newport bond presentation

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newport bond presentation

  1. 1. The “Cast” of a Bond issue <ul><li>Issuer </li></ul><ul><li>Rating agency </li></ul><ul><li>Investors </li></ul><ul><li>Credit insurer </li></ul><ul><li>Underwriter </li></ul><ul><li>Escrow agent </li></ul><ul><li>Bond Advisor </li></ul><ul><li>Legal counsel </li></ul><ul><li>Custodian </li></ul><ul><li>Taxpayers </li></ul>
  2. 2. Conflicts of Interest <ul><li>Banks are not remunerated for the service they provide the issuer, but for the income they make for their bank. </li></ul><ul><li>Banks are selling a product to earn fees. Taxpayers are assuming an obligation. Once the bond is sold, the bank is gone. The taxpayer, however now has an obligation which has to be paid, principal and interest, until maturity </li></ul><ul><li>Bankers always have an edge on the issuer. The more informed you are as an issuer, the better your deal. </li></ul><ul><li>Never buy a “canned product” from a bank always hire </li></ul><ul><ul><li>An independent bond advisor to evaluate proposals </li></ul></ul><ul><ul><li>A top notch independent legal advisor to vet the documents </li></ul></ul>
  3. 3. Bonds vs. Loans <ul><li>Indentures make bonds less flexible than loans. </li></ul><ul><li>In a crisis, bond investors are less forgiving than banks. </li></ul><ul><li>Bonds can be resold. Investors change over time, as does the price of issue. </li></ul><ul><li>The seconday market provides information on prevailing investor sentiment on the credit. </li></ul><ul><li>Bond prices change over time due to: </li></ul><ul><ul><li>Interest rates </li></ul></ul><ul><ul><li>Perceptions of credit risk </li></ul></ul><ul><ul><li>Legislation </li></ul></ul><ul><ul><li>Investment fads and fashions </li></ul></ul>
  4. 4. Types of Bonds <ul><li>Security </li></ul><ul><ul><li>General obligation </li></ul></ul><ul><ul><li>Tax Anticipation </li></ul></ul><ul><ul><li>Project finance </li></ul></ul><ul><ul><li>Secured </li></ul></ul><ul><li>Maturity </li></ul><ul><ul><li>Bullet </li></ul></ul><ul><ul><li>Amortizing </li></ul></ul><ul><ul><li>Sinking fund </li></ul></ul><ul><ul><li>Defeased/escrowed </li></ul></ul>
  5. 5. Quirks of Muni Bond market <ul><li>Tax-free status is not guaranteed and may be revoked after issue by the IRS </li></ul><ul><li>Issuance needs voter approval </li></ul><ul><li>Because repayment/prepayment is complex, debt management requires skill </li></ul><ul><li>Not transparent, many costs are hidden from view. </li></ul><ul><li>Conflicted actors </li></ul><ul><li>Substantial irregularities </li></ul><ul><li>Formally bond issuance/service exempt from “tax caps”. In pratice since the money has to come from somewhere limitations exist. </li></ul>
  6. 6. Quirks of Newport bonds <ul><li>Bonds have “rarity value” = potential untapped investor demand </li></ul><ul><li>High percentage of institutional vs retail investors </li></ul><ul><li>Many held until maturity </li></ul><ul><li>Limited variety in terms of underwriters </li></ul><ul><li>Seconday market illuquidity makes judging the market's view on the town's finaces hard. </li></ul><ul><li>Credit guarantees hide true costs of current financial management. </li></ul><ul><li>Newport's finances are minimally penalized vs other communities in terms of borrowing costs, FOR NOW </li></ul>
  7. 7. The Secret to a Good Bond Issue <ul><li>A effective bond issue is never an end to itself. It is a tool for reaching , clearly defined, finacila objectives. </li></ul><ul><li>Never look at a bond issue in isolation. Look at the overall finacial picture, anticipate future bond issues and fit them into a master plan tothether with present and past issues. </li></ul><ul><li>Always maintain tight coordination of the planning, budgeting and finacial management processes throughout the life of your debt. </li></ul><ul><li>Consider ALL the costs in a finacing. If you can't see them or measure them ask your advisor. </li></ul><ul><li>Always seek the lowest ALL-IN cost alternative </li></ul>
  8. 8. The Secret to a Good Bond Issue <ul><li>Never forget that other towns in RI have better finaces . Attract investors and maintain them though excellent communication, transparancy and availability. </li></ul><ul><li>Signal potential problems ahead of time, along with strategies to manage it. Always underpromise and overdeliver </li></ul><ul><li>NEVER BS INVESTORS </li></ul><ul><li>Never loose investor confidence.Project control and competence, even if the reality may be different. </li></ul><ul><li>Your taxpayers are often your best investors . Never ignore them, keep them appraised of opportunities. They are also more forgiving in a crisis. </li></ul>
  9. 9. Effective Borrowing strategies <ul><li>Always balance town and investors needs </li></ul><ul><li>Use the lowest-cost structure to achieve your finacing needs. </li></ul><ul><li>Time value of money is the quintessence of bond finacing. On $10million, the six month shift in the timing of a cashflow item at : </li></ul><ul><ul><li>4.5% equals $225,000. </li></ul></ul><ul><ul><li>5 % equals $250,000 </li></ul></ul><ul><ul><li>NEVER FORGET THIS </li></ul></ul><ul><li>For every new issue always evaluate “New Money” vs refinancing tradeoffs. </li></ul>
  10. 10. Effective Borrowing Strategies <ul><li>Always seek to keep the TOTAL funding at the most cost-effective low for the prevailing rate environment. </li></ul><ul><li>Mananage the maturity schedule to keep projected cashflows for ALL indebitedness , consistent prudent and managable. </li></ul><ul><li>Go for the simplest structure. If you can't explain it to the crowd at Cappies after two beers, don't do it. </li></ul><ul><li>Avoid bunching maturities </li></ul><ul><li>Write your indenture as if you are about to default </li></ul><ul><li>Structure you cash flows so you don't </li></ul>
  11. 11. Effective Borrowing strategies <ul><li>Exploit Banks: make them earn their fees . Use them as no-cost source and information and ideas on: </li></ul><ul><ul><li>Pricing </li></ul></ul><ul><ul><li>Structure </li></ul></ul><ul><ul><li>Investor demand </li></ul></ul><ul><li>When you hear something you like , get a second opinion from a competing bank , then hire you own advisor for further vetting. </li></ul><ul><li>The town tenders for all its services. Bonds should be no exceptions. Negotiated deals can add extra hidden costs to taxpayers between 0.5%-1.5% . On a $10million issue that is between $50-150,000 in extra costs for the taxpayer. </li></ul>
  12. 12. Borrowing strategy <ul><li>Establish a centralized vetting and traffic managemnet function for all potential bond issues </li></ul><ul><li>Ensure that bond proposals follow predefined formats to facilitate consistent evaluation by the public and you </li></ul><ul><li>Screen debt proposals before they are submitted to the ballot for the following: </li></ul><ul><ul><li>Borrowings and amounts: Make sure they fit in the Town's overall finacial plan and projections </li></ul></ul><ul><ul><li>Capital requirement: Make sure s they represent projects with clearly defined economic value </li></ul></ul><ul><ul><li>Maturity Schedules: Make sure they do not jepordize projected cashflows especially in light of GASB 45 </li></ul></ul>
  13. 13. Beware of “Boilerplate” <ul><li>Have a top notch legal team write/vet the indenture and the credit support document. </li></ul><ul><li>When the chips are down good indentures have saved many an issuer from much unpleasantness. </li></ul><ul><li>Have your legal advisors pay particular attention to: </li></ul><ul><ul><li>Seniority and subordination </li></ul></ul><ul><ul><li>Cross default </li></ul></ul><ul><ul><li>Force majeur/change of legislation </li></ul></ul><ul><ul><li>Events of default </li></ul></ul><ul><ul><li>Credit support triggers </li></ul></ul>
  14. 14. The yield curve and its quirks

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