HomeMy Public PortalAboutExhibit MSD 67O Finance_Committee_ReportsTable of Contents
Item No. Document
5‐13 Underwriter Selection Considerations
The Cost of Debt
Initial Cost
On‐Going Cost
Cost Comparison
Comparison of Annual Present Value Cost
Refunding Opportunity: No Rate Movement
Historical 15‐Year and 20‐Year MMD
Recommendations
Considerations Regarding the Use of Build America Bonds
Build America Bonds (BABs) – Basics
Market Acceptance
Potential Savings
Treatment of Federal Payments
Treatment of Federal Payments – MSD
Additional Considerations
Assumptions for Analysis
Summary of Results
Wastewater Debt Service Structure
Disclosure & Market Update
Disclosure Obligations
Disclosure Documentation
Key Events Impacting MSD Disclosure
Proposed Event Timeline
Proposed Timing of Series 2011 Issuance
MSD Bondholders
Historical Market Trend
St. Louis Metropolitan Sewer District
August 21, 2008
Underwriter
Selection
Considerations
2
The cost of debt to be paid by MSD is influenced by two main
factors:
Initial costs paid to the underwriter in the form of takedown or sales
commission.
On-going annual costs paid to bond holders in the form of semi-
annual debt service payments.
To evaluate underwriter proposals, these two components
were analyzed on a present value basis to determine the
lowest cost to MSD.
The Cost of Debt
3
Underwriters charge a take-down, or commission, for the sale
of the bonds.
This amount is paid at closing, and is always stated in
present value dollars.
The table below indicates that Edward Jones has proposed a
take-down higher than that proposed by Stifel Nicolaus.
Initial Cost
4
On-going costs vary with the
structure of the debt, based
on:
Term and amount of each
maturity
Coupon and yield structure
(“premium” vs. “par” vs. “discount”
structures)
Call features (redemption dates
and prices)
Each of these items has
been considered, and the
proposals have been
adjusted to allow for equal
comparisons; the present
value results are shown to
the right.
Although Edward Jones
presents a higher initial cost,
on-going costs are lower for
the full term of the borrowing.
On-Going Cost
Present Value Annual Debt Service
Date Edward Jones Stifel Nicolaus Date Edward Jones Stifel Nicolaus
5/1/2009 707,996 724,781 5/1/2024 675,064 691,068
5/1/2010 1,347,762 1,379,714 5/1/2025 642,536 657,768
5/1/2011 1,282,819 1,313,231 5/1/2026 611,575 626,073
5/1/2012 1,221,006 1,249,952 5/1/2027 582,105 595,906
5/1/2013 1,162,171 1,189,723 5/1/2028 554,056 567,192
5/1/2014 1,106,171 1,132,395 5/1/2029 1,392,243 1,419,068
5/1/2015 1,052,869 1,077,830 5/1/2030 1,324,677 1,349,992
5/1/2016 1,002,136 1,025,894 5/1/2031 1,261,834 1,285,736
5/1/2017 953,848 976,461 5/1/2032 1,201,640 1,224,193
5/1/2018 907,886 929,409 5/1/2033 1,142,453 1,163,690
5/1/2019 864,139 884,625 5/1/2034 1,087,221 1,097,066
5/1/2020 822,500 841,999 5/1/2035 1,035,111 1,043,665
5/1/2021 782,867 801,427 5/1/2036 986,175 993,504
5/1/2022 745,144 762,810 5/1/2037 937,648 943,802
5/1/2023 709,239 726,053 5/1/2038 893,162 898,208
Edward Jones Stifel Nicolaus
Present Value Total*:28,996,052 29,573,235
*Present value computed at 5%.
5
The present value of the initial
costs and on-going costs have
been combined for a total cost
of debt.
The chart to the right indicates
that if the bonds are held to
maturity, the Edward Jones
proposal represents the lowest
cost to MSD.
However, the bonds have a call-
feature that, if exercised,
significantly reduces the benefit
of the Edward Jones proposal,
making the Stifel Nicolaus
proposal the least costly option.
The evaluation of the proposals
is largely influenced by the
likelihood of a future
redemption.
Cost Comparison
(Cost to Maturity)
Edward Jones Stifel Nicolaus
PV Adjusted Debt Service:$28,996,052.15 $29,573,235.12
Takedown:690,000.00 187,500.00
Total Cost:$29,686,052.15 $29,760,735.12
PV Benefit:$74,682.97
(Cost to 8-Year Par Call)
Edward Jones Stifel Nicolaus
PV Adjusted Debt Service:$29,427,101.96 $29,841,565.56
Takedown:690,000.00 187,500.00
Total Cost:$30,117,101.96 $30,029,065.56
PV Benefit:$88,036.40
6
Comparison of Annual Present Value Cost:
(Edward Jones -Stifel Nicolaus)
The chart displays the difference in the present value cost of debt for the
two proposals each year. All dates are included to illustrate the shift in
cost benefit that occurs over time; callable years are shaded below.
Evaluated at the 2038 maturity date, the Edward Jones proposal has a
$75,000 advantage over the Stifel Nicolaus proposal.
Evaluated at the first call date of 2016, the Stifel Nicolaus proposal is
$88,000 less costly than the Edward Jones proposal.
If the bonds are called at any time from 2016 to 2025, the Stifel Nicolaus
proposal is less costly.
Historical market analysis suggests that an opportunity for a refunding is
likely to occur over the next 17 years.
yr 2
yr 4
yr 6
yr 8
yr 10
yr 12
yr 14
yr 16
yr 18
yr 20
yr 22
yr 24 yr 26 yr 28 yr 30
yr 2
yr 4
yr 6
yr 8
yr 10
yr 12
yr 14
yr 16
yr 18
yr 20
yr 22
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037
AAA MMD 8/15/08 AAA MMD 8/15/16
7
Refunding Opportunity:
No Rate Movement
Difference in yield
generates the savings.
If rates are held constant over the next eight years, MSD will have the opportunity to
refund the bonds for savings, as a result of being able to replace the current debt with
debt that is shorter on the yield curve. Based on these yield curves, potential savings
range between $400,000 and $700,000 depending on the structure of the bonds.
8
Historical 15-year and 20-year MMD
Minimum Maximum Average Current
MMD 20yr AAA GO 3.81 % 6.85 % 5.00 % 4.41 %
MMD 15yr AAA GO 3.59 % 6.65 % 4.76 % 4.15 %
Historical rate volatility over the last fifteen years suggests that
some additional movement will allow a refunding for savings prior
to 2025, the break-even point between the two proposals.
9
Affirm Stifel Nicolaus as lead manager.
Institutional and retail capabilities
Lowest cost indicative pricing proposal
Include Edward Jones, Siebert Brandford Shank and
Ramirez in syndicate.
Provide for selling group of Missouri firms.
Recommendations
Metropolitan St. Louis Sewer DistrictConsiderations Regarding the Use of Build America Bonds September 2009presented byPublic Financial Management
Build America Bonds (BABs) - Basics()• ARRA authorizes the issuance of taxable Build America Bonds with Federal subsidy.– Can be issued for same purposes as tax-exempt governmental bondsbonds.– Federal government pays a 35% subsidy of the taxable interest cost.• Tax credit to the issuer in an amount due on each payment date (Direct Payment BABs); or•Federal government allows 35% tax credit to bondholder (Tax Credit•Federal government allows 35% tax credit to bondholder (Tax Credit BABs).– Authorization sunsets at the end of 2010.– Issuer must designate the bonds as BABs before issuance.• Issuer must file payment request prior to each payment date.1
Market Acceptancep• The market has become comfortable with BABs transactions, i l di th ith t diti l tllincluding those with traditional ten-year par calls. CompetitiveNegotiatedTotalCompetitiveNegotiatedTotalNo. of deals 129 106 235T t l (000' )$2 943 911$16 103 069$19 046 980Total par (000's)$2,943,911 $16,103,069 $19,046,980 Mean Par (000's) $22,821 $152,268 $175,089 • 20% of the competitive transactions have been for $40 million or Median Par (000's) $10,905 $23,710 $34,615 more.• Rating agencies currently prefer issuers demonstrate the ability 2to pay debt service without deducting the federal payments.
Potential Savingsg• BABs structures have provided significant savings to issuers.• Savings are greater in the later maturities.3
Treatment of Federal Paymentsy• When considering the use of BABs, the treatment of the federal payments dthMtBdOdi dtb id dunder the Master Bond Ordinance needs to be considered.• Federal payments may typically be treated one of three ways:Off t t d bt i i tO ti l i dditi l–Offset to debt service requirement –Optimal since no additional coverage required– As revenues – Requires additional coverage to be available– Not considered - Federal payments may not be able to be considered as either an offset to debt service requirements or as revenues•The treatment of federal payments may have varying impacts related to•The treatment of federal payments may have varying impacts related to different provisions within the Master Bond Ordinance.– Coverage calculations– Impact on future bonding capacity–Debt service reserve fund sizingg– Funding of “Payments Account”4
Treatment of Federal Payments - MSDy• Subject to bond counsel affirmation, the federal payments may be treated as revenues under MSD’s Bond Ordinance.– Coverage calculationsC ill b l th if f d l t id d d bt i ff t•Coverage will be lower than if federal payments were considered a debt service offset.• For MSD, minimum coverage will be substantially the same for BABs or tax-exempt bonds.–Impact on future bonding capacitypgpy• A BABs transaction will have little or no impact on the MSD’s future bonding capacity.– Debt service reserve fund sizingDfiiti f“DbtS i R F dR i t”i fl ibl ll i MSDt•Definition of “Debt Service Reserve Fund Requirement” is flexible, allowing MSD to base it upon net debt service requirements.– Funding of “Payments Account”S ffi i tf d t d bt i i dt b d it d30d i t•Sufficient funds to pay debt service are required to be deposited 30 days prior to payment dates.• Depending on the timing of the federal payments, MSD may need to fund the full debt service from other revenues and reimburse itself after federal payments are received.5
Additional Considerations• Savings Analysis– Value of Missouri state tax exemption– Call option – 10-year par vs. make whole–Likelihood of serial vs. term structure– Impact of par/discount structure vs. premium structure–2% limit on costs of issuance including underwriter’s discount2% limit on costs of issuance, including underwriter s discount• Intangible Considerations–Semiannual application for the subsidySemiannual application for the subsidy– Federal legislative risk– Loss of future flexibility, especially as related to advance refundings• Economic vs. legal defeasance• Potential increased cost of funding escrows•Availability of subsidy on refunded bonds•Availability of subsidy on refunded bonds6
Assumptions for Analysispy• Par amount of the bonds is $60 million.It t t dild b d iil t ti ith kt•Interest rates and yields are based upon similar transactions in the market.– Tax-exempt yields based upon “AAA” MMD rates plus 0.20% with a premium couponing structure.– Taxable yields based upon comparable treasury rates plus 1.60% with a par couponing structure.• 10-year par call• New debt service wrapped around existing debt service for overall level structure.B d t f 2027 t 2039–Bonds mature from 2027 to 2039– First interest payment in 2010• Debt service reserve fund is the lesser of:– 10% of par– Maximum annual debt service net of federal payments–125% of average annual debt service net of federal payments–125% of average annual debt service net of federal payments• Costs of Issuance and underwriter’s discount are $10/$1,000 combined7
Summary of ResultsyA BABs transaction appears to provide significant savings for MSD.Tax-ExemptTaxable (BABs)PA$60 000 000$60 000 000Par Amount$60,000,000$60,000,000Total Proceeds 63,957,721 60,000,000 Project Fund 57,725,433 54,570,595 Debt Service Reserve Fund 5,632,288 4,829,405 Costs of Issuance 600,000 600,000 Max Annual Net Debt Service 6,513,750 5,982,311 Total Net Interest Cost 68,964,279 53,973,966 Total Net Interest Cost to Call 24,542,279 21,253,609 All-in TIC 4.6121% 3.7972%8
Wastewater Debt Service Structure*Includes 2009 SRF Bonds.9
Metropolitan St. Louis Sewer DistrictDisclosure & Market Update August 9, 2011Public Financial Management
Disclosure Obligationsg¾The Securities and Exchange Commission (“SEC”) and the Municipal Securities Rulemaking Board (‘MSRB”) regulate disclosurerequirementsformunicipaldisclosure requirements for municipal securities.The bond issuer, MSD, is ultimately responsibleforprovidingadequateresponsible for providing adequate disclosure of all material facts about the bonds as well as financial information and risk factors that impact its ability to makedebtservicepaymentsinfullandmake debt service payments in full and on time.While there are no hard and fast rules dictating disclosure content, general guidance is that information is material if there is substantial likelihood that a reasonable investor would consider it important in making an investment decision.2
Disclosure Documentation¾The Preliminary Offering Statement, (“POS”), is the primary disclosure document and is disseminated approximately two weeks prior to pricing.If material facts change during this pre‐pricing period, the POS must be updated.ggppgp,p¾Following the sale and prior to closing and the delivery of funds, the Final Official Statement, (“FOS”), is distributed to bond purchasers.IfmaterialfactsemergebetweenpricingandclosingthatsignificantlyimpacttheIf material facts emerge between pricing and closing that significantly impact the creditworthiness of the issuer, investors and underwriters may have cause to withdraw from the transaction.¾The issuer remains obligated to update disclosure for 25 days following the bond closing.Bonds unsold at the initial pricing may be marketed to investors during this period.¾Issuers must provide ongoing annual disclosure of updated financial statements and upon occurrence of material events, as defined by an agreement published with the POS and FOS.3
Key Events Impacting MSD Disclosureypg¾Resolution of major litigation with EPA and Missouri DNR.Consent Decree will provide outline of MSD’s Litigationpfinancial obligations and timeframe for capital projects.Process will inform stakeholders regarding iifiidiCCredit Agency DiscussionsBond Sale Disclosureposition of Missouri DNR regarding Consent Decree.¾Conclusion of Rate Commission process.Bond Sale DisclosureRate CommissionRate Commission report will guide near term MSD rates and revenue.New five‐year rate plan as adopted by MSD trusteeswillinfluencedebtcapacityRate Commissiontrustees will influence debt capacity.4
Proposed Event Timelinep¾The following table summarizes the timing of key actions to be taken by the EPA and Rate Commission .Date Environmental Protection Agency Rate CommissionAugust 4EPA releases Consent Decree30‐day comment period beginsSeptember 5 (estimated)Comment period endsSeptember–January EPA reviews commentsOctober 18 Rate Commission vote on recommended ratesOctober 21 Rate report released to TrusteesOctober 27 First possible Trustee action on rate recommendationNovember 10 Second possible reading of rateordinancerate ordinanceJanuary 2012 Anticipated filing of Consent Decree with Court5
Proposed Timing of Series 2011 Issuance pg¾October21‐Rate Commission recommendation27Fi tiblTttitdtiSMTWTF S12345678OCTOBER27 ‐First possible Trustee action on rate recommendation¾November8 ‐Enterprise audit statement review9 10111213141516 17 18 19 20 21 2223 24 25 26 27 28 2930 31NOVEMBER8‐9 ‐Rating agency meetings10 ‐Possible Trustee action on rate recommendation18ReleaseofauditedfinancialstatementsSMTWTF S123456 7 8 9 10111213 14 15 16 17 18 19NOVEMBER18 ‐Release of audited financial statements22 ‐Credit ratings released23‐POS circulated20 21 22 23 24 25 2627 28 29 30SMTWTF SDECEMBER¾December8‐Pricing via competitive sale1213FOSprintedandcirculated1234567891011 12 13 14 15 16 1718 19 20 21 22 23 2425 26 27 28 29 30 3112‐13 ‐FOS printed and circulated 22 ‐Bonds close and proceeds are received6
MSD Bondholders¾The following table details the largest institutional holders of MSD’s Senior Wastewater System Revenue Bonds, which make up approximately 36% of Senior bondholders.¾The remaining 64% of bondholders are unidentified; this group includes bonds held by retail g;gpypurchasers.Metropolitan St. Louis Sewer District Senior Wastewater System Revenue Top BondholdersPar Amount Firm($000)Franklin Templeton Investments 49,470Nationwide Insurance Co (Office of Investments) 10,000General Re‐New England Asset Management Inc 8,336Advantus Capital Management Inc 7,610American United Life Insurance Co 7,155DelphiCapitalManagementInc4565Delphi Capital Management Inc4,565Metropolitan Life Insurance Co (Investments) (MetLife) 4,000Fidelity Management & Research Company (Fixed‐Income Division) 3,000Asset Allocation & Management Co LLC (AAM) 3,000AllianceBernstein LP 3,000Capital Guardian Trust Co 2,815Northern Trust Global Advisors Inc 2,815Deutsche Asset Management (DeAM) (NYC) (345 Park Avenue) 2,500Unitrin Inc 2000Harris Investment Management Incorporated 2000Eaton Vance Management Inc 2,000GE Asset Management Incorporated 1973Lord, Abbett & Co LLC 1,760GuardianInvestorServicesLLC1500Guardian Investor Services LLC1500Wellington Management Co LLP 1,363State Farm Insurance Companies 1330Davis Selected Advisers LP 750Nuveen Asset Management LLC (Minneapolis) 500Invesco PowerShares Capital Management LLC 500Oppenheimer Investment Management LLC 2507
Historical Market Trend¾The current 20‐year structure of MSD’s 2011 bonds has an average life of just under 12 years.¾As of July 29, 2011, the 12‐year MMD AAA GO index was 3.05%, approximately 40 basis points lower than the average rate since January 2008.gy5.00%5.50%4.50%3.50%4.00%3.00%2.00%2.50%12‐Year AAA GO MMD Average 12‐Year AAA GO MMD8