Structuring The Financing

Structuring the Financing
Financing
The Mechanics of a Bond Sale
Sale
California Debt and Investment Advisory Commission
David Johnson Cheryl Hines

Banc of America Securities LLC Merrill Lynch
(213) 229-3431 (415) 676-3211
676-3211
March 13, 2008
2008
0
Introduction
Introduction
At this point, the Issuer has made several decisions:
Identified a need to borrow money.
Identified a revenue stream to pay debt service.
Assembled a finance team.

Bond counsel
Investment banker
Financial advisor
Its now time to STRUCTURE THE FINANCING!
Topics
Topics
Types of Debt Obligations
Sizing the Bond Issue
Debt Service Structure
Refunding Bonds
Ratings
Variable Rate Debt
2
There are many types of debt that California
governments issue:
General Obligation Bonds Sales Tax Bonds
TRANs Pension Bonds
Lease Revenue Bonds Special Tax Bonds
Certificates of Participation Tax Allocation Bonds
Revenue Bonds Assessment Bonds
Obligations
Structuring a bond issue is directly affected by the
type of debt being issued.
Reserve Fund Requirement
Additional Bonds Test
Debt Service Coverage Requirements
Term
Tax Treatment
Call Features
Leased Assets
Sizing the Bond Issue
Project or Construction Fund
Capitalized Interest Fund
Debt Service Reserve Fund
Costs of Issuance
Underwriting Discount
5
The Project Fund
Fund
Funds acquisition of the asset or construction of the
project.
Based on actual costs or reliable estimates.

Net Funded or Gross Funded?

Gross Funded – Deposit exact amount required to pay

for asset or project.

Net Funded – Amount deposited plus interest earnings

sufficient to fund project.
The Capitalized Interest Fund
Fund
Bond proceeds used to pay interest for a finite
period of time.
Interest is capitalized for a number of reasons:
Until a project/asset can produce revenue.
Until the government has beneficial use (COPs, Lease
Revenue Bonds)
Until revenue is projected to be sufficient to pay debt
service.
The Debt Service Reserve Fund
Fund
Provides additional security for investors.
Found in most credits with the exception of GO Bonds.

Sizing limited to the lesser of:

Maximum Annual Debt Service
125% of Average Annual Debt Service
10% of Par Amount
Fund is invested with earnings usually going as an offset

to debt service.
Can often be satisfied by purchasing a Debt Service

Reserve Fund Surety Policy.

8
Costs of Issuance
Issuance
Bond proceeds may be used to pay certain eligible
costs.
Professional
Bond Counsel and/or Disclosure Counsel
Services Financial Advisor and Trustee/Paying
Agent
Rating Agencies
Appraisal, Feasibility Study, Engineer’s
Report
Special Tax Consultant
Title Insurance
Credit Bond Insurance and/or Surety Bond

Enhancement Premium
Letter of Credit fees
9
Discount
Underwriter’s compensation and expenses.
Average Takedown
Components
Management Fee
Expenses
Funding At closing, Underwriter pays for bonds an

Method amount less the underwriting discount.
$100,000,000 Par
(650,000) Less discount of 6.50/$1,000
$ 99,350,000 Purchase Price
Other Expressed as dollars per thousand

Considerations dollars of bonds (e.g., $6.50/$1,000)
10
Sizing Example
Net Funded Construction Fund
Capitalized Interest Fund
Debt Service Reserve Fund
Costs of Issuance
11
Sizing Assumptions – Uranium Springs Water District
Project Cost and Draw 4/1/2007 $ 10,000,000

Schedule 10/1/2007 $ 10,000,000
4/1/2008 $ 10,000,000
10/1/2008 $ 10,000,000
$ 40,000,000 Total Project
Cost
Bonds Dated: 1/1/2007
Final Maturity: 1/1/2039
12
Costs of Issuance $200,000 Legal, FA, Trustee

Ratings, Printing, Misc.
Bond Insurance 40 bps Bond Insurance Premium

(Total Debt Service x .40%)
Underwriting Discount $6.50/bond Takedown, Management Fee,

Expenses
13
Debt Service Reserve Lesser of:
Fund
Maximum Annual Debt Service

125% of Average Annual Debt Service
10% of Par Amount
Capitalized Interest Through 2-year Construction Period

1/1/09
14
Reinvestment Earnings Go To:

Assumptions Capitalized 2.50% Construction
Interest Fund
Fund:
Construction 2.50% Construction

Fund: Fund
Debt Service 5.0% Construction

Reserve (Bond Fund
Fund: Yield)
15
Sizing Example – Net Funded Project Fund
Fund
Sources of Funds:
Par Amount: $ 46,390,000 1/1/07 Initial Deposit: $ 38,723,636
Total Sources of Funds: $ 46,390,000
Project Fund Earnings $ 968,704
Uses of Funds:
Project Fund $ 38,723,636
Cap Interest Fund
Cap Interest Earnings: $ 112,609
Fund: $ 4,008,591
Debt Service
Reserve Fund: $ Debt Service Reserve $ 195,051
2,795,850
Fund Earnings
Bond Insurance: $ 357,550
COI: $ 200,000
Total Project Cost $ 40,000,000
Underwriter’s
Discount: $
Rounding: $ 301,535
2,838
Total Uses of Funds: $ 46,390,000
16
Sizing Example – Capitalized Interest Fund
Fund
Sources of Funds:
Par Amount: $ 46,390,000 1/1/07 Initial Deposit: $ 4,008,591
7/1/07 Interest Payment: ($ 1,005,697)
Uses of Funds:
1/1/08 Interest Payment: ($ 1,005,697)
Cap Interest
Fund: $ 4,008,591
Debt Service 7/1/08 Interest Payment: ($ 998,599)
Reserve Fund: $
2,795,850
Bond Insurance: $ 357,550 1/1/09 Interest Payment: ($ 998,599)
COI:
$ 200,000
Fund Balance on
Underwriter’s
1/1/09: $ 0
Discount: $
Rounding: $ 301,535
2,838

17
Sizing Example – Debt Service Reserve Fund

Sources of Funds:
Par Amount: $ 46,390,000
Lesser of:
Maximum Annual $ 2,795,850
Debt Service
Uses of Funds:
Project Fund $ 38,723,636 125% of Average $ 3,491,698
Annual Debt Service
Cap Interest
Fund: $ 4,008,591
10% of Par Amount $ 4,639,000
Debt Service
Reserve Fund: $
2,795,850
COI: $ 200,000
Underwriter’s
Discount: $
Rounding: $ 301,535
2,838

18
Sizing Example – Bond Insurance Premium
Premium
Sources of Funds:
Par Amount: $ 46,390,000

Total Principal & $ 89,387,448
Interest:
Uses of Funds:
x.40%
Bond Insurance
Cap Interest
Premium $
Fund: $ 4,008,591
Debt Service 357,550
Reserve Fund: $
2,795,850
COI: $ 200,000
Underwriter’s
Discount: $
Rounding: $ 301,535
2,838

19
Sizing Example – Costs of Issuance
Issuance
Sources of Funds: Costs of Issuance:
Par Amount: $ 46,390,000
Bond Counsel: $ 100,000

Financial
Advisor: $ 50,000
Uses of Funds:
Trustee: $ 5,000
Cap Interest
Fund: $ 4,008,591
Rating Agencies: $ 30,000
Debt Service Printing: $ 7,500

Reserve Fund: $
2,795,850
Miscellaneous: $ 7,500
COI: $ 200,000
Total COI: $ 200,000
Underwriter’s
Discount: $
Rounding: $ 301,535
2,838
20
Sizing Example – Underwriting Discount
Discount
Sources of Funds: Underwriting Discount:
Par Amount: $ 46,390,000
Takedown
Total Sources of Funds: $ 46,390,000 ($3.50/bond): $ 162,365
Management Fee
Uses of Funds: ($1.00/bond): $ 46,390
Cap Interest Expenses
($2.00/bond): $ 92,780
Fund: $ 4,008,591
Debt Service

Reserve Fund: $ Underwriter’s

2,795,850
Discount ($6.50/bond): $
301,535
COI: $ 200,000
Underwriter’s

Discount: $
Rounding: $ 301,535
2,838

21
Debt Service Structure
Sample Structures
Current Interest vs. Deferred Interest
Optional Redemption
Refunding Considerations
22
Level Debt Service
Service
$46,390,000
Uranium Springs Water District
Revenue Bonds
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-
07 09 11 13 15 17 19 21 23 25 27 29 31 33 35 37
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
DSRF Implications Bond Insurance Implications

Lesser of:
Maximum Annual Debt $ 2,795,850 Total Principal & $ 89,387,448
Service Interest
125% of Average $ 3,491,698 x.40%
Annual Debt Service
10% of Par Amount $ 4,630,000 Insurance Premium $

23
357,550
“Wrapped” Debt Service
Service
$48,255,000
000
UraniumSSprings WaterDDistrict
ct
Revenue Bonds
nds
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-
0088
1100
1122
1144
1166
1188
2200
2222
2244
2266
2288
3300
3322
3344
3366
3388
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
Lesser of:
Service Interest
125% of Average $ 4,144,838 x.40%
Annual Debt Service

24
424,431
Short Maturity
Maturity
$46,630,000
000
UraniumSSprings WaterDDistrict
ct
Revenue Bonds
nds
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-
0088
1100
1122
1144
1166
1188
2200
2222
2244
2266
2288
3300
3322
3344
3366
3388
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
2200
Lesser of:
Service Interest
125% of Average $ 7,549,914 x.40%
Annual Debt Service

25
217,438
Structuring the Bonds
Bonds
στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό
Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το
Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί
επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα
Serial Bonds
$46,390,000
Uranium Springs Water District Mature “serially” by year.
Water Revenue Bonds Take advantage of positively
Dated: January 1, 2007 Due: January 1, 2039
στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό
sloped yield curve.
Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το
Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί
επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα εμφανιστεί επιλέξτε το Λεξικό Γεωργακά στο παράθυρο που θα
Maturity Schedule
Maturity Principal Interest
(January 1) Amount Rate Yield
2008 780,000 1.820% 1.820%

2009 795,000 2.070% 2.070%
2010 815,000 2.370% 2.370%
2011
2012
830,000
855,000
2.670%
3.020%
2.670%
3.020% Term Bonds
2013 880,000 3.220% 3.220%
2014 910,000 3.370% 3.370%
2015 940,000 3.520% 3.520%
2016
2017
970,000
1,005,000
3.630%
3.740%
3.630%
3.740%
Single coupon covering
2018
2019
1,045,000
1,085,000
3.840%
3.940%
3.840%
3.940% multiple years.
2020 1,130,000 4.030% 4.030%
2021
2022
1,175,000
1,220,000
4.110%
4.180%
4.110%
4.180% Retired with annual Sinking
2023 1,275,000 4.270% 4.270%
2024 1,325,000 4.350% 4.350% Fund Payments.
$ 7,610,000 4.72% Term Bonds maturing January 1, 2029
26
Current or Deferred Interest Bonds
Bonds
Current Interest Bonds
Pay interest at stated coupon.
Interest typically paid every 6 months.
May be sold at par, at a premium or at a discount.
Investor’s yield determined by price paid for the Bond.
900,000
800,000
700,000
600,000
Interest
500,000
400,000
300,000
Principal
200,000
100,000
-
08
09
12
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18
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20
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27
Current or Deferred Interest Bonds
Bonds
Capital Appreciation Bonds
“Zero” coupon or deferred interest bonds.
Interest accretes to maturity.
Sold at a deep discount.
Investor’s yield determined by price paid for the Bond.
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
-
08
09
10
11
12
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20
20
20
20
20
20
20
20
28
Other Considerations
Considerations
Optional Redemption
Standard optional redemption period is 10 years.
Callable bonds generally have a higher yield than non-callable
bonds generally have higher yie
bonds.
Par Bonds, Original Issue Discount Bonds, and Original

Issue Premium Bonds
Coupon Yield Price

Par Bond 5.00% 5.00% 100%
Discount Bond 5.00% 5.10% 98% (est)
Premium Bond 5.00% 4.90% 100.9% (est)
29
Refunding Considerations
Considerations
Advance Refunding
Old Bonds are not currently subject to optional redemption.
New Bond proceeds are used to fund an escrow that defeases old
bonds to call date.
Escrow invested in Treasury (SLGs)with
withmaximum permitted yield
maximumpermitted
equal to bond arbitrage yield.
Can only advance refund one time.
Current Refunding
Old bonds are currently subject to optional redemption.
New bond proceeds used to redeem old bonds.
30
Ratings and Credit Enhancement
The Rating Agencies
Rating Agency Packages
Obtaining a Rating
Credit Enhancement – Bond Insurance
Credit Enhancement – Letters of Credit
31
The Rating Agencies
Agencies
Moody’s S&P Fitch
Aaa AAA AAA

Long-Term
Aa1, Aa2, Aa3 AA+, AA, AA- AA+, AA, AA-

A1, A2, A3 A+, A, A- A+, A, A-
Baa1, Baa2, Baa3 BBB+, BBB, BBB- BBB+, BBB, BBB-
Ba1, Ba2, Ba3 BB+, BB, BB- BB+, BB, BB-
MIG-1, MIG-2, MIG-3 SP-1+, SP-1, SP-2, F-1+, F-1, F-2, F-3
Short-Term
(Notes) SP-3 (Notes) (Notes)
VMIG-1, VMIG-2, A-1, A-2, A-3 LOC (Commercial

VMIG-3 (Commercial (Commercial Paper Paper and
Paper and VRDBs) and VRDBs) VRDBs)
32
Obtaining a Rating
Rating
A typical rating agency package might include:
3 years of audited financial statements
Current and proposed budget
Bond Documents, including:
¾ Trust Indentures
¾ Lease Agreements
¾ Installment Sale Agreements
¾ Redevelopment Loan Agreements
Preliminary Official Statement
Special Reports
Sizing and Debt Service Schedules
Timing and Responsibility Schedule
Distribution List
33
Obtaining a Rating
Rating
It is often useful to meet with the rating analysts to:
Describe the project
Get feedback on the structure
Describe salient aspects of security
Review demographics and economicsof serviceaarea
ofservice
On-site or at rating agency offices
34
Variable Rate Bonds
Historical Interest Rates
Structuring Options
Pros and Cons of Alternative Structures
The Dutch Auction Process
ARS vs. VRDBs
35
Variable Rate vs. Fixed Rate
Rate
Securities Industry and Financial Markets Association (SIFMA) Index (formerly BMA)
vs. Bond Buyer Revenue Bond Index (RBI)
A Ten Year History
7.00%
SIFMA 10 Year Avg = 2.65%
6.00%
RBI 10 Year Avg = 5.25%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
8
8
99
99
99
99
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
/1
/1
/1
/1
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
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2/
8/
2/
8/
2/
8/
2/
8/
2/
8/
2/
8/
2/
8/
2/
8/
2/
8/
2/
8/
2/
BMA SIFMA
36
Introduction to Variable Rate Structures
Structures
There are three primary variable rate structures used in
the municipal market:
Commercial Paper
Variable Rate Demand Bonds
Auction Rate Securities
37
Variable Rate Structuring Options
Options
Commercial Paper
Can be drawn down and paid back as needed.
Outstanding CP is remarketed for a maximum of 270 days.
Bank credit facility required for liquidity.
Money Market Funds are the primary investor.
38
Options
Variable Rate Demand Bonds
Long-term bond with rate that resets periodically (daily,

weekly, monthly, etc.).
Investor can “put” bonds on short notice (allows bond to
trade at par).
Bank credit facility required to support put.
39
Options
Auction Rate Securities
Long-term bond with rate that resets periodically

(weekly, monthly, etc.).
No “put” feature and thus, no bank facility.
Rate reset via Dutch Auction process.
40
Pros vs. Cons of Alternative Structures
Structures
PROS CONS
Debt Service certainty Less flexibility to refinance if

rates go down.
Fixed Rate
Lower rates Interest rates may rise.

Variable Rate
More flexibility to Takes more time to manage.

restructure/refinance.
41
VRDB Process
Process
Remarketing Agent Remarketing Agent

Sets Interest Rate Establishes interest rate at
periodic intervals (i.e., daily,
weekly, monthly)
Existing Holders
Existing Holders
Hold or Put
May hold bonds or “put” bonds
back to Remarketing Agent.
New Purchasers
New Purchasers
Submit Orders
Submit orders for any bonds that
have been “put” back to the
Remarketing Agent.
DTC
Clears Trade Next Day
42
Dutch Auction Process
Process
Purchaser/Seller
Submits Orders
Broker/Dealer Broker-Dealer
Relays Orders Passes orders to Auction Agent
Auction Agent Auction Agent

Auction Results Assembles bids in ascending order.
Determines highest bid to clear
auction, which is interest rate
applied to issue until next auction.
DTC
Clears Trade Next Day
43
Dutch Auction Orders
Orders
Bid Order
Hold ARS provided that the reset interest rate is not less than that
specified by the bid of the current ARS holder.
If the rate is below, the ARS are sold.
Hold at Market
Hold ARS regardless of reset interest rate.
Potential Bid
Minimum rate acceptable to buy additional ARS.
Sell Order
Sell ARS without regard to the reset interest rate.
Potential investors can submit bid orders to buy ARS at a specified rate.
44
ARS vs. VRDBs At-A-Glance
At-A-Glance
ARS VRDBs
Short End of Yield Curve 9 9
Flexible Reset Intervals 9 9
Ability to Enter into Swaps 9 9
Callable Anytime 9 9
Investor Tender Option 9
Requires LOC or Liquidity
Facility
9
Requires Bond Insurance 9
Interest Rate determined
by Dutch Auction
9
45

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Structuring The Financing

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Structuring the Financing

The Mechanics of a Bond Sale

California Debt and Investment Advisory Commission

David Johnson Cheryl Hines

March 13, 2008

 Identified a need to borrow money.

 Identified a revenue stream to pay debt service.

 Assembled a finance team.

Its now time to STRUCTURE THE FINANCING!

 Sizing the Bond Issue

 Debt Service Structure

 Variable Rate Debt

There are many types of debt that California

Types of Debt Obligations

 Additional Bonds Test

 Debt Service Coverage Requirements

Sizing the Bond Issue

Project or Construction Fund

Capitalized Interest Fund

Debt Service Reserve Fund

 Based on actual costs or reliable estimates.

 Net Funded or Gross Funded?

 Gross Funded – Deposit exact amount required to pay

for asset or project.

sufficient to fund project.

The Capitalized Interest Fund

The Debt Service Reserve Fund

 Sizing limited to the lesser of:

 Fund is invested with earnings usually going as an offset

 Can often be satisfied by purchasing a Debt Service

Reserve Fund Surety Policy.

Credit  Bond Insurance and/or Surety Bond

Funding  At closing, Underwriter pays for bonds an

Other  Expressed as dollars per thousand

Net Funded Construction Fund

Capitalized Interest Fund

Debt Service Reserve Fund

Project Cost and Draw 4/1/2007 $ 10,000,000

Bonds Dated: 1/1/2007

Final Maturity: 1/1/2039

Sizing Assumptions – Uranium Springs Water District

Costs of Issuance $200,000 Legal, FA, Trustee

Bond Insurance 40 bps Bond Insurance Premium

Underwriting Discount $6.50/bond Takedown, Management Fee,

Sizing Assumptions – Uranium Springs Water District

Debt Service Reserve Lesser of:

Maximum Annual Debt Service

Capitalized Interest Through 2-year Construction Period

Sizing Assumptions – Uranium Springs Water District

Reinvestment Earnings Go To:

Construction 2.50% Construction

Debt Service 5.0% Construction

Sizing Example – Net Funded Project Fund

Total Uses of Funds: $ 46,390,000

Sizing Example – Capitalized Interest Fund

Total Uses of Funds: $ 46,390,000

Sizing Example – Debt Service Reserve Fund

Total Uses of Funds: $ 46,390,000

Sizing Example – Bond Insurance Premium

Total Sources of Funds: $ 46,390,000

Total Uses of Funds: $ 46,390,000

Sizing Example – Costs of Issuance

Total Sources of Funds: $ 46,390,000

Identified a need to borrow money.

Identified a revenue stream to pay debt service.

Assembled a finance team.

Sizing the Bond Issue

Debt Service Structure

Variable Rate Debt

Additional Bonds Test

Debt Service Coverage Requirements

Based on actual costs or reliable estimates.

Net Funded or Gross Funded?

Gross Funded – Deposit exact amount required to pay

Sizing limited to the lesser of:

Fund is invested with earnings usually going as an offset

Can often be satisfied by purchasing a Debt Service

Credit Bond Insurance and/or Surety Bond

Funding At closing, Underwriter pays for bonds an

Other Expressed as dollars per thousand

Par Bonds, Original Issue Discount Bonds, and Original

Can be drawn down and paid back as needed.

Outstanding CP is remarketed for a maximum of 270 days.

Bank credit facility required for liquidity.

Money Market Funds are the primary investor.

Long-term bond with rate that resets periodically (daily,

Long-term bond with rate that resets periodically

Debt Service certainty Less flexibility to refinance if

Lower rates Interest rates may rise.

More flexibility to Takes more time to manage.