Issuing Municipal Debt


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Information about going through a municipal bond process.

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Issuing Municipal Debt

  1. 1. Issuing Municipal Debt
  2. 2. Why issue debt? • Capital Project Funding Because 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 Needs Governments borrow in anticipation of future revenue streams. • Refund Bonds Refunding bonds are used to re-finance a prior issue or issues to achieve lower interest rates
  3. 3. Types of Municipal Bonds • General Obligation Bonds Issuer 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.
  4. 4. General Obligation Bond • Advantages Readily accepted in the marketplace due to the strength of the security pledge (“full faith & credit”) Usually have lower interest rates than revenue bonds No reserve fund required Lower costs of issuance
  5. 5. General Obligation Bond • Disadvantages Tax limitations Require voter approval Difficult to enter the market quickly
  6. 6. Type of Municipal Bonds • Revenue Bonds Issuer 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.
  7. 7. Revenue Bonds • Advantages Voter approval usually not required Enter the market quickly Debt secured by system users
  8. 8. Revenue Bonds • Disadvantages Considered less secure than GO Bonds Credit enhancement may be needed Reserve fund required Issuer subject to bond indenture requirements Higher costs of issuance than GO bonds
  9. 9. Financing Team Internal Team • Administrative – City Manager, Administrative Team, Mayor • Finance staff • Development Services staff, Utility staff, other enterprise fund staff • Legal
  10. 10. Financing Team External Team • Financial Advisor Assists in evaluating alternatives for funding Assists in producing and reviewing documents Designs debt structure Recommends timing of sale Assists with rating presentation Obtains credit enhancement if warranted Conducts pre-marketing of issue (Competitive Sale) Evaluates Bids (Competitive Sale) Oversees pricing and allocation of bonds in a negotiated sale
  11. 11. Financing Team External Team • Bond Counsel/Tax Counsel Certify that issuer has legal authority to issue Ensure compliance with state and local laws Draft legal documents Review documents prepared by other counsel Provide legal opinion on exemption from federal and if applicable, state and local income tax
  12. 12. Financing Team External Team • Underwriter Purchase bonds from issuer and remarket to investors Prepare structure alternatives Assist in preparation of financing package Coordinates meetings and document review Oversees application for credit enhancement Conduct premarketing activities with issuer
  13. 13. Financing Team External Team • Underwriter’s counsel Prepares the disclosure document (Preliminary Official Statement, Official Statement) Prepares the bond purchase agreement Negotiates on behalf of the underwriter Ensures compliance with securities law Conducts “due diligence” • Credit Enhancement Provider Guarantees the timely payment of debt service • Credit rating agencies: Standard and Poors, Fitch, Moodys Evaluate and publish opinion of the credit quality of the debt
  14. 14. Financing Team External Team • Paying agent/Registrar Receives funds from issuers and makes payments to bondholders Issues new bond certificates when the bonds are traded in the secondary market Responsible for tax reporting to the Federal government regarding the amount of interest paid to the investors
  15. 15. Financing Team External Team • Other possible vendors include: • Arbitrage agent – computes arbitrage liability • Refunding verification agent – verifies funds in escrow for refunding • Printers – print bond documents
  16. 16. Bond Documents • Ordinances/Resolutions Council/Trustees Authorize Referendum and/or borrowing; approve bond sale • Disclosure Documents-Official Statements Satisfy full disclosure requirements and avoid antifraud liabilities of securities law Used as a selling document Preliminary 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 requirements Final Official Statement will include elements from the preliminary statement but will also include all final details such as interest rates, maturity dates, etc.
  17. 17. Bond Documents • Bond Purchase Agreement Contract between issuer and underwriter Representations and warranties Certificates and opinions – closing conditions • Tax Document – determines tax status and events which may change tax status
  18. 18. Bond Documents • Bond Indenture Contract between the issuer and the bondholders Specifies interest rates, maturity dates, timing of interest payments, callable features Financial covenants and formulas for calculating compliance with the convents
  19. 19. Credit Enhancements • Bond insurance • Additional security pledge
  20. 20. 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.
  21. 21. Ratings • Standard and Poors and Fitch AAA highest quality, ratings below BBB are below investment grade • Moodys Aaa 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.
  22. 22. 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.
  23. 23. 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
  24. 24. • Chief Financial Officer Marcy Lamb City of Stillwater 723 S. Lewis St Stillwater, Oklahoma Sept. 23, 2013