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Bond Issuance 101 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 security 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 Municipal Bond? • 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 interest 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 income tax • Because Municipal Bonds are generally tax-exempt, investors are willing to accept lower interest rates on tax-exempt debt • It’s not what you earn, it’s what you get to keep! • Concept of the “taxable yield equivalent” Example : 3.00% tax-exempt interest rate = 3.75% equivalent taxable yield for investor 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 IssuesNumber 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 Asset-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 • Investment advisors Investors • Commercial banks • Bank trust departments • Insurance companies Mutual Funds (a) 25% _______________________ Sample: Investor Participation Years to Maturity (a) Includes mutual funds, money market 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 credit unions, and broker dealers. Bank Trusts (c) Includes property-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) retirement funds, government-sponsored enterprises and Short Bond Funds foreign holders. Intermediate Bond Funds Source: Federal Reserve System (SIFMA). Hedge 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 Long-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, arbitrage 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
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