Preparing to Access the Capital Markets North Caroli lina a Local al Government Investment Associa iation July 20, 2017 Member NYSE|FINRA|SIPC
Preparing to Access the Capital Markets – Overview In today’s market environment, credit quality – whether determined by the rating agencies or banks and other investors – has become increasingly important to a successful debt issuance. When preparing for a debt issuance, an issuer should consider credit related items as part of the pre-transaction and planning process. Effectively accessing the capital markets is often times the culmination of a three phased approach to planning for and issuing debt: – Phase 1: High Level Strategy and Planning HIGH GH LEVEL STRATEGY – Phase 2: Develop Plan of Finance DEVELOP PL P PLAN AN AND P PLANNING OF F FINANCE – Phase 3: Implement Plan of Finance IMPLEMENT P T PLAN OF F FINANCE July 20, 2017 North Carolina Local Government Investment Association 1
Credit Overview Since the financial downturn, the credit quality of Cre redit Spreads : 30-Year MMD MMD 8 a local government has become more important AAA BBB 7 than in previous market environments. 6 cent (%) 5 Perce Credit rating agencies, banks and investors have 4 increased the level of due diligence performed on 3 transactions. 2 A local government should not manage itself exclusively for rating agencies and investors; however, often times good planning and credit strategies are aligned. – Strategic Planning and Goals. – Formalized Management Practices / Policies. – Multi-year Financial Planning . – Economic Development (locally and regionally). July 20, 2017 North Carolina Local Government Investment Association 2
Moody’s Investor’s Service GO Rating Methodology Implemented in January 2014 Category Rating Short T Ter erm m Long T Term Percent ntag age Control Control Economy / Tax Base 30% Finances 30% Management 20% Debt / Pensions 20% The information shown above outlines the Quantitative elements of the rating methodology. In addition to these factors, other Qualitative elements are considered in the ultimate rating outcome. July 20, 2017 North Carolina Local Government Investment Association 3
Standard and Poor’s GO Rating Methodology Implemented in September 2013 Category Rating Short T Ter erm m Long T Term Percent ntag age Control Control Institutional Framework 10% Economy 30% Management 20% Budget Flexibility 10% Budgetary Performance 10% Liquidity 10% Debt and Contingent Liabilities 10% The information shown above outlines the Quantitative elements of the rating methodology. In addition to these factors, other Qualitative elements are considered in the ultimate rating outcome. July 20, 2017 North Carolina Local Government Investment Association 4
Moody’s Investor’s Service Utility Rating Methodology Implemented in December 2014 Category Rating Short T Ter erm m Long T Term Percent ntag age Control Control System Characteristics 30% Financial Strength 40% Management 20% Legal Provisions 10% The information shown above outlines the Quantitative elements of the rating methodology. In addition to these factors, other Qualitative elements are considered in the ultimate rating outcome. July 20, 2017 North Carolina Local Government Investment Association 5
Standard and Poor’s Utility Rating Methodology Implemented in January 2016 Risk A k Asses essmen ment t Factor Rating Short T Ter erm m Long T Term Category Percent ntag age Control Control Enterprise Economic Fundamentals 45% Market Position 25% Industry Risk 20% Operational Management 10% Assessment Financial Debt Service Coverage 40% Liquidity 40% Debt and Contingent Liabilities 10% Financial Management 10% Assessment The information shown above outlines the Quantitative elements of the rating methodology. In addition to these factors, other Qualitative elements are considered in the ultimate rating outcome. July 20, 2017 North Carolina Local Government Investment Association 6
High Level Strategy and Planning HIGH LEVEL EVEL STRA RATEG EGY DEVEL EVELOP P PL PLAN N AND ND PL PLANN NNING NG OF FI F FINANCE CE - St Strat ategic V Vis isio ion - Finan ancial ial Po Polic icie ies - Board / d / Council il C Communic icat atio ion - Benchm hmark rking - Capital I Imp mproveme ment Pl Plan an - Debt C Capacit ity / / Debt A Affordab dabil ilit ity - Budget F Forecasting - Fundin ding A Approac ach IMPL MPLEMENT EMENT PL PLAN O N OF FINA NANC NCE - LGC C C Coordin inat atio ion - Working G Group an and F d Fin inancing Sche hedule - Cr Credi dit R Rat atin ing St Strat ategy - Post st I Issu ssuance July 20, 2017 North Carolina Local Government Investment Association 7
Strategic Vision and Board Communication Strategy Establish a strategic vision for your organization. This may include a series of internally or externally generated planning documents. Establish an effective Board / Council communication strategy, working with Staff to further define and implement the vision. Develop a series of next steps and an implementation plan to achieve the goals established in the strategic vision and planning documents – capital investments are often a major piece of these strategies. Identify requested capital projects that could help achieve the strategic vision. July 20, 2017 North Carolina Local Government Investment Association 8
Capital Improvement Plan The development of a multi-year Capital 5-Year CIP: U Uses of of Funds Improvement Plan (“CIP”) includes: Admin Education 10% 20% – Identifying realistic capital and maintenance Police / needs (not a wish list). Sheriff 20% Streets & Sidewalks – Assigning funding sources for all projects with a 20% Parks & balanced approach of pay-as-you-go cash, Recreation grants, reserves and debt. 30% 5-Year CIP: Sources of F Funds – Analyzing potential operating budget impacts GO Bonds associated with planned capital projects. 15% Installment Financings 25% Pay-As-You- – Revisiting this process at regular intervals. Go Capital 10% Capital Reserve – Adopting a plan at the governing level. Fund 10% Grants 40% July 20, 2017 North Carolina Local Government Investment Association 9
Capital Improvement Plan Process While in the process of developing a long-term Identify Financial Determine Universe of Capital Improvement Plan the locality may Resources Available to Capital Needs Fund Capital Projects consider implementing a multi-step CIP Development process in order to achieve a balanced & fully funded CIP that addresses identified capital needs: Evaluate Debt Capacity / Prioritize Affordability Capital Projects 1. Identify financial resources available to fund capital projects. 2. Identify capital needs for the next 5-10 Initial CIP Funding Plan years. 3. Determine funding capacity/affordability. Revisit/Refine Project 4. Develop an initial CIP and Funding Plan. Timing, Amounts and Funding Sources 5. Revise CIP to maximize project funding within identified resources. 6. Finalize and approve the CIP. Finalize and Approve CIP 7. Revisit CIP on an annual basis. July 20, 2017 North Carolina Local Government Investment Association 10
Budget Forecasting Development of a long-term budget planning process can be another important element when preparing for to interact with rating agencies and investors. Elements of the long-term budget planning process can include: – Historic Trend Analyses. – Forward looking projections for key revenue and expenditure line items. – Sensitivity analyses to identify potential cash flow implications of board / management initiatives. July 20, 2017 North Carolina Local Government Investment Association 11
Develop Plan of Finance HIGH LEVEL EVEL STRA RATEG EGY DEVEL EVELOP P PL PLAN N AND ND PL PLANN NNING NG OF FI F FINANCE CE - St Strat ategic V Vis isio ion - Finan ancial ial Po Polic icie ies - Board / d / Council il C Communic icat atio ion - Benchm hmark rking - Capital I Imp mproveme ment Pl Plan an - Debt C Capacit ity / / Debt A Affordab dabil ilit ity - Budget F Forecasting - Fundin ding A Approac ach IMPL MPLEMENT EMENT PL PLAN O N OF FINA NANC NCE - LGC C C Coordin inat atio ion - Working G Group an and F d Fin inancing Sc Schedule - Cr Credi dit R Rat atin ing St Strat ategy - Post st I Issu ssuance July 20, 2017 North Carolina Local Government Investment Association 12
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