HomeMy Public PortalAboutExhibit MSD 11A1 District's Debt Managment Policy
DEBT MANAGEMENT POLICY
3/22/04
METROPOLITAN ST. LOUIS SEWER DISTRICT
Table of Contents
Introduction.....................................................................................................................1
Policy Statement.............................................................................................................2
Formulating Rates and Charges......................................................................................3
Types of Debt..................................................................................................................4
Purpose of Debt..............................................................................................................5
Types of Products ...........................................................................................................7
Structural Features........................................................................................................11
Funds and Accounts......................................................................................................13
Credit Objectives...........................................................................................................14
Method of Bond Issuance..............................................................................................14
Use and Investment of Bond Proceeds .........................................................................16
Documentation of Transactions.....................................................................................17
Market Relationships.....................................................................................................17
Consultant & Investment Banking Firm Selection..........................................................17
Glossary of Terms.........................................................................................................21
Metropolitan St. Louis Sewer District – Debt Management Policy - 1 -
Metropolitan St. Louis Sewer District
Statement of Policy
Debt Management & Formulation of Rates and Charges
March 22, 2004
Introduction
In 2000 the Metropolitan St. Louis Sewer District (“MSD”) began a
comprehensive review of capital infrastructure needs, directing the preparation of
several studies and plans as follows:
“Program Planning of the District’s Capital Improvement and
Replacement Program”, prepared by Sverdrup/Kwame/Metcalf &
Eddy Joint Venture, September 2002;
“Strategic Five-Year Business Plan—2002-2007”, initially prepared in
2001 by MSD with participation of a citizens group. The Strategic
Plan is updated annually.
“Report on Revenue Requirements, Costs of Service, and Rates for
Wastewater Service”, prepared by Black & Veatch, April 2002;
“Stormwater User Charge Study,” prepared by Camp Dresser &
McKee Inc., (In Process).
As a result of this planning process MSD identified wastewater system capital
needs totaling $3.7 billion and storm sewer system capital needs totaling $1.0
billion (in 2002 dollars) to be completed over an eighteen year period. A
November 2000 voter referendum approved amendments to MSD’s charter, or
“Plan of the Metropolitan Sewer District” to enhance accountability to the public
and broaden MSD’s authorization to access debt financing. Key provisions of the
2000 MSD Charter amendment included the following:
Establishment of a Rate Commission to review proposed rate
changes and advise the MSD Board of Trustees, (the “MSD
Trustees”) regarding proposed rate changes;
Creation of the position of Internal Auditor appointed by the MSD
Trustees;
Instituting a requirement for a Management Audit to be completed
every five years:
Instituting a requirement for preparation of a continuing Five-Year
Strategic Plan to be updated and approved annually;
Instituting term limits for the members of the MSD Trustees;
Permitting the issuance of district-wide revenue bonds to fund capital
projects, subject to a voter approval requirement based on a simple
majority; and
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Providing for the sale of bonds by negotiated, as well as competitive,
sale.
Based on engineering studies and reports, the MSD Board of Trustees (the
“MSD Trustees”) identified Phase One Capital Improvement and Repair Program
(the “CIRP’) totaling $647 million to be funded by a combination of bond
proceeds and revenues to be generated by an increase to sewer rates and
charges. A proposal was forwarded to the Rate Commission on May 16, 2002
for a multi-year increase to rates and charges that would facilitate the funding of
approximately $147 million in capital projects on a pay-as-you-go basis
(“PAYG”), and fund the repayment of $500 million in MSD Sewer Revenue
Bonds. The Rate Commission approved the rate proposal in October 2002 and
approved an amendment to the rate proposal in May 2003. The initial rate
increase was adopted by the MSD Trustees and became effective August 1,
2003. A District wide referendum was held February 3, 2004, with voters
authorizing the issuance of $500 million in MSD Wastewater System Revenue
Bonds.
Policy Statement
The purpose of the Debt Management Policy is to guide current and future
decisions related to the formulation of rates and charges and the issuance of
debt to fund capital projects identified in the CIRP, and authorized by the MSD
Trustees. Rates and charges for wastewater service will be established at levels
adequate to ensure both the timely payment of all debt to be issued and to
provide adequate surplus revenue to maintain the fiscal integrity of utility
operations and fund a portion of the long-term CIRP. This Debt Management
Policy confirms the commitment of the MSD Trustees to sound financial
management practices. It is MSD’s policy to:
Undertake a multi-year planning approach to facilitate both timely and
equitable changes to rates and charges, and actively communicate
information to MSD ratepayers and stakeholders regarding the
financial health of MSD and forecasts of future funding needs;
Maintain a strong financial foundation for MSD operations and
completion of the CIRP;
Assure access to the capital credit markets;
Establish and maintain high credit quality for MSD debt; and
Achieve the lowest aggregate CIRP financing costs consistent with a
prudent degree of risk and the recognition of ratepayer affordability.
The Debt Management Policy incorporates elements and information from a
number of sources, including existing MSD practices and procedures, national
credit agency guidelines, national and industry policies and best practices
employed by high performing public entities. The MSD Trustees recognize that
the Debt Management Policy may be amended or modified from time to time and
reserves the right to waive or modify any of the policies and guidelines included
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herein if, in its judgment, doing so advances the MSD’s objectives and is deemed
fiscally prudent.
Funding the Long-Term CIRP
In accordance with MSD’s Strategic and Operating Plan for 2002-2007, the
Executive Director will ensure the completion and timely updates of a
comprehensive capital improvement program including the preparation of a 15-
year CIRP. Stormwater projects and wastewater infrastructure projects will be
financed by separate funding sources. Stormwater projects will be financed
through stormwater charges, with some current funding derived from subdistrict
specific property taxes. The issuance of Stormwater Revenue Bonds may be
considered at a later date. Wastewater infrastructure projects will be funded by
wastewater charges and Wastewater System Revenue Bonds. Appropriate
ranking systems for stormwater and wastewater infrastructure projects will be
utilized to develop the CIRP. The ranking process for both categories of CIRP
projects will reflect the following parameters:
Capital projects that are necessary to ensure compliance with Federal
Environmental Protection Agency and State of Missouri Department of
Natural Resources rules and regulations and that protect the health
and safety of MSD customers will be given the highest priority.
Capital projects will be consistent with MSD’s long-term goals and
mission and reflect a well-conceived plan to address infrastructure
needs.
Capital projects will be consistent with regulatory trends, including
existing and future permit requirements and evolving Sanitary Sewer
Overflow, Combined Sewer Overflow, Total Maximum Daily Load,
flow blending, and storm water regulations.
It is anticipated that the Long-Term CIRP will be funded with a combination of
PAYG and debt financing, with debt issuance subject to voter authorization. To
the extent Federal, State or other sources of grant revenues are available MSD
will appropriately consider and pursue such funding sources. Given the
uncertain nature of such grant sources, however, the Executive Director will
include in the long-term CIRP a plan of finance for funding the CIRP that reflects
PAYG and debt financing funding sources. The mix of PAYG and debt financing
should balance concerns regarding the affordability of rates and charges as well
as the impact of debt burden on MSD ratepayers.
Formulating Rates and Charges
Rates and charges will be established at levels to generate sufficient revenues to
support the full cost (direct and indirect) of operations including ongoing and
preventive maintenance, to ensure the timely payment of debt, to provide debt
service coverage and meet other Master Bond Ordinance, provisions as
applicable, and to ensure adequate and appropriate levels of liquidity and
emergency reserves. Rates and charges shall be reviewed at least annually.
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Each year, at the time the annual operating and capital budget is presented for
the consideration of the Trustees, the Executive Director will report to the
Trustees regarding the adequacy of rates and charges to meet all legal
obligations as well as the broader goals and mission of MSD.
Types of Debt
The MSD Trustees shall authorize and approve all debt issued for the purpose of
financing a portion of MSD’s CIRP, as well as debt that may be issued for the
purpose of refunding any MSD debt outstanding. The MSD Trustees may
employee a Financial Advisor to assist MSD with a capital financing strategy and
the evaluation or analysis of specific relevant debt management matters. When
the MSD Trustees determine that the use of debt is appropriate, the following
criteria will be utilized to evaluate the type of debt to be issued.
Long-Term Debt
MSD may issue long-term debt (general obligation or revenue bonds) where it is
deemed that capital improvements should not be financed from current revenues.
Long-term borrowing will not be used to finance current operations or normal
maintenance. Long-term debt will be self-supporting and structured such that the
weighted average maturity of the debt does not exceed the expected useful life of
the capital project.
Short-Term Debt
Short-term borrowing may be utilized as authorized by MSD Charter, Article 3,
Section 3.020(13), for the temporary funding of capital projects or for operational
cash flow deficits subject to the following policies:
MSD may issue short-term debt when there is a defined and adequate
repayment source.
Lines of Credit may be considered as an alternative to other short-
term borrowing options if it is determined to be more cost-effective.
Other Short-Term Debt, including commercial paper notes, may be
used when it provides an interest rate advantage or as interim
financing until market conditions are more favorable for long-term debt
issuance.
Lease Purchase Debt
Lease purchase debt, including certificates of participation, shall be considered
as an alternative to long-term vendor leases. Such debt shall be subject to
annual appropriation. In order to reduce the cost of lease borrowing and to
improve control over leases MSD may implement a master lease program.
Variable Rate Debt
To maintain a predictable debt service burden, MSD may give preference to debt
that carries a fixed interest rate. MSD, however, may consider variable rate debt
to diversify its debt portfolio, reduce interest costs and match the durations of
assets and liabilities. Prior to issuing variable rate instruments, MSD Staff and
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the Financial Advisor will analyze the savings available in comparison to fixed
rate instruments and evaluate and quantify the risks associated with the variable
rate debt. The most recent five-year average of the BMA Index may be used as
a benchmark for determining variable rate debt cost. Ancillary costs for
remarketing, liquidity, or broker-deal and tender agent fees should also be
reflected in the analysis.
As long as variable rate debt is outstanding, MSD will actively monitor
and evaluate market conditions and shall determine if it is appropriate
and cost efficient to convert the variable rate debt to fixed interest
rates.
Consistent with rating agency guidelines, the percentage of unhedged
variable rate debt outstanding at the time of any debt issuance shall
not exceed the upper limit for such debt specified by the rating
agencies. Unhedged variable rate debt representing 15 to 20 percent
of MSD’s total outstanding debt is an acceptable upper limit. For
purposes of this limitation, variable rate debt is considered hedged if it
is subject to an interest cap, has been synthetically converted to a
fixed rate, or if short-term investments offset variable rate debt
exposure. Short-term MSD investments for purposes of this limitation
shall include monies invested and maintained for working capital and
liquidity purposes.
MSD may use contracts that limit exposure to interest rate volatility,
such as interest rate Caps and Collars, to hedge interest rate
fluctuations.
Variable rate bonds may be used in conjunction with a financial strategy, which
results in long-term synthetic fixed rate debt. Prior to using synthetic fixed rate
debt to fund authorized capital expenditures, MSD will require that the interest
rate cost is at least 20 basis points lower than traditional fixed rate debt, based
on projections provided by MSD Staff and the Financial Advisor. Any risks
associated with the utilization of a synthetic fixed rate debt structure will be
identified and evaluated by the Financial Advisor in a written recommendation to
the MSD Trustees. The risk analysis will be consistent with the provisions of this
Debt Management Policy.
Purpose of Debt
Long-term debt may be issued to finance authorized CIRP projects, or to refund,
on a current or advanced basis, outstanding debt obligations.
New Money Bonds
New money issues are those financings that generate additional funding to be
available for expenditure on capital projects. These funds will be used for
acquisition, construction and major rehabilitation of capital assets identified in the
CIRP. The structure for any financing shall be recommended by the Financial
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Advisor based on the composition of MSD’s outstanding debt and market
conditions at the time of the sale for the new money issue.
Refunding Bonds
MSD may undertake a refunding of outstanding debt for the purpose of capturing
interest rate savings, to restructure debt, change the type of debt instruments
being used, or to retire a bond issue and indenture in order to remove
undesirable covenants, based on the recommendation of MSD’s Financial
Adviser.
Refunding outstanding bonds for debt service savings may be undertaken on a
current basis; i.e., the optional call date for the bonds to be redeemed is within 90
days of the dated date of the new refunding bonds. Before MSD undertakes a
current refunding, its Financial Advisor will analyze the contemplated refunding
and opine to MSD Staff that the economic benefit of such refunding will achieve a
total projected net present value savings in an amount equal to or exceeding
three percent of the total par amount of the bonds to be refunded.
The refunding of outstanding bonds for debt service savings may be undertaken
as an advanced refunding; i.e., the optional call date for the bonds to be
redeemed is at least 90 days after the dated date of the refunding bonds. The
refunding may reflect a net cash or crossover refunding structure. Before MSD
undertakes an advanced refunding its Financial Advisor will analyze the
contemplated refunding and opine to MSD Staff that the economic benefit of
such refunding meets the following two-part criteria:
Each maturity to be advance refunded will produce a three
percent minimum present value savings; and
The total present value savings for all maturities to be advanced
refunded will result in a net present value savings equal to or
exceeding four percent of the total refunded par amount.
The present value analysis of savings may be supplemented by utilization of a
call-option-pricing model to measure the potential savings that may be generated
for individual bond maturities. The call-option-pricing model computes the
maximum possible refunding value of an outstanding bond and then computes
the savings under current market conditions as a percentage of the maximum
value. The target savings from any particular refunding candidate shall be a
minimum of 75 percent of the expected value of the call option, net of all
transaction expenses. At the recommendation of MSD Staff and the Financial
Advisor, individual refunding candidates that are above or below the savings
objective may be included in order to optimize MSD’s financial objectives for any
given refunding issue.
If the structure of an advanced refunding transaction incorporates an interest rate
swap or other hedging agreement, the transaction must generate demonstrable
additional savings as compared to the relevant traditional net cash or crossover
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refunding approach. The amount of additional savings demonstrated should be
commensurate with the additional risk assumed by MSD in the transaction.
Recognizing that are a multiplicity of possible such transaction structures, with
different and varying sources of risk, no specific savings criterion are specified.
Prior to proceeding on such an advanced refunding, MSD’s Financial Advisor
must undertake an analysis of the risks associated with the interest rate swap or
hedging agreement, estimate the additional savings to be realized and provide a
written recommendation to the MSD Finance Committee that such additional
savings is commensurate with any risks associated with the proposed
transaction. The identification of risks associated with the transaction shall be
consistent with the “Interest Rate Swap Risk Analysis” section of this Debt
Management Policy.
Escrow Structuring
MSD shall utilize the least costly securities available in structuring refunding
escrows. The Secretary-Treasurer may authorize the Financial Advisor or a
qualified third party agent, who is not a broker-dealer, to assist with the structure
of the escrow and procurement of securities for refunding transactions. The
Secretary-Treasurer shall require the Financial Advisor or qualified third party
agent to provide a Fair Market Opinion that shall state that the securities were
procured through an arms-length, competitive bid process (in the case of open
market securities), that such securities were more cost effective than State and
Local Government Obligations (SLGS), and that the price paid for the securities
was reasonable within Federal guidelines. MSD shall take all necessary steps to
optimize escrows and to avoid negative arbitrage in its refundings. Any resulting
positive arbitrage will be rebated as necessary according to Federal guidelines.
Types of Products
MSD may utilize financial instruments that lower its interest expense, manage its
financial risk, and improve its financial condition. MSD may not use financial
instruments that create extraordinary leverage or financial risk, lack adequate
liquidity to terminate at fair market value, or whose value cannot be determined
easily from available market information. The use of derivative financial products
should produce a result not otherwise available in the cash market (e.g., lack of
advance refunding/non-callable debt) or provide a higher level of savings or
benefit commensurate with any risks associated with the derivative financial
product.
Current Coupon Bonds
Current coupon bonds are bonds that pay interest periodically and principal at
maturity. They may be used for both new money and refunding transactions.
Current coupon bonds may be structured to meet the demands of the investor
and thereby reduce the cost of borrowing. Features such as annual principal
maturities, the use of discounts, maturity of the debt, parameters of the call
provisions, bond insurance and cash funded or surety debt service reserve fund
may be adjusted based on the market conditions at the time of sale.
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Zero Coupon and Capital Appreciation Bonds
Zero coupon bonds and capital appreciation bonds have principal amortization
that is much slower than level debt service with coupon bonds, resulting in
increased interest expenditure over the life of the bonds. Zero coupon and capital
appreciation bonds shall only be recommended in limited circumstances.
Interest Rate Swaps and Hedging Agreements
Any utilization of interest rate swaps, or hedging agreements is subject to
Missouri statutory authorization and limitations. To the extent permitted by law,
MSD may utilize the following financial products after identifying the specific
financial objective to be realized and assessing that product’s attendant risks:
Interest Rate Swaps
Options on Interest Rate Swaps
Swaptions
Caps/Floors/Collars
Interest rate swaps and hedging agreements will be considered where
appropriate in the issuance of or management of debt only in instances where it
has been demonstrated that the swap or agreement will either provide a hedge,
which reduces risk of fluctuations in expense or revenue, or alternatively, where it
will reduce total project cost. Swaps and hedging agreements will only be
utilized with prior approval of the MSD Trustees.
Interest Rate Swap Risk Analysis
MSD shall evaluate all financial products with respect to the unique risks they
each create. The analysis and recommendation of the Financial Advisor should
establish that the risks to MSD are justifiable. A specific determination must be
made that the projected benefits exceed the identified risks by an adequate
margin over a comparable cash market transaction, if available. At a minimum,
MSD and the Financial Advisor should perform a risk evaluation of the following
factors and questions:
Market or interest rate risk—Does the transaction hedge or create
interest rate volatility?
Tax risk--Is the value of the instrument subject to a future change in
federal income tax policy?
Termination risk—Under what circumstance might the transaction be
terminated? At what value?
Risk of uncommitted funding or “put risk”—Does the transaction
create an additional financing obligation dependent upon third party
participation?
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Credit risk--How would the transaction be impacted by a change in
MSD’s credit ratings?
Liquidity renewal risk--What is the impact on the transaction of higher
liquidity charges upon renewal of the liquidity facility? What actions
can mitigate the risk of liquidity renewal?
Counterparty risk--What is the creditworthiness of the counterparty?
What downgrade and collateral provisions mitigate this risk?
Basis risk--Do the anticipated payments MSD receives match the
payments it makes?
Interest Rate Swap Procurement
MSD’s preference is that the procurement of interest rate swaps be undertaken
on a competitive bid basis. MSD prefers the utilization of interest rate swap
contracts that have strong price transparency and which are of a type referred to
as “plain vanilla,” e.g., a percentage of LIBOR and BMA interest rate swaps. On
a product-by-product basis, MSD will consider a negotiated procurement of
financial instruments that have customized or specific attributes benefiting MSD,
provided that justification of the benefit is documented. To the extent MSD
procures an interest rate swap through a negotiated process, the Financial
Advisor or other qualified advisor will provide a Fair Market Opinion letter to the
Treasurer that includes a certification that the interest rate swap pricing reflects
fair market value of the transaction.
Interest Rate Swap Counterparty Requirements
MSD will only enter into interest rate swap agreements with highly rated financial
institutions. Credit criteria for financial institutions are as follows:
The institutions’ long term, unsecured and unsubordinated obligations
are rated at the time of execution of the interest rate swap agreement
by at least one rating agency at least “Aa3” by Moody’s Investors
Services, Inc. (Moody’s) or “AA” by Standard and Poor's Ratings
Services, a division of McGraw-Hill Companies, Inc. (“S&P”), or
FitchRatings “Fitch”) and by at least one other rating agency at no
lower than an “A2” by Moody’s or “A” by S&P or FitchRatings; or
The institutions’ obligations under the interest rate swap agreement
and the Credit Support Annex are unconditionally guaranteed by a
bank or non-bank financial institution the long-term, unsecured and
unsubordinated obligations of which are rated at the time of execution
of the interest rate swap agreement by at least one credit agency at
least “Aa3” by Moody’s or “AA” by S&P or FitchRatings and by
another rating agency not lower an “a2” by Moody’s or “A” by S&P or
FitchRatings.
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Financial institutions seeking to act as an interest rate swap counterparty must
agree to one-way collateral and ratings downgrade provisions that provide
additional protection for MSD.
Interest Rate Swap Documentation
MSD will use standard International Swap Dealer Association (ISDA) interest rate
swap documentation including the Schedule to a Master Agreement and a Credit
Support Annex thereto. Interest Rate Swap documentation should include the
following terms and provisions:
Downgrade provisions triggering termination should be bilateral;
Governing law for interest rate swaps may be New York, but should
reflect Missouri’s authorization provisions;
The language related to credit events in the master agreement should be
narrowly drafted with regards to MSD credit downgrade events and
specify downgrade trigger events and remedies for the counterparty;
Eligible collateral should be limited to Treasuries and Federal Agencies;
Collateral thresholds should be set on a sliding scale reflective of
counterparty credit ratings.
Termination value should be set by the “market quotation” methodology.
Interest Rate Swap Contract Limitations
MSD may enter into interest rate swap contracts, provided that the cumulative
total of all Interest Rate Swap contracts at any one time shall not exceed 10
percent of the then outstanding long-term debt, adjusted for the amount of any
authorized new money bonds not yet issued. MSD will avoid incurring
significantly more than $100,000,000 of exposure to any single counterparty. For
the purpose of this size limitation, a counterparty is considered to include all
affiliated or syndicated entities to the same transaction.
Benefit Expectation from use of an Interest Rate Swap
Financial transactions using interest rate swaps or other hedging agreements
that are intended to produce the effect of a synthetic variable rate debt or
synthetic fixed interest rate debt must generate demonstrable additional savings
as compared to alternative traditional variable or fixed rate financing approaches.
Target savings should reflect the greater complexity and higher risk of derivative
financial instruments. The savings threshold should increase with the complexity
and risk features of the specific proposed interest rate swap. In calculating the
prospective savings derived from use of an interest rate swap, all applicable
remarketing credit and liquidity fees must be added to variable rate debt cost,
utilizing the five-year historic average of comparable variable rate securities.
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Prior to executing any interest rate swap transaction, MSD’s Financial Advisor
shall undertake an analysis of the proposed transaction, compare the interest
rate swap proposal to a more traditional financing approach, if available, review
any all risks associated with the interest rate swap transaction, quantify the
reasonably expected economic benefit to be derived from the transaction. The
advisor shall also advise the Treasurer that the economic benefits either are or
are not commensurate with any risks to MSD regarding the transaction so
analyzed.
Collateral Requirements for Interest Rate Swap Agreements
MSD shall not provide collateral to secure its obligations under interest rate swap
agreements. Collateral posted by counterparty shall consist of cash or U.S.
Government securities deposited with a third party trustee.
Structural Features
MSD bonds will be structured consistent with requirements specified in the Plan
of the Metropolitan Sewer district and applicable Missouri statutes. Bond issues
will be structured to optimize the cost of funds while recognizing the debt
affordability targets discussed in the Debt Management Policy. Debt structure
decisions must recognize the impact on MSD ratepayers, and such impact will be
communicated in appropriate public forums prior to debt issuance.
Term of Debt
The weighted average maturity of the debt issue will not exceed the useful life
the project(s) to be financed. Final maturity of the bonds will not exceed 30 years
from the date of issuance.
Debt Service Structure
Combined principal and interest payments for any bond issue will be structured in
consideration of existing debt outstanding and to achieve approximately equal
annual debt service requirements over the life of the bonds. Exceptions will
occur for refunding bonds that may have varying principal repayments structured
to fill in gaps created by refunding specific principal maturities. The objective is
to achieve level debt service in aggregate for each lien, with the debt service
trailing off as bonds mature.
Lien Levels
Senior and junior liens for debt issues may be utilized if the resulting debt
structure optimizes certain critical debt constraints, typically either cost or
capacity.
Capitalized Interest
Certain types of financings such as certificates of participation, lease-secured
financings, and certain revenue bonds may require that interest on the bonds be
paid from capitalized interest until MSD has constructive use of the capital
infrastructure funded by the bond proceeds. In order to avoid unnecessarily
increasing the bond size MSD will minimize its use of capitalized interest.
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Premium and Discount Bonds
While premium and discount bonds may reduce the interest cost of the bonds
they should only be used when economically justified and upon recommendation
by the Financial Advisor.
Bifurcated Coupons
Bifurcated coupons for individual maturities may be utilized if the Financial
Advisor provides a written recommendation to MSD Staff confirming that the
coupon bifurcation will enhance the pricing of the bonds by optimizing interest
from both institutional and retail investors.
Debt Service Reserve Fund
A Debt Service Reserve Fund will be established in an amount equal to the
lesser of (1) the maximum amount of principal of and interest due in any MSD
fiscal year on all outstanding parity debt obligations, (2) 125 percent of the
average annual debt service on Parity Debt Obligations, or (3) an amount not in
excess of 10 percent of the sale proceeds of the Parity Debt Obligations. A
surety bond insurance policy may be used if such use is not expected to impair
the marketing of the bonds and only upon the written recommendation of the
Financial Advisor.
Amortization
MSD will seek to achieve overall level annual debt service for all debt
outstanding. Amortization of principal for debt issues will reflect this objective.
Call Provisions
In general, MSD’s debt instruments will include a call provision for maturities
longer than 10 years. Prior to issuing bonds without a-call provision, MSD will
evaluate expected interest savings, based on the theoretical value of the call
option.
Credit Enhancement
Bond insurance will be used when it provides an economic advantage to a
particular bond maturity or entire issue. The decision to use bond insurance shall
be based upon the value it adds to a specific transaction. The analysis of that
value shall compare the present value of the prospective interest savings
produced due to the insurance to the cost of the insurance premium. Insurance
may be purchased when the premium cost is less than the projected interest
savings. Bond insurance may be purchased for the entire par amount of an
issue or for specific maturities thereof, based on a recommendation to the
Secretary-Treasurer from the Financial Advisor regarding the most cost-effective
approach.
For MSD bond issues sold on a negotiated basis, quotations for bond insurance
will be solicited from at least three providers. In the case of a competitive bond
sale, MSD will solicit applications for pre-qualification of insurance from at least
three qualified providers. The winning underwriter in a competitive sale will
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determine whether it will purchase insurance for the issue. For a negotiated
issue, the MSD Trustees will authorize the purchase of bond insurance if it is
deemed prudent and reasonable.
Letters of Credit may be considered as an alternative approach to credit
enhancement. If a letter of credit is proposed, MSD will select the provider
pursuant to a competitive procurement process and taking into account bank or
provider ratings and any impact on marketing the bonds.
Liquidity Facility
Liquidity may be necessary and prudent to ensure the marketability of certain
short-term financing instruments such as commercial paper, variable rate
demand obligations or auction rate securities. MSD may select a liquidity facility
through a competitive procurement process. Provider selection criteria will
include but not be limited to the following:
Only those banks with long-term ratings greater than or equal to that of
MSD, and short-term ratings of “P-1” and “A-1+,” by Moody’s and S & P,
respectively, will be solicited.
Providers must agree to terms and conditions acceptable to MSD and as
recommended by the Financial Advisor. MSD will provide a term sheet
along with the request for qualifications to which the banks will highlight
modifications;
Providers must demonstrate experience and credibility in the market by
providing representative list of clients for whom the bank has provided
liquidity facilities; and
Fees, including upfront and annual charges, will be evaluated, taking into
account differential trading costs as appropriate.
Funds and Accounts
MSD has established and will maintain Wastewater Revenue and Stormwater
Revenue Funds to facilitate the separate accounting of all cash receipts of fees,
charges, licenses, and permits for sanitary sewer and stormwater services. MSD
has established and utilizes the General Fund to finance the ordinary operations
of the District and to account for revenues and activities of the District that are
not provided for in any other fund.
The Operating, Maintenance and Construction Improvement (OMCI) Funds
account for the expenditure of subdistrict property tax receipts and Construction
Funds are established for the Sanitary Replacement and Stormwater
Replacement projects funded through the annual CIRP. The Capital
Improvement Trust Fund accounts for the expenditure of capital improvement
surcharge moneys collected between 1988 and 1995.
Metropolitan St. Louis Sewer District – Debt Management Policy - 14 -
Debt Service Funds account for the principal and interest due on short-term
financing and the planned Wastewater Revenue bonds as well as the Debt
Reserve Account to be established as part of the Master Bond Ordinance for the
Wastewater Revenue Bonds.
Special Funds include the Improvement, Real Property Improvements and
Alterations Fund, the Water Backup Insurance and Reimbursement Fund and the
Emergency Fund and are established to account for distinct purposes and
programs as established by the MSD Trustees.
The Master Bond Ordinance, to be approved by the MSD Trustees, together with
Supplemental Bond Ordinances that may be authorized from time to time by the
MSD Trustees will establish a flow of funds for application of revenues pledged to
the repayment of bonds issued by MSD. The Finance Director will direct and
ensure that the funds and accounts established by the Master Bond Ordinance
are maintained and that the revenues are allocated consistent with the pledges
and covenants included in the Master Bond Ordinance.
Liquidity
MSD will accumulate and maintain cash-on-hand for liquidity purposes and as a
source of unrestricted operating reserves in an amount equal to 45 days
operating expenses (excluding depreciation). The liquidity requirement will be
reviewed from time to time and the Executive Director is expected to offer
recommendations for adjustments to the requirement as appropriate to maintain
prudent ongoing operating reserves. Surplus revenue in excess of this liquidity
requirement may be allocated to PAYG CIRP projects.
Credit Objectives
MSD will actively seek to maintain and improve the credit ratings of its
outstanding debt obligations through the highest quality fiscal management and
adherence to prudent investment and debt management policies, including debt
affordability benchmarks. Credit objectives, together with the relative cost of
debt, will be considered in the structure of any junior or subordinate lien debt.
MSD will maintain ongoing communications with all three national credit rating
agencies and, at a minimum, provide annual credit updates to credit analysts.
Method of Bond Issuance
MSD may consider selling its bonds on either a competitive or negotiated basis.
MSD shall utilize a sale method to achieve the lowest debt cost depending on the
size and characteristics of the proposed issue and the applicable market
conditions at the time of sale. MSD Staff and the Financial Advisor will provide a
written recommendation to the Finance Committee regarding the method of sale
for each proposed bond issue. The conditions, which indicate the appropriate
method for selling a particular bond issue, are generally described below.
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Competitive sale methodology:
Bond prices are stable and/or demand is strong;
Market timing and interest rate sensitivity are not critical to the pricing;
Participation from Disadvantaged Business Enterprises (DBE / Small
Business Enterprises (SBE) firms is best efforts;
MSD has a well established credit rating and is a recognized issuer in
the market;
There are no complex explanations required during marketing,
regarding: issuer’s projects, media coverage, political structure,
political support, funding, or credit quality;
The bond type and structural features are conventional;
Bond insurance is included or pre-qualified (available); and
The transaction size is manageable
Negotiated sale methodology:
Bond prices are volatile and/or demand is weak and/or the supply of
competing bonds is high;
Market timing is important, such as for refundings;
Coordination of multiple components of the financing is required;
Participation from DBE / SBE firms is enhanced;
MSD has lower or weakening credit rating;
MSD is not a well known issuer to investors;
Sale and marketing of the bonds will require complex explanations
about the issuer’s projects, media coverage, political structure,
political support, funding, or credit quality;
The bond type and/or structural features are non-standard, such as
for a forward bond sale, issuance of variable rate bonds or where
there is use of derivative products;
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Bond insurance is not available or not offered;
Early structuring and market participation by underwriters desired;
MSD has selected a group of qualified investment banking firms
through a competitive procurement process with lead bankers for
specific issues chosen from the pre-qualified banking pre-qualified
underwriters pool;
Large transaction size; and
Strong retail participation is desired and expected to enhance pricing
efforts.
Use and Investment of Bond Proceeds
The Secretary-Treasurer shall comply with all applicable federal, State, and bond
ordinance restrictions regarding the use and investment of bond proceeds. Any
Investment of bond proceeds shall be executed in accordance with MSD’s
Investment Management Policy. Net bond proceeds will be deposited in the
Construction fund only be used to reimburse qualified capital expenditures
funded on an interim bases and to fund the costs of capital projects authorized by
the MSD Trustees.
Diversification
The Secretary-Treasurer shall diversify invested bond proceeds in order to
reduce risk exposure to single issuers (other than Treasuries and Agencies),
types of investment products and types of securities held.
Competitive Bidding of Investments
The Secretary-Treasurer shall competitively bid and or use the services of the
Financial Advisor, or qualified Investment Advisor, to bid the purchase of
securities, investment agreements, float contracts, forward purchase contracts
and any other investment products use to invest bond proceeds. Underwriters of
MSD’s bonds may bid on the sale of investment products for the bond proceeds.
The Financial or Investment Advisor shall document the bidding process and
results thereof and shall certify in writing that MSD received a competitive and
fair market price on all investments purchased based on the bidding process.
Disclosure
The Secretary-Treasurer will require a full disclosure of all fees charged for
investment services or the sale of investment products to MSD to ensure that a
provider of investment products has no conflict of interest and all investments are
purchased at a fair market price.
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Documentation of Transactions
The decision processes used in each financing transaction shall be fully
documented. The documentation will capture information regarding the
recommendations of the Financial Advisor, selection of the financing team,
decisions on product selection and structuring features, sizing, timing, selection
of vendors providing ancillary services and selection of investment securities or
products. This information will be compiled into a post-pricing book, “bond
transaction file,” which will be prepared and delivered to the Secretary-Treasurer
by the Financial Advisor for each financing. MSD shall keep on permanent file
the post-pricing book.
Market Relationships
The Secretary-Treasurer and the Director of Finance shall be primarily
responsible, along with the Executive Director, for maintaining MSD’s
relationships with Moody’s Investors Service, Standard & Poor’s, and
FitchRatings as well investors and bondholders. In addition to general
communication, the Secretary-Treasurer and Director of Finance, or their
appropriate designees, shall: 1) meet, either in person or telephonically, with
each agency’s analysts at least once each fiscal year, and 2) communicate with
each agency’s analysts prior to each competitive or negotiated debt transaction.
Continuing Disclosure
MSD shall comply with U.S. Securities and Exchange Commission Rule 15c2-12
by filing with each Nationally Recognized Municipal Securities Information
Repository its annual financial statements and other financial and operating data
for the benefit of its bondholders no later than six months after the end of the
MSD’s fiscal year. The inability to make timely filings must be disclosed
promptly.
Rebate Reporting
The use and investment of bond proceeds shall be monitored continuously to
ensure compliance with arbitrage restrictions. Existing regulations require that
issuers calculate annual rebate requirements related to any bond issues and pay
any required rebate every five years. Therefore, MSD Staff shall ensure that
bond proceeds and investments are traced in a manner that facilitates the
completion of accurate rebate calculations, and rebate payments, if any, are
made in a timely manner.
Consultant & Investment Banking Firm Selection
MSD will select its Financial Advisor, investment banking firms and its bond
counsel by a competitive-negotiated process through a Request for Proposals
(RFP) pursuant to the procurement authority of the Secretary-Treasurer. All then
applicable MSD contracting policies will apply to all contracts with finance
professionals. Selection may be based on a best value approach for
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professional services or the lowest responsive cost-effective bid based upon pre-
determined criteria.
Financial Advisor Selection
MSD will select an independent financial advisor (or advisors) to assist with the
issuance of all debt and debt administration processes. The financial advisory
services may include, but shall not be limited to, the following:
Providing recommendations to the MSD staff & Trustees;
Evaluating risks and opportunities associated with debt issuance;
Monitoring marketing opportunities;
Evaluating proposals submitted to MSD by investment banking firms and
providing coordination with the banking team;
Advising on investment banking firm selection for debt transactions;
Advising on structuring and pricing of bond issues;
Preparing requests for proposals for other financial services (trustee and
paying agent services, printing, credit facilities, remarketing agent
services etc);
Educating MSD personnel on relevant financing topics;
Providing advice, assistance and preparation for presentations with rating
agencies and investors;
Providing post-transaction analysis.
Financial Advisor Selection Criteria
Selection of MSD’s financial advisor(s) should be based on the following criteria:
Experience in providing consulting services to complex issuers;
Knowledge and experience in structuring and analyzing complex issues;
Experience and reputation of assigned personnel; and
Fees and expenses.
Investment Banking Firms
MSD may select a group of investment banking firms to underwrite debt issues
on a negotiated basis. MSD will select a senior manager (or co-senior managers)
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for each negotiated sale from among the qualified banking firms based on the
following criteria:
The firm’s ability and experience in managing complex transactions
similar to this Debt to be issued;
Prior knowledge and experience working with transportation issuers;
The firm’s willingness and ability to risk capital to underwrite MSD debt
obligations;
Quality and experience of personnel assigned to MSD’s engagement;
Proposed management fees and expenses;
The proposed marketing plan; and
The ability to sell bonds to Missouri retail investors.
Co-manager Selection
Co-managers will be selected utilizing the same criteria as used for the senior
manager. In addition to their individual qualifications, co-managers appointed to
specific transactions shall depend upon of the transaction size and the necessity
to ensure maximum distribution of MSD’s debt obligations.
Syndicate Policies
MSD will approve syndicate policies and designation priorities prior to the
issuance of debt.
MSD may periodically reassess and recommend changes at any time the
composition of the investment banking firms underwriting MSD’s debt issues.
Bond Counsel
MSD debt shall be issued with a written opinion by legal counsel affirming that
MSD is authorized to issue the proposed debt, that MSD has met all
constitutional and statutory requirements necessary for issuance, and a
determination regarding the proposed debt’s federal income tax status. MSD
shall select a nationally recognized bond counsel firm with extensive experience
in public finance and tax issues through a competitive request for proposal
process. Bond counsel will prepare an approving opinion and other documents
relating to the issuance of debt.
Disclosure Counsel
MSD shall hire, when appropriate, Disclosure Counsel to prepare official
statements in the event of a competitive sale. Disclosure Counsel will be
responsible for ensuring that the official statement complies with all applicable
rules regulations and guidelines. Disclosure Counsel will be a nationally
Metropolitan St. Louis Sewer District – Debt Management Policy - 20 -
recognized firm with extensive experience in public finance. The counsel will be
selected base on a competitive procurement process.
Special Counsel
MSD shall hire, when appropriate, Special Counsel to provide assurance that
MSD is compliant with all applicable statutory, regulatory and contractual
provisions of bond issues.
Disclosure by Financing Team Members
Finance Team Members will be directed at the time of selection to provide written
disclosure of any conflicts of interest that may relate to their ability to represent
MSD, to disclose any relationships with MSD Trustees, to disclose any current
investigative action of any federal or state regulatory agencies, and to establish
their compliance with rules promulgated by the Municipal Securities Rulemaking
Board as applicable. Team members will be obligated to disclose promptly any
material changes to the disclosure provided in the selection process or in this
Debt Management Policy.
Metropolitan St. Louis Sewer District – Debt Management Policy - 21 -
Glossary of Terms
Arbitrage . The difference between the interest paid on the tax-exempt securities
and the interest earned by investing the security proceeds in higher-yielding
taxable securities. IRS regulations govern arbitrage on the proceeds from
issuance of municipal securities.
Bond Anticipation Notes (BANs). These notes are re-paid from the proceeds
of the issuance of long-term debt. Typically issued for capital projects.
Call Provisions. The terms of the bond giving the issuer the right to redeem all
or a portion of a bond prior to its stated date of maturity at a specific price,
usually at or above par.
Caps (Interest Rate). The purchase of this product allows an issuer selling
variable rate debt (see definition below) to hedge against high interest rates by
setting a limit above which the interest costs cannot rise.
Capitalized Interest. A portion of the proceeds of a bond issue that is set aside
to pay interest on the same bond issue for a specific period of time. Interest is
commonly capitalized for the construction period of the project.
Collars (Interest Rate). This product is a combination of an interest rate cap and
an interest rate floor. The variable rate issuer purchases a cap to limit the
maximum interest rate costs, and sells the floor option (the least amount of
interest expense an issuer can expect to pay) to obtain a premium that will be
used to pay for the cap. These events create a band of interest rates between
the floor and the cap that will serve as the upper and lower limits within which the
issuer’s interest rates may fluctuate.
Commercial Paper. Very short-term, unsecured promissory notes issued in
either registered or bearer form, and usually backed by a line of credit with a
bank.
Competitive Sale. A sale/auction of securities by an issuer in which
underwriters or syndicates of underwriters submit sealed bids to purchase the
securities. Contrast to a negotiated sale.
Continuing Disclosure. The principle that accurate and complete information
material to the transaction which potential investors would be likely to consider
material in making investment decisions with respect to the securities be made
available on an ongoing basis.
Credit Enhancement. Credit support purchased by the issuer to raise the credit
rating of the issue. The most common credit enhancements consist of bond
insurance, direct or standby letters of credit, and lines of credit.
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Credit Support Provider. With respect to the ISDA Schedule any guarantor or
contingent guarantor (e.g. a contingent swap counterparty) of a party’s
obligations under the swap agreement.
Current Coupon Bonds. Bonds that pay interest periodically and principal at
maturity.
Debt Service Coverage. Net Revenue available for debt service divided by debt
service.
Debt Service Reserve Fund. The fund in which moneys are placed which may
be used to pay debt service if pledged revenues are insufficient to satisfy the
debt service requirements.
Deep Discount Bonds. These are bonds that are priced for sale at a substantial
discount from their face or par value.
Derivatives. A financial product whose value is derived from some underlying
asset value.
Designation Policies. Outline how an investor’s order is filled when a maturity
is oversubscribed when there is an underwriting syndicate. The senior managing
underwriter and issuer decide how the bonds will be allocated among the
syndicate. There are three primary classifications of orders that form the
designation policy: Group Net orders; Net Designated orders and Member
orders.
Escrow. A fund established to hold moneys pledged and to be used to pay debt
service on an outstanding issue.
Expenses. Compensates senior managers for out-of-pocket expenses
including: underwriters counsel, DTC charges, travel, syndicate expenses, dealer
fees, overtime expenses, communication expenses, computer time and postage.
Interest Rate Swap. An agreement between an issuer and a counter-party in
which one party exchanges a stream of interest computed on a notional amount
for another stream of interest computed on that notional amount. Frequently,
one party is exchanging a variable rate stream for a fixed rate stream of interest
or vice versa.
Letters of Credit. A bank credit facility wherein the bank agrees to lend a
specified amount of funds for a limited term.
Management Fee. The fixed percentage of the gross spread which is paid to the
managing underwriter for the structuring phase of a transaction.
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Market Quotation. With respect to one or more terminated transactions and a
party making the determination, an amount determined on the basis of quotations
from four leading dealers in the relevant market (“Reference Market-makers”).
Each quotation will be for an amount, if any, that would be paid to such party or
by such party that would have the effect of preserving the economic equivalent of
any payment(s) that would have been required under the terminated transaction.
Members. These are underwriters in a syndicate other than the senior
underwriter.
Moral obligation bonds. Typically issued by a state agency or authority, these
bonds are secured by revenues from the financed project, and an additional non-
binding pledge that any deficiencies in the legally pledged revenues will be
reported to state legislature, which may in turn appropriate state funds to make
up the shortfall. Commonly, legislation that authorizes the issuance of such
bonds provides that the state may apportion money to support debt service, but
has no legal obligation to do so.
Moody’s Median. Key financial, debt, economic and tax base statistics with
median values for each statistic presented.
Negotiated Sale. A method of sale in which the issuer chooses one underwriter
to negotiate terms pursuant to which such underwriter will purchase and market
the bonds.
Net Revenue. Defined in greater detail by the Authority’s Indenture. Net
Revenue is the difference between gross revenue and operating and
maintenance expenses.
Original Issue Discount. The amount by which the original par amount of an
issue exceeds its public offering price at the time it is originally offered to an
investor.
Original Issue Premium. The amount by which the original par amount of an
issue is below its public offering price at the time it is originally offered to an
investor
Pay-As-You-Go. An issuer elects to finance a project with existing cash flow as
opposed to issuing debt obligations.
Present Value. The current value of a future cash flow.
Price Transparency. The availability of current pricing and trading information of
securities.
Private Placement. The original placement of an issue with one or more
investors as opposed to being publicly offered or sold.
Metropolitan St. Louis Sewer District – Debt Management Policy - 24 -
Rebate. A requirement imposed by Tax Reform Act of 1986 whereby the issuer
of tax-exempt bonds must pay the IRS an amount equal to its profit earned from
investment of tax-exempt bond proceeds at rates exceeding the tax-exempt
borrowing rate. The tax-exempt borrowing rate (or “bond yield”) is calculated
pursuant to the IRS code together with all income earned on the accumulated
profit pending payment.
Second Method. With respect to one or more terminated transactions that the
settlement amount will reflect full two-way payments of any amounts owed by
one party (whether defaulting or otherwise) to another.
Selling Group. The group of securities dealers who participate in an offering not
as underwriters but rather who receive securities less the selling concession from
the managing underwriter for distribution at the public offering price.
Swaption. An option agreement granting the purchaser the right, but not the
obligation, to enter into an interest rate swap at a later date.
Syndicate Policies. The contractual obligations placed on the underwriting
group relating to distribution, price limitations and market transactions.
Threshold Amount. With respect to the ISDA Credit Support Annex, that Swap
Termination Value amount above which a party is required to post collateral. For
example, at a Threshold Amount of $10,000,000 if the Swap Termination Value
equals -$15,000,000, KDOT would be required to post collateral of $5,000,000.
Underwriter. A dealer that purchases new issues of municipal securities from
the Issuer and resells them to investors.
Underwriter’s Discount. The difference between the price at which bonds is
bought by the Underwriter from the Issuer and the price at which they are
reoffered to investors.
Valuation Date. With respect to the ISDA Credit Support Annex, that date on
which the Swap Termination Value will be calculated for purposes of determining
any required collateral amount to be posted. Valuation Date is typically specified
as any Local Business Day.
Valuation Percentage. With respect to posted collateral under the ISDA Credit
Support Annex, 100% minus any discount or “haircut” applied to eligible
collateral. For example, eligible Federal Agency securities collateral typically has
a Valuation Percentage of 95%, i.e. a 5% haircut. Thus, a party required to post
$5,000,000 in collateral under the Credit Support Annex could provide
$5,000,000 of Cash collateral or $5,263,158 of Federal Agency securities.
Variable Rate Debt. This is debt with an interest rate that is re-set at intervals
according to an index or a formula or other standard of measurement as stated in
the bond contract.