Structuring the Financing Structuring the Financing The Mechanics of a Bond Sale The Mechanics of a Bond Sale California Debt and Invest ment Advisory Commission ment Advisory Commission California Debt and Invest David Johnson Cheryl Hines David Johnson Cheryl Hines Merrill Lynch Banc of America Securities LLC Merrill Lynch Banc of America Securities LLC (415) 676-3211 (213) 229-3431 (415) 676-3211 (213) 229-3431 March 13, 2008 March 13, 2008 March 13, 2008 March 13, 2008 0
Introduction Introduction At this point, the Issuer has made several decisions: Identified a need to borrow money. Identified a need to borrow money. Identified a revenue stream to pay debt service. Identified a revenue stream to pay debt service. Assembled a finance team. Assembled a finance team. Bond counsel Bond counsel Investment banker Investment banker Financial advisor Financial advisor Its now time to STRUCTURE THE FINANCING! 1
Topics Topics Types of Debt Obligations Types of Debt Obligations Sizing the Bond Issue Sizing the Bond Issue Debt Service Structure Debt Service Structure Refunding Bonds Refunding Bonds Ratings Ratings Variable Rate Debt Variable Rate Debt 2
Types of Debt Obligations There are many types of debt that California governments issue: General Obligation Bonds Sales Tax Bonds General Obligation Bonds Sales Tax Bonds TRANs Pension Bonds TRANs Pension Bonds Lease Revenue Bonds Special Tax Bonds Lease Revenue Bonds Special Tax Bonds Certificates of Participation Tax Allocation Bonds Certificates of Participation Tax Allocation Bonds Revenue Bonds Assessment Bonds Revenue Bonds Assessment Bonds 3
Types of Debt Obligations Types of Debt Obligations Structuring a bond issue is directly affected by the type of debt being issued. Reserve Fund Requirement Reserve Fund Requirement Additional Bonds Test Additional Bonds Test Debt Service Coverage Requirements Debt Service Coverage Requirements Term Term Tax Treatment Tax Treatment Call Features Call Features Leased Assets Leased Assets 4
Sizing the Bond Issue Project or Construction Fund Project or Construction Fund Capitalized Interest Fund Capitalized Interest Fund Debt Service Reserve Fund Debt Service Reserve Fund Costs of Issuance Costs of Issuance Underwriting Discount Underwriting Discount 5
The Project Fund The Project Fund Funds acquisition of the asset or construction of the project. Based on actual costs or reliable estimates. Based on actual costs or reliable estimates. Net Funded or Gross Funded? Net Funded or Gross Funded? Gross Funded – D Deposit exact amount required to pay eposit exact amount required to pay Gross Funded – for asset or project. for asset or project. Net Funded – A Amount deposited plus interest earnings mount deposited plus interest earnings Net Funded – sufficient to fund project. sufficient to fund project. 6
The Capitalized Interest Fund The Capitalized Interest Fund Bond proceeds used to pay interest for a finite period of time. Interest is capitalized for a number of reasons: Interest is capitalized for a number of reasons: Until a project/asset can produce revenue. Until a project/asset can produce revenue. Until the government has beneficial use (COPs, Lease Until the government has beneficial use (COPs, Lease Revenue Bonds) Revenue Bonds) Until revenue is projected to be sufficient to pay debt Until revenue is projected to be sufficient to pay debt service. service. 7
The Debt Service Reserve Fund The Debt Service Reserve Fund Provides additional security for investors. Found in most credits with the exception of GO Bonds. Found in most credits with the exception of GO Bonds. Sizing limited to the lesser of: Sizing limited to the lesser of: Maximum Annual Debt Service Maximum Annual Debt Service 125% of Average Annual Debt Service 125% of Average Annual Debt Service 10% of Par Amount 10% of Par Amount Fund is invested with earnings usually going as an offset Fund is invested with earnings usually going as an offset to debt service. to debt service. Can often be satisfied by purchasing a Debt Service Debt Service Can often be satisfied by purchasing a Reserve Fund Surety Policy. Reserve Fund Surety Policy. 8
Costs of Issuance Costs of Issuance Bond proceeds may be used to pay certain eligible costs. Bond Counsel and/or Disclosure Counsel Professional Financial Advisor and Trustee/Paying Services Agent Rating Agencies Appraisal, Feasibility Study, Engineer’s Report Special Tax Consultant Title Insurance Bond Insurance and/or Surety Bond Credit Premium Enhancement Letter of Credit fees 9
Underw riting Discount Underw riting Discount Underwriter’s compensation and expenses. Average Takedown Components Management Fee Expenses At closing, Underwriter pays for bonds an Funding amount less the underwriting discount. Method $100,000,000 Par (650,000) Less discount of 6.50/$1,000 $ 99,350,000 Purchase Price Expressed as dollars per thousand Other dollars of bonds (e.g., $6.50/$1,000) Considerations 10
Sizing Example Net Funded Construction Fund Net Funded Construction Fund Capitalized Interest Fund Capitalized Interest Fund Debt Service Reserve Fund Debt Service Reserve Fund Costs of Issuance Costs of Issuance Underwriting Discount Underwriting Discount 11
Sizing Assumptions – U U ranium Springs Water District ranium Springs Water District Sizing Assumptions – 4/1/2007 $ 10,000,000 Project Cost and Draw Schedule 10/1/2007 $ 10,000,000 4/1/2008 $ 10,000,000 10/1/2008 $ 10,000,000 $ 40,000,000 Total Project Cost Bonds Dated: 1/1/2007 Final Maturity: 1/1/2039 12
Sizing Assumptions – U U ranium Springs Water District ranium Springs Water District Sizing Assumptions – $200,000 Legal, FA, Trustee Costs of Issuance Ratings, Printing, Misc. 40 bps Bond Insurance Premium Bond Insurance (Total Debt Service x .40%) $6.50/bond Takedown, Management Fee, Underwriting Discount Expenses 13
Sizing Assumptions – U U ranium Springs Water District ranium Springs Water District Sizing Assumptions – Lesser of: Debt Service Reserve Fund Maximum Annual Debt Service 125% of Average Annual Debt Service 10% of Par Amount Through 2-year Construction Period Capitalized Interest 1/1/09 14
Sizing Assumptions – U U ranium Springs Water District ranium Springs Water District Sizing Assumptions – Earnings Go To: Reinvestment Assumptions Capitalized 2.50% Construction Interest Fund Fund: Construction 2.50% Construction Fund: Fund Debt Service 5.0% Construction Reserve (Bond Fund Fund: Yield) 15
Sizing Example – N Net Funded Project Fund et Funded Project Fund Sizing Example – Sources of Funds: Par Amount: $ 46,390,000 1/1/07 Initial Deposit: $ 38,723,636 Total Sources of Funds: $ 46,390,000 Project Fund Earnings $ 968,704 Uses of Funds: Project Fund $ 38,723,636 Cap Interest Fund Cap Interest Earnings: $ 112,609 Fund: $ 4,008,591 Debt Service Debt Service Reserve $ 195,051 Reserve Fund: $ 2,795,850 Fund Earnings Bond Insurance: $ 357,550 Total Project Cost $ 40,000,000 COI: $ 200,000 Underwriter’s Discount: $ 301,535 Rounding: $ 2,838 Total Uses of Funds: $ 46,390,000 16
Sizing Example – C Capitalized Interest Fund apitalized Interest Fund Sizing Example – Sources of Funds: Par Amount: $ 46,390,000 1/1/07 Initial Deposit: $ 4,008,591 Total Sources of Funds: $ 46,390,000 7/1/07 Interest Payment: ($ 1,005,697) Uses of Funds: Project Fund $ 38,723,636 1/1/08 Interest Payment: ($ 1,005,697) Cap Interest Fund: $ 4,008,591 7/1/08 Interest Payment: ($ 998,599) Debt Service Reserve Fund: $ 2,795,850 Bond Insurance: $ 357,550 1/1/09 Interest Payment: ($ 998,599) COI: $ 200,000 Fund Balance on Underwriter’s 1/1/09: $ 0 Discount: $ 301,535 Rounding: $ 2,838 Total Uses of Funds: $ 46,390,000 17
Sizing Example – D Debt Service Reserve Fund ebt Service Reserve Fund Sizing Example – Sources of Funds: Par Amount: $ 46,390,000 Lesser of: Total Sources of Funds: $ 46,390,000 Maximum Annual $ 2,795,850 Debt Service Uses of Funds: Project Fund $ 38,723,636 125% of Average $ 3,491,698 Annual Debt Service Cap Interest Fund: $ 4,008,591 10% of Par Amount $ 4,639,000 Debt Service Reserve Fund: $ 2,795,850 Bond Insurance: $ 357,550 COI: $ 200,000 Underwriter’s Discount: $ 301,535 Rounding: $ 2,838 Total Uses of Funds: $ 46,390,000 18
Sizing Example – B Bond Insurance Premium ond Insurance Premium Sizing Example – Sources of Funds: Par Amount: $ 46,390,000 Total Sources of Funds: $ 46,390,000 Total Principal & $ 89,387,448 Interest: Uses of Funds: x.40% Project Fund $ 38,723,636 Bond Insurance Cap Interest Premium $ Fund: $ 4,008,591 357,550 Debt Service Reserve Fund: $ 2,795,850 Bond Insurance: $ 357,550 COI: $ 200,000 Underwriter’s Discount: $ 301,535 Rounding: $ 2,838 Total Uses of Funds: $ 46,390,000 19
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