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Home , Bond (finance)

BOND ISSUANCE 101

Pima County Community College District June 4, 2018

2325 E. Camelback Road 2325 E. Camelback Road 2325 E. Camelback Road Suite 750 Suite 750 Suite 750 Phoenix, AZ 85016 Phoenix, AZ 85016 Phoenix, AZ 85016

ERIKA COOMBS Phone: (602) 794-4030 MARK READER Phone: (602) 794-4011 RANDIE STEIN Phone: (602) 794-4002 Director Fax: (602) 794-4046 Managing Director Fax: (602) 794-4046 Director Fax: (602) 794-4046 [email protected] [email protected] [email protected]

Disclosure

Stifel, Nicolaus & Company, Incorporated (“Stifel”) has prepared the attached materials. Stifel is providing the information for discussion purposes and is declaring that it has done so within the regulatory framework of MSRB Rule G-23 as a financial advisor, as defined therein, and not an underwriter to the issuer for this proposed issuance of municipal securities. A “financial advisory relationship” shall be deemed to exist when a firm enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters. Accordingly, any services provided by Stifel as they relate to our role as financial advisor should not be construed as those of an underwriter or placement agent.

These materials have been prepared by Stifel for the client or potential client to whom such materials are directly addressed and delivered for discussion purposes only. All terms and conditions are subject to further discussion and negotiation. Stifel does not express any view as to whether financing options presented in these materials are achievable or will be available at the time of any contemplated transaction. These materials do not constitute an offer or solicitation to sell or purchase any securities and are not a commitment by Stifel to provide or arrange any financing for any transaction or to purchase any in connection therewith and may not relied upon as an indication that such an offer will be provided in the future. Where indicated, this presentation may contain information derived from sources other than Stifel. While we believe such information to be accurate and complete, Stifel does not guarantee the accuracy of this information. This material is based on information currently available to Stifel or its sources and are subject to change without notice. Stifel does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and /or counsel as you deem appropriate.

This presentation may not be distributed or duplicated without the permission of Stifel. Stifel invests significant time and effort in preparing these materials and requests that you respect our prerogative to limit distribution to our clients and as we deem consistent with our business plan.

2 Table of Contents

Section Description Page I Municipal Market Overview 5 II Bond Process A. Overview 12 B. Key Documents 17 C. Rating & Pricing 20 D. Closing & Post Closing 26 Glossary

3 SECTION I: Municipal Market Overview MUNI MARKET OVERVIEW: What is a ?

• Mechanism for obtaining money today –Conversion of expected future revenue stream of income (whether from tax receipts, general fund revenues or other sources) into currently available funds for capital projects • Promise to repay money: –On a date certain –With at a specific rate From specific revenues • Issued by a “governmental” Issuer • Generally tax-exempt

5 MUNI MARKET OVERVIEW: Tax Exemption

• Sixteenth Amendment to the U.S. Constitution created an • Because Municipal Bonds are generally tax-exempt, are willing to accept lower interest rates on tax-exempt • It’s not what you earn, it’s what you get to keep! • Concept of the “taxable equivalent”

Example : 3.00% tax-exempt = 3.75% equivalent taxable yield for in 20% tax bracket

6 MUNI MARKET OVERVIEW: U.S. Debt Markets

Municipal Issuance: 2008 to 2018 (a) Outstanding U.S. Debt Market: 2007 to 2017 16,000 $500.0 45,000.0 $450.0 14,000 40,000.0 $400.0 12,000 35,000.0 $350.0

30,000.0 10,000

$300.0

25,000.0

8,000 $250.0 Billions Billions 20,000.0 $200.0

6,000 Number of Issues of Number 15,000.0 $150.0 4,000 10,000.0 $100.0 2,000 $50.0 5,000.0

0 $0.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (a) Municipal Treasury Total GO and Revenue Issuance Number of Issues Mortgage Related Corporate Debt Federal Agency Securities Money Markets -Backed

______

(a) Data through April 2018. Source: Thomson Reuters (SIFMA) and The Bond Buyer.

7 MUNI MARKET OVERVIEW: Holders

Holders of U.S. Municipal Securities Investors (2017)

Insurance Other (d) • High net-worth individuals Individuals Retail Companies (c) 5%  Often older high tax 14% 41% Investors bracket

Banking Institutions (b) • Bond funds, mutual funds 15% Institutional • advisors Investors • Commercial • trust departments • companies

Mutual Funds (a) 25%

______Sample: Investor Participation Years to (a) Includes mutual funds, funds, closed-end Investor Type 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 funds and exchange traded funds. Money Market Funds (b) Includes U.S. chartered depository institutions, foreign Money Managers banking offices in the U.S., banks in U.S. affiliated areas, Municipalities Individual Retail unions, and broker dealers. Bank Trusts (c) Includes -casualty and life insurance companies. Bank Portfolios (d) Includes nonfinancial corporate business, nonfinancial Professional Retail noncorporate business, state and local governments and Large Investment Advisors (looking for larger block sizes) funds, government-sponsored enterprises and Bond Funds foreign holders. Intermediate Bond Funds Source: Federal Reserve System (SIFMA). Funds (looking for block sizes with liquidity) Property & Casualty Trading Accounts (across the curve) 8 MUNI MARKET OVERVIEW: Why Do Investors Buy Municipal Bonds?

• Generate tax-free income stream • Wealth preservation (high credit quality) • Predictable stream of income • Diversification with a wide variety of choices – Investment quality, maturity ranges – Issuers, bond type, geography • Liquidity • Generally attractive to risk-averse investors

9 MUNI MARKET OVERVIEW: AZ Bond Issuance

Arizona Bond Issuance 2017 -Term, Negotiated Arizona Issuance $8,000 Category Par Amount ($M) %

$7,000 $293 1 Education 2,029 37% 2 Transportation 972 18%

$6,000 3 Healthcare 813 15% $5,000 $63

4 Electric Power 735 13% (Millions) $44 $200 $4,000 5 General Purpose 393 7% $7,014 6 Utilities 302 6% $3,000 $6,191 $6,059 $5,488 7 Public Facilities 93 2% $4,546 $2,000 $4,369 8 Environmental Facilities 53 1%

$1,000 9 Development 52 1%

10 Housing 47 1% $0 2012 2013 2014 2015 2016 2017 5,488 Long-Term Short-Term

10 II. Bond Process – A. Overview BOND PROCESS: Overview

Key Steps in Preparing for a Financing

Develop Rating Agency Bond Determine Financing & Bond Marketing, Post Closing – Financing Approvals Program Insurer Pricing Ongoing Items Terms Conversations &Closing

Step 1: Develop Financing Program Step 4: Board approvals

• Engage financing team members • Approve financing terms and related documents Formally appoint financing team and delegates Identify funding needs, repayment sources and appropriate • • bond structure authority to administration to execute final documents • Send financing information to JCCR Step 2: Determine Financing Terms Step 5: Bond marketing, pricing and closing Bond documents outline security pledge and flow of funds • • Distribute POS to prospective investors Preliminary Official Statement (“POS”) describes security, issuer, Establish interest rates and final principal amounts on • • project and any potential risks day of pricing

Step 3: Rating agency and bond insurance conversations Execute documents and deliver funds at closing, • typically two weeks after pricing • Introduce rating agency to issuer’s credit

Secure rating(s) and solicit bond insurance pricing quotes, if Step 6: Post closing • applicable Continuing disclosure, rebate, budget setting, • debt reports 12 BOND PROCESS: Structuring Considerations

Size of Financing Debt Payment Structure  How much in bond proceeds is needed  Pace of bond funding needs  When are proceeds needed  Level or escalating payments  Federal tax law considerations:  Term of financing • 3 year reasonable expenditure expectations • $15 million rebate exemption Prepayment Options/Call Features • Bank Qualified status for issuing less than  Add issuer flexibility $10 million in calendar year  May impact pricing  Bond capacity (GO Bonds)  Assessed value growth (GO Bonds) Refinancing Existing Bonds  Tax rate policy parameters  Savings  Principal repayment  Modify structure and/or terms  Outstanding debt

13 BOND PROCESS: Overview – Participants (Public Sale)

Issuer Bond Counsel Financial Advisor • Selects financing team • Drafts Authorizing • Advises Issuer on all • Determines borrowing Resolution, Legal Opinion matters regarding bond needs and key parameters and closing documents issuance of debt • Provides legal advice to • Fiduciary duty to the Issuer • Authorizes issuance of issuer based on existing • Typically assembles Official bonds federal, State and local Statement on behalf of legislation and Issuer arbitrage/tax law

Rating Agency Trustee, Bond Registrar and Underwriter • Provides on Paying Agent • Securities dealer; markets Issuer’s bonds and existing bonds, sets , sells obligations bonds to investors • Financial institution with trust powers; fiduciary Bond Insurance/Credit capacity to facilitate the Underwriter’s Counsel Enhancement collection and distribution of • Manages Due Diligence call funds for the benefit of the • Lend higher credit quality and prepares Bond bondholder for a fee and guarantee Purchase Agreement debt service payment to • Maintains list of bondholders • Advises Underwriter on bondholders, if applicable legal issues 14 BOND PROCESS: Type of Bond Sales

Method of Sale is Selected in Light of Financial, Market, Transaction- Specific and Issuer-Related Conditions

• Underwriter(s) selected up • Typically one buyer • Financial Advisor provides front comprehensive services to prepare the sale (ratings, • Additional flexibility with sale • Subject to negotiations with purchaser structuring, terms, timing, etc.) date/timing

• Sealed bid submitted by • Underwriter assists with • Potential purchaser may underwriters - parameters set structuring, pre-marketing and include banks with banking for bid & date chosen for sale sale timing relationship with the Issuer • Very limited ability to control Negotiated • Broaden investor • Typically shorter amortization who purchases the bonds (i.e. base/competition among and smaller deal size than Competitive local residents) investors public sales • Utilized less often than • Preferred with volatile • Limited competition for bonds negotiated sale method markets, story bonds and less (limited number of banks

depending on financing • Works best with highest credit Private parameters) quality and stable markets • Gross spread negotiated • Gross spread difference between underwriter pays issuer and the price underwriter sells bonds to investors

15 Bond Process – B. Key Documents BOND PROCESS: Key Documents

• Authorized by Governing Board

Agenda Language • Provided by Bond Counsel

• Sets terms and parameters under which bonds can be issued, flow of Authorizing funds, pledge of revenues • Authorizes issuance Resolution • Formally appoints financing team participants • Delegates authority to administration to execute final documents

• Preliminary Official Statement  Governing Board should review the POS, especially information Draft Financing related to the District and the community Documents • Continuing Disclosure Certificate • Registrar Contract • Depository Trust Agreement (if applicable) • Bond Purchase Agreement

Debt Policies • Post Issuance Compliance and Procedures • Tax Exemption Status • Continuing Disclosure

17 BOND PROCESS: Key Documents

Preliminary Official Statement (“POS”) S.E.C. Rule 15c2-12 = ISSUER’S DOCUMENT  Includes all material information needed to make an informed investment decision S.E.C. Rule 10b-5  Does not include any untrue or misleading statements nor does it omit any material information POS Deemed Final Certificate

Legal Opinion Bond Counsel attesting to the validity of the bonds  Bond issuance consistent with applicable state and federal laws  Voter authorization to issue Bond Counsel attesting to the tax status of the bonds

Continuing Disclosure Undertaking (“CDU”) Issuer’s promise to keep investors informed about specific information/events and annual financial information and operating data

Bond Purchase Agreement Contract between the underwriter and the issuer setting forth the final terms, prices and conditions of the underwriter’s purchase of the issuer’s bonds  Signature from Board Chair or Board Member 18 Bond Process – C. Rating & Pricing BOND PROCESS: Credit Quality

LONG-TERM CREDIT RATING SCALE RISK GRADE Decreasing Credit Quality, Increasing Yields Aaa AAA AAA Highest quality

1 + + Aa 2 AA AA Highest quality 3 - - 1 + +

A 2 A A Highest quality Investment 3 - - 1 + + Baa 2 BBB BBB Highest quality 3 - -

Ba, B BB, B BB, B Speculative Caa, Ca CCC, CC, C CCC, CC, C Highly speculative C D D Junk

20 BOND PROCESS: Credit Quality

• Vary based on security type – all rating agencies provide information on their Rating Criteria

Liquidity Management & ( & , Governance unrestricted (Tenure, strategic plan resources, & policies, Board expendable composition, track resources) record) Debt Load (revenues, (Debt Coverage, % expenditures, risk annual operating management) expenses, expendable resources to total debt service)

Bond Provisions Demand Analysis Credit (Security pledge, rate (Geographic, covenant, additional competition) Rating bonds test)

21 BOND PROCESS: Credit Quality

Community College General Obligation Ratings (as of May 2018)

Standard & Poor’s Moody’s

A- BBB 1% 2% A AAA A3 A1 4% 7% 1% Aaa AA+ 13% A+ 12% 12% 18% Aa3 Aa1 14% 22% AA- AA 26% Aa2 30% 38%

22 BOND PROCESS: Negotiated Pricing

Internal Marketing Credit Approval Pricing Process

Distribute POS, rating Schedule individual Review overall market report, maturity structure meetings or calls with credit conditions and municipal internally analysts flows

Receive feedback from Answer questions and Review recent comparables / trading / receive feedback from and trading levels sales teams on structure investors Develop “price thoughts” Internal distributions to Receive credit approvals for institutional and retail sales the transaction Pre-pricing call with Issuer teams and Underwriting Desk Distribute POS, rating reports, maturity structure Hold order period -- review to investors order book with Issuer and Feedback make adjustments as Decisions necessary

Issuer Issuer can see Underwriter Obtain approval on final the orders Underwriter from investors. takes orders interest rate scale and This allows from investors them to time and work with confirm orders with the sale and the Issuer to investors react to orders adjust terms to Institutional & received from react to their Retail Investors investors in demands while real time. still meeting objectives for the financing. 23 BOND PROCESS: Negotiated Sale - Day of Pricing

• Underwriter evaluates market conditions at the open

• Order period commences, pricing wire(s) sent out

• Online Order Entry System – allows issuer to view orders as they are entered

• At conclusion of order period, a “pricing call” is typically held – Conference call between issuer, banker and underwriter to discuss sale status

• Re-pricing Considerations – Depending on investor demand, the Underwriter may propose slight adjustments to yields or coupons

• Concluding the Pricing – When a significant number of bonds have been sold, the underwriter will commit to purchase all unsold bonds at proposed rates – If the underwriter and issuer reach agreement on the final structure, interest rates (coupons) and yields of the bonds, then the terms are entered on a bond purchase agreement (BPA) presented for approval to the issuer – The BPA is executed by the Issuer (authorized in Resolution) and the underwriter the day of the sale – Investor orders are confirmed

Bond Process D. Closing & Post Closing BOND PROCESS: Closing

Closing Preparation Example: Flow of Funds (2-3 Weeks after pricing)  Official Statement electronically distributed to buyers with final pricing Underwriter information  Closing documents reviewed  Signatures obtained by Bond Counsel (for those parties not physically attending the closing) Bond Proceeds  Closing memorandum prepared: • Location and date of closing • Final pricing numbers • Wire transfer instructions • Flow of funds Trustee Day of Closing  Bond proceeds delivered to Trustee

Acquisition Fund Costs of Issuance Fund

26 BOND PROCESS: Post Closing

Continuing Disclosure

Investment Annual Earnings / Hearings Arbitrage and Forms

Bond Issuance

Spending Exceptions / Surveillance Private Use

Tax Levy / Tax Rate Setting

27 BOND PROCESS: Post Closing

Documents to come by or after closing • Summary of Sale booklet • Transcript CD from Bond Counsel Arizona Department of Administration – Bonded Indebtedness Report • Due in August Continuing Disclosure Filings • Issuer’s responsibility IRS Tax Regulations, Arbitrage, Yield Restriction and Rebate • IRS Form 8038-G filed at closing indicating existence of adopted federal tax compliance policies • Federal tax laws generally restrict the ability to earn arbitrage in connection with tax-exempt bonds • Certain exemptions and rebate requirements Use a qualified arbitrage rebate consultant to determine liability •  Documentation of appropriate interest earnings on bond proceeds  Remittance of excess interest earnings on bond proceeds • Violations can lead to IRS deeming the bonds taxable or sizable fines and restrictions

28 BOND PROCESS: Post Closing

Credit Rating Surveillance Calls • Provide updates on economic, financial, etc. information, as requested

Private Placements • Send transcript of lease agreements to rating agencies

Monitor Tax Levy and Tax Rate

Refinancing Opportunities

Adoption of Policies and Procedures Related to Debt Management

Record Retention / Assigned Responsibilities

29 Glossary

GLOSSARY: Useful Terminology

• Tax-Exempt Bond – Interest on most municipal securities is exempt from federal income taxes and income taxes for the state of the issuer. Taxable Equivalent Yield: The yield on a theoretical taxable investment that, after subtracting income taxes, results in the tax exempt bond yield. . Taxable Equivalent Yield = Yield on the tax exempt bond ÷ (100% - Income Tax Bracket) . Example: Taxable Equivalent Yield for a 4.00% Tax-Exempt Bond Yield = 4.00% ÷ (100% - 30% Income Tax Bracket) = 4.00% ÷ 70% = 5.71%

• Taxable Bond – A security where the interest is not exempt from federal income taxes. However, state income taxes may or may not still apply. The IRS can declare original issue tax-exempt bonds to be taxable if federal tax laws are violated.

• New Money Bonds – Bonds issued for financing new capital, not refunding outstanding bonds.

• Refunding Bonds – Issuance of a new bond for the purpose of retiring an already outstanding bond issue, usually to reduce interest costs, restructure the amortization schedule or remove a restrictive covenants.

• Defeasance – Using available monies to provide for debt repayment prior to their stated maturity. 31 GLOSSARY: Pricing

Yield Curve • Compilation of interest rates • Rate at which interest is paid paid for different maturities • Fixed rate: set at time of • Varying investor interest pricing • Short term versus long term • Variable rate: may be reset rate daily, weekly, monthly… • Interest is usually paid semi- • Varies over time annually • Shape of the • • Short term versus long term Par/Annual Principal or face amount of Yield – borrowing Principal borrowing Market • • Taxable versus tax-exempt Amount Size matters (i.e. $1MM versus Return borrowing $55,000 maturity) • Level of risk • Market supply and demand • Allow bonds to be retired • Comparative prices before scheduled maturity Call Features • Specify period of call • Date at which principal is protection and prepayment repaid penalty • Serial bond: principal is due on Maturity a particular date • Indicates credit quality • Term bond: principal is Credit rating • Allows price/rate comparison amortized over several years, • Underlying and/or insured may have sinking fund 32 GLOSSARY: Pricing

Principal x Investor’s Rate Price of Return = Issue Price Rate Issuer Pays = Coupon Investor Pays

Premium Bond

Yield to Maturity Dates Maturity

Par Bond Final Maturity Yield to Call

Discount Bond

33 GLOSSARY:

What does a basis point mean to you?

• Interest rates (and yields) are expressed in Basis Points (bp)

• 1 bp = 1/100 * 1.0% = 0.0001 – Difference between 4.50% and 4.49% = 0.01% = 1 Basis Point

• The dollar impact of 1 basis point is approximately $8,800 over the life of a 15-year, $10 million issue and $6,880 on a basis (i.e., change in price of the securities to investors)

34 GLOSSARY: Pricing

Municipal Market Data (MMD) Thomson Reuters Municipal Market Data. A daily, generic, “AAA” rated general obligation benchmark yield curve for tax-exempt trading. • Benchmark interest rate for tax-exempt, generic “AAA” rated municipal bonds • Comparative sales shown during pricing will normally show a spread to MMD comparison

‘AAA’ Municipal Market Data Yields 3.5% 30-Year MMD

3.0%

2.5% 10-Year MMD

2.0%

1.5%

1.0% 2-Year MMD 0.5%

0.0% Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

Additional Comparable Interest Rate Tax-Exempt “AAA” MMD Credit Bond Yield Rate Spread

35 Source: Thomson Reuters. As of 5/17/18 GLOSSARY: Day of Pricing – Desk Speak

Bump Lower yield, higher dollar price. Cut Higher yield, lower dollar price. Cheap Yields higher (dollar price lower) Rich Opposite of cheap. Yields lower than reasonable for specific (dollar price higher) than credit. reasonable for specific credit. Rally Decreasing yields in market. Selling Off Opposite of rally. Increasing yields in market. Tightening Delta of spreads diminishing Widening Opposite of tightening. Delta of between credit categories. spreads increasing between credit categories MMD Thomson Reuters Municipal Market Data. A daily, generic, Spreads Delta between different “AAA” rated general obligation categories or between an index benchmark yield curve for tax- and specific bond yield. Most exempt trading. often quoted as spread to “AAA” MMD index. Over- Number of orders exceeds the Subscribed bonds available for a certain Inventory Underwriter takes in unsold maturity bonds

36 GLOSSARY: Components of Underwriter’s Discount

Gross Spread (Underwriter’s Discount)

• Takedown ($/$1,000) – compensation to the underwriter for selling the securities (generally largest component)

• Management fee – fee for structuring or could be fee paid to lead manager of a syndicate

• Underwriter’s Counsel

• DTC - Industry formula – utilized for and clearance services of the Depository Trust and Clearing

• CUSIP (Committee on Uniform Security Identification Procedures) - Industry formula – paid to obtain the unique identifiers for securities (9-digit alphanumeric)

• Wire fees – Industry formula - syndicate wires platform fee

• Electronic Order Entry/Order Monitor - Portion industry formula, portion investment bank formula

• Day -Investment bank formula – funds to cover the period between the early morning transfer of funds and settlement on the day of closing)

• Marketing expenses – Investment bank formula – could include investor road show expenses

• Other/Miscellaneous - Some states have other industry standard fees (i.e. municipal advisory council)