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HomeMy WebLinkAbout05.F.1) Overview of Bond Financing for Public UtilitiesF 1. OVERVIEW OF BOND FINANCING FOR PUBLIC UTILITIES By Sarah Hollenbeck, Managing Director, Public Funding Management, Inc. (PFM) Central Contra Costa Sanitary District Central Contra Costa Sanitary District Overview of Bond Finance November 10, 2016 -PFM The PFM Group Public Financial Management, Inc. PFM Asset Management, LLC PFM Advisors San Francisco 50 California Street, Suite 2300 San Francisco, CA 94111 p. 415-982-5544 Bond Terminology -A Bond is a loan, similar to a mortgage - Buyer of the Bond is the lender or investor Seller of the Bond is the borrower or the issuer • Principal or Par Amount: Amount of the loan - Maturity date: Repayment date of the loan Coupon rate: Interest rate paid periodically (usually semiannually) on the loan Usually expressed as a percentage of the par amount (e.g. 2%, 5%, etc.) Price: Amount a lender will lend in return for future receipt of principal and interest payments Central Contra Costa Similar District Yield: Single rate that sets the present value ("Mr) of the principal and interest payments equal to the price 63 Bond Financing Team Members Central Contra Costa Sanitary District A bond transaction requires a collaborative effort between all parties of the financing team The Issuer Decides what it would like to fund through the issuance of debt (construction, renovation, refinancing, etc.) Provides financial information which will be disclosed to potential bond investors Financial Advisor Assembles the financing team, often through a series of competitive bid processes Engages in structuring and pricing discussions with the issuer and underwriter (if a negotiated sale) with the goal of minimizing borrowing costs for the issuer Underwriter Works with the financial advisor to develop structures and borrowing rates which will be marketed to investors If not all the bonds can be sold to investors, the underwriter purchases the bonds it is unable to sell Underwriter's Counsel Advises the underwriter on the legality of the transaction and any other procedural issues Bond Counsel Prepares the loan documents and ensures that the bond issuance complies with existing laws Disclosure Counsel Prepares the Official Statement, the disclosure document provided to potential investors, that describes the Issuer's financial position, sources of repayment for the bonds and other details pertinent to investors Trustee Organizes the transfer of funds between members of the financing team and distributes scheduled debt service payments to bondholders 64 Determining Size and Timing of Borrowing Based on project costs and timing of expenditures, the amounts to be cash funded and bond funded can be determined Tax law requires tax-exempt bond proceeds to be spent within three years of the bonds being issued Advantage of borrowing as soon as project need is known: reduces interest rate risk associated with waiting Advantage of waiting to borrow until funds are needed: minimizes risk of exceeding IRS 3 -year limitation; may allow better alignment of bond size and project funding need For tax-exempt bonds, the borrowing term is limited by the useful life of the assets being financed Bond's maturity cannot exceed 125% of the useful life of the assets The borrowing rate and amortization depend on the financing technique used and the ratings of the issuer CCCSD's outstanding Certificates of Participation ("COPs") are rated AAA by Standard & Poor's and Aal by Moody's The issuance process for COPs typically takes three to four months to execute Fixed transaction costs of approximately $250,000 to $350,000 per issuance 65 Bonds Overview Level Debt Service Central Contra Costa Sanita District Bonds are similar to a mortgage A loan is taken out by the borrower in one Iump sum Interest on the loan is usually paid semi-annually until the final maturity of the loan, principal is usually repaid annually Bonds are usually structured to achieve a steady level of total principal and interest payments ("debt service") for each year Earlier payments consist mostly of interest, later payments consist mostly of principal A sample bond issuance for a $100 million project using the Issuer's estimated borrowing rates is shown below $8,000,000 t $7,000,000 g $6,000,000 4. • $5 000• " 000 $4,000,000 g $3,000,000 1;3 $2,000,000 $1,000,000 $- Sample Level Debt Service Structure ($100M Project) 00 Cr) 0 r ▪ 1-r) cc cr) 0 r re-) r is) up ao cr) 0 c-4 m 71- r\J CN r\J rN m rn rn rn rn rn rn m m m r J- 71- 0 0 0 0 0 0 0 0 0 0 ▪ 0 0 0 0 0 0 0 0 C. 0 0 0 0 0 0 0 0 CN CJ ri r -s4 CN CN (NI r -N rJ rsq (N ri 1 IN 11 (NI li CN (1 r‘i r▪ i ri (N Fiscal Year Ending 6/30 66 Lfl (71- 0 ri Interest • Principal Bonds Overview — Deferred Debt Service A borrower may also choose to "defer" debt service payments until some later date: Revenue constraints in earlier years Other limiting factors such as debt service due for other loans This creates lower initial payments, allowing for smoothing of rate increases Whereas the total debt service for the "level debt service" scenario is $181.2 million, total debt service here is $197.4 million because principal is paid down later and thus accrues more interest $8,000,000 $7,000,000 g $6,000,000 • $5,000,000 $4,000,000 $3,000,000 Tri $2,000,000 47: $1,000,000 $- Sample Deferred Debt Service Structure ($100M Project) 1 (.1D N 00 0 0 r r rn vZr Lri LO r, 00 C r- Nrn 7," Ln LID r, CO CT) 0 c -N1 m • t -n r -I - CN NJ r (-NJ NJ NJ NI NJ rA m rn m m m m m rn th71- 71- • i71- 0 0 0 0 0 0 0 0 0 ,C) 0 0 0 0 0 0 0 0 10 0 0 0 0 0 0 0 10 0 0 0 CN NJ Ni NI NI NI NJ NJ NJ rtA rj rq (NI NJ NJ NJ NJ Ni NJ r',1 rt\J r NJ NJ NJ c NI NJ rt\I Fiscal Year Ending 6/30 67 Interest • Principal Iminarfe 1.111110M 4011110111._ Methods of Sale - Negotiated Underwriting and Competitive Sale Central Contra Costa Sanitar District Negotiated Sale Hire Underwriter Underwriter pre -markets Bonds 4 PFM and Underwriter negotiate prices and borrowing rates Initial prices decided and bonds offered directly to investors Investors offer to buy bonds from Underwriter Final price negotiated 68 Competitive Sale Create Notice of Sale 4 Issuer & PFM pre -market Sale to underwriters Underwriters work-up & submit bids Issuer and PFM evaluate and accept lowest bid Note: District's 2002 Bonds were sold competitively, 2009AB were negotiated MIONION. ammo , Eimmamon mama Methods of Sale Private Placement / Direct Bank Loan Increasingly, issuers are privately placing bonds with banks instead of offering them publicly Instead of having an Underwriter sell bonds to various bondholders, a single bank loans the funds No need to pay for ratings or print and post Official Statements (saves on costs of issuance) Bank loan rate may be fixed or variable Proceeds can be used for refinancing or new capital projects Direct Bank Loan Issuer Variable Rate Payment Option Fixed Rate Payment Option 69 91,10Mi._ • Tax -Exempt Financing Alternatives Aside from bondslCOPs, there are a variety of tax-exempt public financing methods that typically offer lower borrowing costs than private capital, including: I -Bank Loans Community Facilities District (CFD) Special Tax Bonds State Revolving Fund loans Environmental Impact Bonds Green Bonds AI M 70 Tax -Exempt Financing Alternatives (eilltal f Ceuta Saiiltai Mirk' California Infrastructure and Economic Development Bank ("I -Bank") loan is a variation on a COP I -Bank subsidizes the interest rates based on demographic characteristics (income, unemployment, etc.) Community Facilities District ("CFD") Special Tax Bonds Pursuant to 1982 Mello -Roos CFD Act, CFDs can be formed and bond issuance authorized by a 2/3 vote of the property owners in the special district Debt service is paid from special taxes levied on property within the district The property within the district secures the bonds and can be foreclosed upon if special taxes are unpaid Could be used for satellite water recycling facilities or other projects that benefit a limited group of users State Revolving Fund Loans Program run by the State Water Resources Control Board to provide subsidized loans for water infrastructure projects Lengthy application/approval process and subject to funding availability Environmental Impact Bonds Debt service payments are variable, based on a project's environmental benefits and cost savings 71 Green Bonds Central Contra Costa Sanital District Fund eligible projects with environmental benefits Disclosure and verification of use of proceeds Originally coined by World Bank in 2008 for bonds issued by international development banks Increases investor diversification but as yet no measurable borrowing cost advantage Socially Responsible Investing (SRI) Corporate pension fund participation (e.g. Ford, Microsoft) New investors to muni bonds: corporate crossover, retail Large green bond issuers: Commonwealth of Massachusetts — $986 million New York MTA — $783 million District of Columbia Water & Sewer — $450 million San Francisco Public Utilities Commission — $273 million 72 15 _cz 10 cz 0 E5 0 2013 Annual Trends 2014 2015 2016 YID Par Amount ($) --4—No. Deals Use of Funds • Water / Sewer n Transportation 150 100 -Q) (r) CI 50 z 0 IIIV Public Private Partnerships Central Contra Costa Sanits'si y District Public -Private Partnerships ("P3s") can be structured using various models that represent a range of public- and private -sector involvement and varying levels of public and private risk Basic characteristic is reliance on a private organization for a range of services which the private sector may do more cost effectively or with less risk to the public sector Many P3 transactions entail a more limited private role (design -build only) but the relationships of the public and private parties can vary greatly Unlike a public debt -funded projects, P3 projects may be funded through equity contributed by private partners Any debt issued to finance the project is often payable solely by the private partner Private capital carries a higher cost of borrowinci than tax-exempt financing Whether a project is funded publicly or using a P3, payment for the project and any associated debt will ultimately come from the District 73 Interest Rate History Central Contra amla Sanitary DisttIct Tax-exempt interest rates are very low from a historical perspective 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Historic "AAA" MMD Rates Cur. - Maturity Max * Min * Avg. * Current Avg. 2 5.20 0.25 2.35 0.88 (1.47) 5 5.60 0.62 2.94 1.13 (1.81) 10 6.15 1.29 3.67 1.73 (1.94) 30 6.95 1.93 4.61 2.56 (2.05) Source: Thompson Reuters. Since 1993. -ck 43 43 .ch`b ..,Liz) ,Q.N 41, AP 4-3.t4 ,c)43 .csb ..c 50\<0 ,sqp 1 (.17c% 2 year 5 year 10 year 30 year 74 4.6,— • in= ' 1.01111111•11.111_,,__,„ mistime Interest Rate History - Past 2 Years Central Contra Costa Sanitary District Tax-exempt rates have become compressed and have recently been trending upwards 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Historic "AAA" MMD Rates •t\t* ;A t1\tx .1\(1) i ti 1P . t tN(ri t1\♦h tNft? 41\ .t".(1? ♦ t1 ♦ SN S 1, Ntel ° '‘'\9 40° ‘?t e \t"? c)le S4' '(< \~\S ,vg 0,9 2 year 5 year 10 year 30 year 75 IMINIMMAN MNIONNa winnow Sample Debt Service Debt service varies based on prevailing AAA MMD rates at the time of issuance Debt statistics associated with funding a $100 million project at different rates are shown below A reduction of 75 basis points ("bps") would bring the 1 -yr rate to near 0% Rates True Interest Cost Annual Debt Service Total Debt Service Change from Current % Change - 75bps - 50bps -25bps Current +25bps +50bps +75bps 3.02% 3.17% 3.31% 3.46% 3.61% 3.75% 3.90% 5.09M 5.18M 5.28M 5.38M 5.47M 5.57M 5.67M 152.64M 155.46M 158.34M 161.26M 164.21M 167.20M 170.24M 76 - 8.62M - 5.80M -2.92M +2.94M +5.94M +8.98M Concord Contract Concord Contract dated September 10, 1974 "Payments from City to District shall be for commonly used facilities... include all facilities for sewage transmission treatment, and disposal (including wastewater reciamation)yhich are used by District to provide service to City. Revenue from sale of reclaimed wastewater shall be deducted from operational costs." Concord Contract Amendment #3 dated June 6, 1985 8) Prorated Charges "City shall pay District for its share of District's operation and maintenance costs and its share of capital costs based on the total volumes and strengths of sewage generated within each party's service area." 12 B.3) Payment of Capital Costs "District requires financing for continuing improvement and expansion of its facilities...the proportion of such capital financing to be contributed by City will be based on the provisions of Paragraph 8. The District, at City's option, may include the capital contribution owed by City in any financing (including grants and bonds) undertaken by District; in this event, City will repay its percentage of District's obligation on an annual basis, including interest. Otherwise City will provide cash to District for its capital contribution." 77 M vinimmir= 'WNW,