American Association of Port Authorities Commissioners...

American Association of

Port Authorities

Commissioners Seminar

Introduction to Seaport Financing

May 18, 2011

Juan Pittman, Managing Director Jessica Soltz Rudd, Senior Director

Agenda

I. Municipal Bond Overview

II. The Financing Process

III. Various Team Members’ Roles

IV. Underwriting and Securities Process

V. Best Practices

Appendix

SECTION I

Municipal Bond Overview

The Need to Borrow & Viable Funding Options

The competitive, capital intensive nature of seaports frequentlyresults in financial demands beyond available annual cash flow that are sometimes best met through leveraging.

Various capital funding options, include: Federal & State grants Direct loans Third party financings PPPs Commercial Paper – short-term (1-2 years), variable-rate debt

instruments that usually have some type of external support (Letter of Credit)

Bond – a long-term debt instrument obligating the borrower to repay over a fixed period of time. Bonds maturities are typically anywhere from 1 to 30 years.

Purposes of Public Borrowing

Meet essential capital and infrastructure needs Maintain health and safety standards Preserve quality of life and community interests Pay for long-term assets over useful life – cost/benefit allocation Cash flow borrowings

Financing Purpose

RefundingNew Money

•Refinance old debt with new bonds at a lower all-in borrowing cost (economic refunding

•Refinance old debt with new bonds to restructure debt service payments that satisfy a new need and / or eliminate / replace covenants imposed on old bonds (may or may not be an economic refunding)

•Large scale capital projects

•Bridge the gap on timing between expenditures and revenues

What Makes Municipal Bonds Unique?

Interest on qualified municipal securities is exempt from federal income taxation Sixteenth Amendment to the U.S. Constitution created national income tax Since 1913, most municipal bonds have enjoyed exemption from taxation under

doctrine of “reciprocal tax immunity” Tax-exemption periodically comes under threat, particularly in times of federal

budget deficits:• 1968 – first attempt to curb private use of tax-exempt bonds by defining “public purpose” and

limiting private use to 25% with exemptions for Seaports and other quasi-public enterprises• 1986 – sweeping restrictions implemented including arbitrage rebate, Alternative Minimum Tax

(AMT), reduction of private use to 10%, state by state volume caps for qualified private activity bonds, restriction to one advance refunding

• Periodic “flat tax” proposals and specific targeted types of issuance (stadiums, convention centers)

• 2010 – Proposed legislation to discontinue tax-exempts and permanently institute taxable Build America Bond system

Interest on federally tax-exempt bonds issued by governmental entities in a specific state are also (generally) exempt from that state’s income tax

Most seaport bonds are generally subject to AMT treatment More costly than traditional bonds (non-AMT) Public Hearing requirement, limits on refundings and other restrictions

Growth in Municipal Debt Issuance Has Been Dramatic

Annual Volume of Fixed Rate Municipal Bonds Issued in Billions

$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

$450.00

$500.00

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

$432.00

2010:

27% BAB

63% Tax – Exempt

10% Other

Historical Cost of FundsBond Buyer 25-Year Revenue Bond Index:

1979 - Present

Historical Low: 4.38% (3/15/07)

Current RBI: 5.41%

3.00

5.00

7.00

9.00

11.00

13.00

15.00

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Primary Financing Vehicle: The General Seaport Revenue Bond

Bondholder security is comprised of revenues generated by various activities at the seaport

Strength of pledge is the diversity of seaport revenues, including: Rentals Lease revenues Royalties TEU or truck relate fees Fuel fees Miscellaneous

Typical Rate Covenant is 125% for Senior lien bonds and 110% forSubordinate lien bonds

Additional Bonds Test typically considers historical or prospective performance

SECTION II

The Financing Process

Overview of the Financing Process

Weeks

Issuer Decides to

Issue Bonds

Working Group

Selected

Preliminary Plan of Finance

Determined

Rating Agency

Presentation

Finalize Documents and Finance

Plan

Marketing Pricing and Post Sale

Credit Enhancer

Solicitation*

Documents Drafted

Debt Issuance can be complex and lengthy

Regulatory environment Sarbanes-Oxley Act

implications Post-issuance management

increasingly important

*Includes CP LOC

Potential Financing Team Members

Financing Advisor

Issuer’s Counsel

Disclosure Counsel

Underwriters Counsel

Credit Enhancer /

Liquidity Provider

FeasibilityConsultant

Appraiser

Bond Counsel

Issuer’s Counsel

Rating Agencies

Post-Issuance Consultants & Advisors

Potential Financing Team Members

Impacted Agency

Department

Treasurer / Asset

ManagerAnalysisLegalFinanceBudget

Issuer

Principal Legal Documents and Responsible Parties

Ordinances / Resolutions

Preliminary Official

Statement

Bond Counsel

Issuer’s Counsel

Seaport StaffFinancial Advisor

Disclosure Counsel

Feasibility Report

Feasibility Consultant

Final Official Statement


Disclosure Counsel

Senior Manager

Bond Purchase Agreement


Senior ManagerUnderwriter’s

Counsel

IF NECESSARY

SECTION III

Various Team Members’ Roles

The Financial Advisor’s Role

“Navigate the Intricacies of the Financial Marketplace”

Debt planning phase:

Support assembling the financing team Advise management regarding debt structures, develop

documents, assess financial metrics Assist in devising rating agency and market strategy Support underwriters in market/pricing and then

evaluate process

Ongoing assistance:

Advise management in developing and implementing financial targets, capital planning, modeling, lease negotiations, etc.

Developing & Achieving Financial Targets Is Critical to Obtaining A Strong Rating and Investor Interest

Annually:

Release required compliance

Communicate with stakeholders

Update website, including investor relations section

During financing process:

Opt for financing structure that minimizes risk and maximizes return

Evaluate targets in relation to feasibility of projects

Know industry comps & what distinguishes your seaport and why

Clearly communicate with industry players

First steps:

Evaluate: operational performance, balance sheet, operating statement, and debt profile

Understand long-term operational and capital needs

Develop operational & financial targets

Assess performance quarterly and reevaluate annually

The Importance of A Strong Rating: Credit Spreads

Spreads to AAA MMD (Years 1-30)

‐

50

100

150

200

250

300

350

400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Basis Points

‐

50

100

150

200

250

300

350

400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Basis Points

‐

50

100

150

200

250

300

350

400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Basis Points

AA A BBB

April 2011

April 2007 April 2009

Most Bond Insurers Are No Longer Viable

THENSeptember 2007

Insurer Ratings (M/S/F)

Writing New Seaport

Business?Ambac Aaa/AAA/AAA YES

Assured Guaranty

Aaa/AAA/AAA YES

CIFG Aaa/AAA/AAA YES

FGIC Aaa/AAA/AAA YES

FSA Aaa/AAA/AAA YES

MBIA Aaa/AAA/AAA YES

XL Capital Aaa/AAA/AAA YES

Radian Aaa/AAA/AAA YES

ACA Aaa/AAA/AAA YES

NOWMay 2011

Insurer Ratings (M/S/F)

Writing New Seaport

Business?

Ambac Caa2/R/NR NO

CIFG NR/NR/NR NO

FGIC NR/NR/NR NO

Assured Guaranty Municipal (FSA)

Aa3/AA+/NR YES

XL Capital (Syncora)

Ca/R/NR NO

Radian Ba1/BB-/NR NO

ACA NR/NR/NR NO

NPFG Baa1/BBB/NR

NO

BHAC Aa1/AA+/NR NO

Recent Financings (CY2010)

Spread to MMD for Select Tax-Exempt Transactions

0

20

40

60

80

100

120

140

160

180

200

201120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

2620

2720

2820

2920

3020

3120

3220

3320

3420

3520

3620

3720

3820

3920

40

Basis Po

ints

POLB (2010A) POLB (2010B) VPA ASPA

PoSF (Non‐AMT) HI Harbor (Non‐AMT) HI Harbor (AMT, unins.) HI Harbor (AMT, AGC ins.)

NCPA DE RIV PA (unins.) DE RIV PA (AGC ins.) SCPA

Recent Financings

Select 2010 Port Transactions

+1646.2510/1/40--Non-AMTNR/BBB+/BBB+106.045Florida Ports Financing Committee12/9/10

Sale Date IssuerPar

Amount($m)

Underlying Ratings(M/S/F)

Tax Status Insurance Final

Maturity

Final Maturity

Yield

Spread to

MMD (bps)*

1/22/10 Port Commission of San Francisco 14.220 A1/A-/A Non-AMT -- 3/1/40 5.25 +118

1/22/10 Port Commission of San Francisco 22.430 A1/A-/A Taxable -- 3/1/30 7.408 +380

2/25/10 Nort Carolina Ports Authority 43.935 A3/NR/BBB+ Non-AMT -- 2/1/40 5.20 +103

3/31/10 City of Long Beach - PoLB 200.835 Aa2/AA/AA Non-AMT -- 5/15/25 4.22 +72

4/21/10 Virginia Port Authority 68.630 Aa3/A+/NR Non-AMT -- 7/1/40 4.75 +64

4/29/10 City of Long Beach - PoLB 158.085 Aa2/AA/AA Non-AMT -- 5/15/27 4.20 +64

7/8/10 Delaware River Port Authority 308.375 A3/A-/NR Non-AMT AGM (partial) 1/1/40

4.89 (ins.)/ 5.09

(unins.)

+90 / +120

10/21/10City of Long Beach –Carnival Cruise Terminal Project

30.000 NR/BBB+/NR Taxable -- 11/1/30 7.282 +475

11/17/10 South Carolina State Ports Auth. 170.000 A1/A+/NR Non-AMT -- 7/1/40 5.55 +93

11/17/10 State of Hawaii - Harbor System 164.275 A2/A+/A+ Non-AMT -- 71/40 5.80 +118

11/17/10 State of Hawaii - Harbor System 37.115 A2/A+/A+ AMT AGM

(partial) 7/1/21 5.14 (unins.) +194

US Seaport Ratings: Solidly Investment Grade

Moody's

Aa213%

Aa313%

A110%

A227%

A313%

Baa115%

Baa23%

Baa33%

B23%

S & P

AA+6% AA

12%

AA-24%

A6%

B+6%

BBB28%

BBB-12%

CCC+6%

Fitch

AA19%

AA-13%

A+19%

A25%

A-6%

BBB+6%

BBB-6%

BB+6%

Fitch

S & PMoody’s

The Rating Agencies’ Seaport Industry Outlooks

Fitch Ratings: Stable Outlook “Fitch expects that 2011 is likely to bring a continuation of the slow

but measured recovery that began in 2010.”• Essential nature of port infrastructure to the global economy• Increased restraint from U.S. consumers• Prerecession levels not expected until 2012 at the earliest• Use of leases with MAGS for downside protection

2011 Outlook: Global Transportation Infrastructure; January 20, 2011

Moody’s: Negative Outlook “Downside risk remains despite early signs of recovery”

• Cargo declines stabilized in early 2010; Fiscal year results will still be negative• U.S. Ports operating in a highly competitive environment, complicated by evolving

trade dynamics• Shipping sector outlook stable, but profitability still more than a year away• Weakened financial metrics pressure credit profiles• Financing risks

U.S. Port Sector Outlook; June 2010

Standard & Poor’s: Individual Credit Outlooks S&P has not provided a seaport industry credit outlook, rather the

agency continues to provide an outlook for each individual credit• To date: most seaport credits have a Stable Outlook

Key Credit-Relevant Trends

Price of fuel

Decreased trade with Japan

Increased competition/increased access

Panama Canal expansion

Cost of improved intermodal connectivity

Profitability of the shipping lines and port operators

How to best plan for growth: The correlation between US GDP & container traffic has changed

GDP and Container Traffic Continue to Move in Step

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

25%

Year over year change ‐G

DP

Year over year change ‐Total US TEUs

GDP (Constant 2005 Dollars) TEUs

Sources: Bureau of Transportation Statistics, Bureau of Economic Analysis

SECTION IV

Underwriting and Securities Process

The Underwriting Process

Internal Credit/Research Staff

Write “credit report” and assist institutional sales force

Bond Investors: Institutional and Retail

Submit orders for new issues Buy and sell bonds in secondary

market

Traders

Maintain secondary market trading liquidity for investors

Buy and sell securities for a firm’s account

Underwriters

Develop marketing strategy Coordinate input from sales

professionals Help finalize bond sales/structure Establish price/yield levels on the

bonds

Sales Professionals: Institutional and Retail

Help coordinate marketing strategy Obtain input from investors

regarding bond structure Solicit orders for the bonds

Who are the Participants?

Investment Banks Assist Issuers in Accessing the Capital Markets

Underwriting is the intermediation of risk between issuer and investor

Other non-financial examples of underwriting are Insurance

UnderwritingSales & Trading

Public Finance

UnderwriterIssuer (Borrower)

What is “Underwriting?”Intermediation of risk between Issuer and Investor

Investor (Lender)Bonds Bonds

Bond Proceeds Bond Proceeds

Lowest Cost of Funds on Easiest Terms

Highest Return with Strongest Security

Distribution of Debt Securities

Market Segmentation – Types of Investors (Maturity Range): Bank trust departments (1-10 yrs) Investment advisors (5-10 yrs) Intermediate bond funds (5-15 yrs) Insurance companies (P&C) and

corporations (1-20 yrs) Long-term bond funds (20-30 yrs) Retail/Individuals (1-30 yrs)

Investor Maturity Preferences

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

Bank Trust Departments

Retail/Individuals

Insurance Companies and Corporations

Investment Advisors

Long-Term Bond Funds

Intermediate Bond Funds

Factors Affecting a Pricing

Market Psychology

Economic Indicators

Market Technicals

Bond Structure

The Yield Curve

Current Yield Curve (as of May 5, 2011)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

Yields (%)

SECTION V

Best Practices

Debt Financing – Best Practices

Stay abreast of industry issues and proactively plan

Develop a multi-year capital plan

Establish internal operational and financial targets

Frequently evaluate performance & reevaluate targets

Create a debt management plan

Proactively manage relationship with the rating agencies and market participants

Construct strong deal-related documents that support continuing disclosure

521 MADISON AVENUE, SEVENTH FLOORNEW YORK, NY 10022

TEL: 212 355-4050 FAX: 212 355-3756

www.FRASCALLC.com

Jessica Soltz [email protected]

21 Orinda Way Suite C, #113

Orinda, CA 94563925 386-0148

1455 Pennsylvania Ave NW Suite 400

Washington, DC 2004202 349-3676

Juan [email protected]

3455 Peachtree Road NE Fifth Floor

Atlanta, GA 30325404 995-7023

APPENDIX A

The Working Group

The Working Group

• No Litigation Certificate• POS/OS sections related to: Litigation, Leases, [Summary of Use/Lease]• County certificates

Represents the County and is responsible for drafting sections of the POS/OS and for its general completeness and accuracy. Also responsible for coordinating with the County on all matters relating to bond issuance.

In-House Counseland/or Issuer’s Counsel

•Ordinance(s)•Authorizing Resolutions•Bond Counsel Opinion•POS/OS sections relating to: the Ordinance (including Security provisions) the Bonds, Tax Matters, Legality, Enforceability of Remedies, Summaries of the Ordinance [and Use Agreements]• Bond Purchase Contract• TEFRA Hearing

Represents the Bondholders and their interests. Responsible for rendering certain unqualified opinions relating to:• The organizational and legal existence of the issuer, including its power and authority to issue and sell bonds• Whether the ordinance has been duly adopted and is valid, binding and enforceable• Whether the bonds are duly authorized, executed and delivered, and are valid binding and enforceable• Whether the lien on revenues is valid and whether there is a first lien and security interest•Whether the bonds are exempt from federal and state taxation

Bond Counsel

Responsible For:DescriptionTeam Member

The Working Group

• Review all documents• Bond structuring• Insurance procurement• Pricing, sale, distribution of Bonds

Group of firms that price, market and sell the Bonds to investors, recommending the optimal timing and amortization schedule/terms. Led by a “Senior” (“Bookrunning” Manager) who has principal responsibility for pricing the Bonds.

Management Team(Underwriters)

• Schedule• Modeling, Bond structuring and Financial Analyses• POS/OS sections relating to: the Seaport, the County, the Project, the shipping Industry, Investment Risks• Advising on fees, pricing, marketing and distribution of Bonds• Rating agency/insurer coordination• Investment of proceeds

Specialist firm working for the Issuer to determine the financial feasibility of undertaking a capital project, evaluating and helping secure various forms of non-debt funding, structuring debt issues and preparing the Issuer to enter the bond market. Advises on terms and pricing of Bonds. Also responsible for preparing materials for rating agency and insurer presentations/solicitations and advising on the reinvestment of bond proceeds.

Financial Advisor

Responsible For:DescriptionTeam Member

The Working Group

• 10(b)5 opinion • Bond Purchase Contract• Blue Sky Survey/Legal Investment Memo• Agreement Among Underwriters

Hired by the Management Team to serve as its legal counsel and to draft certain documents relating to the underwriting, sale and pricing of the Bonds. It spearheads the due diligence efforts and also opines on the completeness and accuracy of disclosure in the POS/OS.

Underwriters’Counsel

• Report of the Seaport Consultant

A forecasting firm specializing in the operation of Seaports whose Report, appended to the POS/OS, evaluates the demand for service at the Seaport, projects traffic, and evaluates the ability of the Seaport to generate sufficient net revenues to repay the Bonds.


•Variety of custodial receipts and certificates

Represents the Bondholders in ensuring that financial covenants are adhered to. Holds certain funds (principal, interest, reserve funds) and ensures that money is available for payment.

Bond Trustee

• Most recent Audited Financial Statements• Consent Letter

The independent accounting firm used by the Issuer to audit its annual financial statements

Independent Accountant

Responsible For:

DescriptionTeam Member

APPENDIX B

Principal Bond Documents


Financial Advisor Senior Manager

Final offering document to investors with all blank information filled in.

Final Official Statement

Airport StaffFinancial Advisor

Disclosure document provided to potential investors in advance of pricing and sale. Details about coupons, yields, principal amounts, maturities and call features are all left blank.

Preliminary Official Statement


Appendix to the POS/OS that discusses the airport, its service area and its ability to generate net revenues sufficient to pay the bonds based on a short term traffic forecast.

Feasibility Report

Bond CounselLegal documents outlining the legal relationship between the Trustee and the Issuer. It contains:

• Security Provisions • Flow of Funds• Rate Covenant• Additional Bonds Test• Parity Debt• Events of Default• Definitions• Eligible Securities for Investment

General/ Supplemental Ordinances

Author(s)DescriptionDocument



Document setting forth the legal and financial relationship among members of the Underwriting Team (the “Syndicate”)

Agreement Among Underwriters

Rating AgenciesWritten confirmation of ratings assigned to the transaction by each rating agency providing a rating

Rating Letters

Bond Insurer and its Counsel

Self explanatory Insurance Policy Surety Policy and Tax Certificate

Bond CounselTax form outlining the disposition of bond proceedsIRS Form 80-38


Memoranda which surveys the securities laws in each state and lists where the sale of bonds to the public, to broker dealers and to institutional accounts is permissible without registration or filing. Includes a summary of special considerations in various states

Blue Sky/Legal Investment Memorandum

Bond Counsel or Underwriters’Counsel

Contract which sets the terms and conditions under which the Issuer will agree to sell and the Senior Manager on behalf of the Underwriters will agree to purchase the Bonds

Bond Purchase Contract

Author(s)DescriptionDocument

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