Requirements

• Beginning in January, 1996, municipal entities
  issuing debt (subject to certain exemptions) were
  required to comply with Rule 15c2-12, Municipal
  Securities Disclosure of the Securities Exchange
  Act of 1934
• Internet web site sec.gov/info/municipal.shtml

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Purpose of the Rule

• Designed to prevent fraudulent, deceptive or
  manipulative acts or practices
• Makes it unlawful for any broker/dealer to
  recommend the purchase or sale of municipal
  security unless procedures in place that provide
  continuing disclosure.

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Continuing Disclosure Details

• Approximately six months from end of fiscal year
• Dissemination Agent
• Submitted electronically through
  DisclosureUSA.org. Disclosure USA sends to
  NRMSIRs
• Underwriters get disclosure information from
  NRMSIRs

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Limited vs. Full Disclosure
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Exemptions

• Issue size is 999,999 or less
• Private Placement (denominations of 100,000 or
  more)
• Sold to not more than 35 persons (knowledgeable
  investors)
• Maturity of nine months or less
• Variable interest rate
• Stated maturity of 18 months or less (must
  disclose Material Events Notice or 11 Deadly
  Sins)

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What are the 11 Deadly Sins?

• Modifications to rights of security holders
• Bond calls
• Defeasances
• Release, substitution or sale of property
  securing repayment of the securities
• Rating changes

• Principal and interest payment delinquencies
• Non-payment related defaults
• Unscheduled draws on debt service reserves
• Unscheduled draws on credit enhancements
• Substitution of credit or liquidity providers, or
  their failure to perform
• Adverse tax opinions or tax events

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What if the information is late?

• Usually caused by a late audit report.
• When issuing future debt, the entity must
  disclose its late filing for the next five years.

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Late Disclosure Filings

• Can late disclosure filings hurt a municipal
  entity when issuing future debt?

YES!
A large Wall Street firm would not submit a
competitive bid because the municipal entity was
delinquent in filing its continuing disclosure!
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Financial Reports
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Annual Audits

• Bond and lease balances from paying agent or
  trustee
• Audit mailing lists should include
• Financial advisor
• Bond insurer
• Rating agency
• Purchaser if privately placed
• Dissemination agent

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Pop Quiz 5
Who is this woman?
J.K. Rowling
Author of the Harry Potter series of books
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Variable Rate Resets
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Popular Mechanics

• 1, 5 and 10 year resets
• Recalculating the rate
• Recalculating the amortization schedule
• Bond documents hold all of the secrets

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Refinancing and Prepayment
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Refinancing and Prepayment

• Typically not allowed prior to 10 years without
  penalty
• Exceptions
• Advance refunding
• Cash defeasance
• Industry standard suggests a minimum Net Present
  Value Benefit of 3

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Refinancing and Prepayment

• Other factors to consider beyond the 3 NPV
  standard
• Period of time before the call date and maturity
• Principal amount of bonds outstanding
• Current dollar savings compared to cost of
  issuance
• Current cash flow needs
• Bond terms and conditions

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Mechanics of an Advanced Refunding
Payments
Original Bondholders
Issuer
Refunding Bond Proceeds
Issuer
Escrow Agent
Refunding Escrow with SLGS/Open Market Securities
NOTE The interest earnings in the Refunding
Escrow should be as close to the Original Bond
Interest Rates for maximum escrow efficiency.
Payments
Payments
Refunding Bondholders
Original Bondholders Until Call Date
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Mechanics of Cash Defeasance
Payments
Original Bondholders
Issuer
Excess Cash
Issuer
Escrow Agent
Refunding Escrow with SLGS/Open Market Securities
NOTE The interest earnings in the Cash
Defeasance Escrow should be as close to the
Original Bond Interest Rates for maximum escrow
efficiency.
Payments
Original Bondholders Until Call Date
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SID Administration
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The Truth

• All bets are off!