Discussion Material- 28th Annual Economic Forecast Salisbu bury y - PowerPoint PPT Presentation

Discussion Material- 28th Annual Economic Forecast Salisbu bury y Ar Area Chambe mber r of Commer mmerce ce December 17, 2015 Member NYSE|FINRA|SIPC

Topics for Discussion 1. 1. What t Goes s into a Bond Rating? – Illustrated through example of Wicomico County – Importance of a Credit Rating; – Introduce the three National Rating Agencies; – Discuss respective methodologies and Four Key Factors: – Economy – Finances – Management – Debt/Pensions 2. 2. Provi vide e a snapsho hot of the historical ical and curren ent market t envir ironm onment December 17, 2015 Salisbury Area Chamber of Commerce 1

Credit Rating Overview and Approach December 17, 2015 Salisbury Area Chamber of Commerce 2

Historical Credit Spreads  An issuer’s creditworthiness has a direct impact on the 30 30-Year ear MMD cost of borrowing, which in turn effects debt capacity and 8 affordability. 7.5 7 6.5 6 Percent (%) 5.5 – The credit spread is the premium an issuer pays to 5 the purchaser of their bonds (i.e. higher interest 4.5 4 rate) as compensation for increased credit risk. 3.5 3 2.5 2 – Since the financial downturn in September 2008, credit quality of issuers has taken on a renewed AAA AA A BBB importance to investors. Credit Spreads (%) vs the 30-yr AAA MMD – The average spread for an A rated borrower has Nov 2004 - Dec 2008 increased from 0.33% from Nov 2004 – Dec 2008 Rating Min Max Average to 0.73% since Dec 2008. AA 0.04 0.19 0.10 A 0.15 1.26 0.33 BBB 0.30 2.52 0.60 Dec 2008 - Oct 2015 Rating Min Max Average AA 0.09 0.56 0.22 A 0.27 1.11 0.73  Thus achieving the best possible rating result continues BBB 0.69 2.58 1.44 to be of major importance for local governments entering the credit markets. Note: credit spreads compared to the 'AAA' equivalent December 17, 2015 Salisbury Area Chamber of Commerce 3

Credit Rating Overview  The following slides will discuss the Credit Ratings framework Moody's S&P Fitch in general and for each of the three major rating agencies in the context of Wicomico County’s (the “County”) general Aaa AAA AAA obligation bond ratings. Aa1 AA+ AA+ Aa2 AA AA AA Aa3 AA- AA-  The County’s general obligation bonds are currently rated A1 A+ A+ Aa2 / AA+ / AA by Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings, respectively. A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB  As highlighted in the table to the right, these ratings place the County one or two “notches” from the highest possible Baa3 BBB- BBB- credit rating for each agency. Non Investment Grade  The County’s ratings were recently affirmed by all three agencies in conjunction with the issuance of the County’s $19,715,000 Consolidated Public Improvement and Refunding Bonds, Series 2015 in November. Source: Moody’s Investors Service, Standard & Poor’s, Fitch Ratings December 17, 2015 Salisbury Area Chamber of Commerce 4

Rating Agency Commentary – Moody’s (10/16/2015) Wicomico County, Maryland  Strengths – Sound financial reserve position; – Strong Management and formal fiscal policies; – Sizable, albeit rural, tax base; – Position as economic center for the Delmarva Peninsula.  Challenges – Slightly above average, but manageable, debt burden.  What Could Change the Long Term Rating (Up) – Continued growth and diversification in the tax base.  What Could Change the Long Term Rating (Down) – Deterioration of reserves; – Declines in tax base in excess of current projections; – Significant increase in debt burden. Source: Moody’s Investors Service December 17, 2015 Salisbury Area Chamber of Commerce 5

Rating Agency Methodology Updates: Moody’s Moody’s Moody’s Rating Scorecard  On January 15, 2014, Moody’s updated its US Local Governments General Obligation Debt methodology and assumptions. Moody's Rating Scorecard: Indicative  Under the new methodology, an initial indicative rating is Ratings calculated from a weighted average of four key factors: HI HI LO LO Rating 0.5 1.5 Aaa US Local Governments General Obligation Debt Methodology 1. Economy / Tax Base 30% 30% 1.50 1.83 Aa1 Tax Base Size (Full Value) 10% 1.83 2.17 Aa2 Full Value Per Capita 10% 2.17 2.50 Aa3 Wealth (Median Family Income) 10% 2. Finances 30% 30% 2.50 2.83 A1 Fund Balance (% of Revenues) 10% 2.83 3.17 A2 Fund Balance Trend (5-Year Change) 5% 3.17 3.50 A3 Cash Balance (% of Revenues) 10% 3.50 3.83 Baa1 Cash Balance Trend (5-Year Change) 5% 3. Management 20% 20% 3.83 4.17 Baa2 Institutional Framework 10% 4.17 4.50 Baa3 Operating History 10% 4.50 4.83 Ba1 4. Debt / Pensions 20% 20% 4.83 5.17 Ba2 Debt to Full Value 5% 5.17 5.50 Ba3 Debt to Revenue 5% Moody's Adjusted Net Pension Liability (3-Year Average) to Full Value 5% 5.50 5.83 B1 Moody's Adjusted Net Pension Liability (3-Year Average) to Revenue 5% 5.83 6.17 B2 6.17 6.50 B3 & Below  Up to a one-notch adjustment can be made from the indicative rating based on other qualitative factors. Indicative Rating 1.97 Current Adjusted Rating (10/16/2015) December 17, 2015 Salisbury Area Chamber of Commerce 6

Moody’s Scorecard Source: Obtained by Davenport from Moody’s personnel December 17, 2015 Salisbury Area Chamber of Commerce 7

Rating Agency Commentary – S&P (10/16/2015) Wicomico County, Maryland  The 'AA+' rating reflects S&P’s opinion of the County’s: – Adequate economic profile; – Strong budgetary performance; – Very strong budgetary flexibility; – Very strong liquidity; – Very strong management; – Strong debt and contingent liability profile; and, – Very strong Institutional Framework.  Outlook – The stable outlook reflects our opinion of Wicomico County's large, diverse, and growing economy. The outlook also reflects our opinion that management will likely continue to manage its budget conservatively in response to economic conditions and maintain its strong finances. We believe the county's strong financial management practices and policies should help support what we consider its strong financial performance. In our opinion, overall debt will likely remain close to current levels due to the county's above-average amortization, providing additional rating stability. Therefore, we do not expect to change the rating within the outlook's two-year period. Source: Standard & Poor’s December 17, 2015 Salisbury Area Chamber of Commerce 8

Rating Agency Methodology Updates: S&P S&P S&P’s Rating Scorecard  On September 12, 2013, Standard & Poor’s updated its US Local  Within the 7 Factors to the left, S&P will rate the measured criteria Governments General Obligation Ratings methodology and as follows: assumptions. – Very Strong 1  Under the new methodology, an initial indicative rating is – Strong 2 calculated from a weighted average of seven key factors: – Adequate 3 – Weak 4 US Local Governments General Obligation Ratings Methodology 1. Institutional Framework 10% 10% – Very Weak 5 Legal and practical environment in which the local gov't operates 2. Economy 30% 30% Total Market Value Per Capita  Based on the scores and weighting within these 7 Factors, S&P Projected per capita effective buying income as a % of US projected will produce a Factor Score Weighted Average which will align to an effective buying income Indicative Rating according to the matrix below: 3. Management 20% 20% Impact of management conditions on the likelihood of repayment Standard & Poor's Rating Scorecard: 4. Budgetary Flexibility 10% 10% Indicative Ratings Available Fund Balance as a % of Expenditures 5. Budgetary Performance 10% 10% HI HI LO LO Rating Total Government Funds Net Result (%) 1 1.64 AAA General Fund Net Revenue 1.65 1.94 AA+ 6. Liquidity 10% 10% 1.95 2.34 AA Total Gov't Available Cash as a % of Total Gov't Funds Debt Service 2.35 2.84 AA- Total Gov't Cash as a % of Total Gov't Funds Expenditures 3.85 3.24 A+ 7. Debt and Contingent Liabilities 10% 10% 3.25 3.64 A Net Direct Debt as a % of Total Governmental Funds Revenue 3.65 3.94 A- Total Governmental Funds Debt Service as a % of Total 3.95 4.24 BBB+ Governmental Funds Expenditures 4.25 4.54 BBB+ 4.55 4.74 BBB-  Up to a one-notch adjustment can be made from the indicative 4.75 4.94 BB rating based on other qualitative factors. 4.95 5.00 B December 17, 2015 Salisbury Area Chamber of Commerce 9

Rating Agency Methodology Updates: S&P  S&P affirmed the County's 'AA+' rating in its October 16, 2015 Standard & Poor's Rating Scorecard: Report and assigned a Stable Outlook. Indicative Ratings HI HI LO LO Rating 1 1.64 AAA 1.65 1.94 AA+ Weighted 1.95 2.34 AA Factor Weight Score Score 2.35 2.84 AA- Economy 30% 3.00 0.90 3.85 3.24 A+ Management 20% 1.00 0.20 3.25 3.64 A Budgetary flexibility 10% 1.00 0.10 Budgetary performance 10% 2.00 0.20 3.65 3.94 A- Liquidity 10% 1.00 0.10 3.95 4.24 BBB+ Debt and contingent liabilities 10% 2.00 0.20 4.25 4.54 BBB+ Institutional framework 10% 1.00 0.10 4.55 4.74 BBB- Weighted Average 1.80 4.75 4.94 BB 4.95 5.00 B Source: Standard & Poor’s report dated 10/16/2015. Indicative Rating 1.80 Current Adjusted Rating 10/16/2015 December 17, 2015 Salisbury Area Chamber of Commerce 10