Financial Markets Update March 2014 RBC Capital Markets, LLC Paul M. Clancy, Director Higher...

Financial Markets Update March 2014

RBC Capital Markets, LLCPaul M. Clancy, Director

Higher Education Finance GroupMarch 21, 2014

Section 1

Interest Rates Update

- US Treasury Market

- Municipal Market


US Treasury Market

US Treasury Market Update

4

The Treasury Yield curve has similarly increased, as economic data has generally improved

U.S. Treasury Yield Curve Changes

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 15 yr 20 yr 30 yr

02/07/2014 02/07/2013

February 2014

February 2013

Source: Bloomberg as of February 20, 2014

0.000%

1.000%

2.000%

3.000%

4.000%

5.000%

6.000%

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

5 Year UST 10 yr UST 30 yr UST

US Treasury Market Update

5

US Treasury Yields reflect a gradual increase since lows in 2012

5, 10 and 30 year UST Rates: 2007 to Present



Municipal Market

Municipal Market Update

7

The tax-exempt variable rate demand note market has seen increased demand and lower yields; bank letters of credit required. LOC charges ranging from 50 – 300 bps depending on borrower credit quality. LOC may be replaced with SBPA for top rated universities; SBPA charges ranging below 75 bps.

0%

50%

100%

150%

200%

250%

300%

May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13

%

SIFMA vs LIBOR Average

SIFMA vs. LIBOR

Current SIFMA: 0.040% (4 bps)

Current 1M LIBOR: 0.155% (15.5 bps)

Average SIFMA: 0.546% (54.6 bps)

Average 1M LIBOR: 0.645% (64.5 bps)



8

The “AAA” MMD has increased relative to 2013 yields, due to a variety of technical factors, including the discussion of quantitative easing by the Federal Reserve and bond fund flows

Municipal GO “AAA” MMD Yield Curve Changes

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

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

Year

02/07/2014 02/07/2013

February 2014

February 2013

Year of Maturity

Source: Muni DSS


9

53 Year Historical Perspective

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0% Bond Buyer 20 GO Bond Index

Today's Rate at 4.44%

Yield Range

Less than 3.50% 8.84%

3.50% - 4.00% 6.49%

4.01% - 4.50% 10.42%

4.51% - 5.00% 10.85%

5.01% - 5.50% 15.18%

5.51% - 6.00% 10.57%

6.01% - 6.50% 8.19%

6.51% - 7.00% 7.46%

7.01% - 7.50% 6.74%

7.51% - 8.00% 3.97%

Greater than 8.00% 11.29%

Total 100.00%

Bond Buyer 20 GO Index since January 1961 % of Time in Each Range Since 1961

Today’s 4.44% level is lower than 76.20% of historical rates since January 1961

Source: Bloomberg as of February 20, 2014Weekly yields and indexes released by the Bond Buyer. Updated every Thursday at approximately 6:00pm EST. 20 Bond General Obligation Yield with 20 year maturity, rated AA2 by Moody's Arithmetic Average of 20 bonds' yield to maturity.


10

35 Year Historical Perspective

Bond Buyer Revenue Index since September 1979 % of Time in Each Range Since 1979

Today’s 5.27% level is lower than 72.22% of historical rates since September 1979

3.5%

5.5%

7.5%

9.5%

11.5%

13.5%

15.5% Bond Buyer Revenue Bond Index

Today's Rate at 5.27%

Yield Range

Less than 3.50% 0.00%

3.50% - 4.00% 0.00%

4.01% - 4.50% 3.23%

4.51% - 5.00% 12.64%

5.01% - 5.50% 21.94%

5.51% - 6.00% 13.92%

6.01% - 6.50% 9.41%

6.51% - 7.00% 3.95%

7.01% - 7.50% 6.96%

7.51% - 8.00% 5.57%

Greater than 8.00% 22.38%

Total 100.00%

Source: Bloomberg as of February 20, 2014Weekly yields and indexes released by the Bond Buyer. Updated every Thursday at approximately 6:00pm EST. 25 Revenue Bond Yield with 30 year maturity, rated A1 by Moody's and A+ by S&P Arithmetic Average of 25 bonds' yield to maturity.


11

While long-term interest rates have risen, floating rates remain extremely low

SIFMA vs. Revenue Bond Index

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00% Revenue Bond Index

Feb 20, 2014 Rate at 5.27%

SIFMA

524bps

Currently, SIFMA is trading at 4 basis points – 524 basis points difference between long term debtSource: Bloomberg as of February 20, 2014


12

The recent decline of current “AAA” MMD reflects a decline in supply and recent bond fund inflows

“AAA” MMD January 1, 2007 to Present Shift in “AAA” MMD Since Feb 2013

Source: TM3, Thomson Reuters10, 20, and 30 year “AAA” MMD shown to represent different average lives of municipal transactionsRates as of February 21, 2014

1.500%

2.000%

2.500%

3.000%

3.500%

4.000%

4.500%

5.000%

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

1.000%

2.000%

3.000%

4.000%

5.000%

6.000%

01/02/2007 01/02/2008 01/02/2009 01/02/2010 01/02/2011 01/02/2012 01/02/2013 01/02/2014

10 yr 20 yr 30 yr

MaximumMinimumCurrent

2007 2008 2009 2010 2011 2012 20130.250% 0.790% -0.900% 0.520% -1.130% -0.740% +1.330%

January 1, 2007 to Present

Shift in 30-year "AAA" MMD

10 Year 20 Year 30 Year

4.860% 5.740% 5.940%1.470% 2.100% 2.470%2.500% 3.520% 3.840%

3.730%3.407%2.381%Average

2.790%2.490%1.660%Minimum

4.510%4.270%3.040%Maximum

30 Year20 Year10 Year

Feb 1, 2013 to Present

Municipal Market Trends Update


14

The diminished supply has resulted in tightening credit spreads between highly rated issuers and lower rated issuers

0

50

100

150

200

250

Jun

-09

Jan

-10

Au

g-10

Mar

-11

Oct

-11

May

-12

Dec

-12

Jul-1

3

Feb

-14

Bas

is P

oint

Spr

ead

to A

AA

MM

D

AA Spread

A Spread

BBB Spread

Credit Spreads for Municipal Issuers



15

RBCCM’s forecast for 2014 reflects diminished municipal supply relative to previous years

0

10

20

30

40

50

60

70

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep Oct

Nov

Dec

$ B

illio

ns

RBC Forecast Supply

Redemptions

Muni Bonds: 2014 Issuance versus Redemptions

Source: US Municipal Notes dated December 2, 2013

Available at: https://research.rbccm.com/sellside/EmailDocViewer?encrypt=678430e4-7c36-4040-a81c-c1f32071e6f0&mime=pdf&co=rbcnew&[email protected]&source=mail


16

Municipal issuance in 2014 has lagged the historical average

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Jan-

13

Feb

-13

Mar

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb

-14

$ m

illio

ns

Competitive

Negotiated

Average

Municipal Weekly Issuance: 2013 to Present

Average: $6.1 billion

Source: Thomson SDC


17

RBCCM anticipates 2014 issuance to decline by 12% relative to 2013

21,156 18,926 28,659 25,772 26,627 32,258 32,544 30,530 18,040 22,901 27,436

281,668 268,131 301,172 287,051 324,406

300,772 316,373 326,797 200,486 269,691 242,556

6.99%6.59%

8.69%8.24%

7.59%

9.69%9.33%

8.54%8.26%

7.83%

10.16%

0%

2%

4%

6%

8%

10%

12%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

US

$ M

M

Higher Education Issuance Other Municipal Issuance Higher Education Issuance as % of Total Municipal Issuance

Proportion of Higher Education Issuance to Total Municipal Issuance by Par Amount

Source: US Municipal Notes dated December 2, 2013; Thomson SDC

Available at: https://research.rbccm.com/sellside/EmailDocViewer?encrypt=678430e4-7c36-4040-a81c-c1f32071e6f0&mime=pdf&co=rbcnew&[email protected]&source=mail


18

Municipal bond funds reflect modest inflows, further increasing demand for the limited supply

Muni Bonds: 2014 Issuance versus Redemptions

Jan-11Jan-11Jan-11Jan-11Feb-11Feb-11Feb-11Feb-11Mar-11Mar-11Mar-11Mar-11Mar-11Apr-11Apr-11Apr-11Apr-11May-11May-11May-11May-11Jun-11Jun-11Jun-11Jun-11Jun-11Jul-11Jul-11Jul-11Jul-11Aug-11Aug-11Aug-11Aug-11Aug-11Sep-11Sep-11Sep-11Sep-11Oct-11Oct-11Oct-11Oct-11Nov-11Nov-11Nov-11Nov-11Nov-11Dec-11Dec-11Dec-11Dec-11Jan-12Jan-12Jan-12Jan-12Feb-12Feb-12Feb-12Feb-12Feb-12Mar-12Mar-12Mar-12Mar-12Apr-12Apr-12Apr-12Apr-12May-12May-12May-12May-12May-12Jun-12Jun-12Jun-12Jun-12Jul-12Jul-12Jul-12Jul-12Aug-12Aug-12Aug-12Aug-12Aug-12Sep-12Sep-12Sep-12Sep-12Oct-12Oct-12Oct-12Oct-12Oct-12Nov-12Nov-12Nov-12Nov-12Dec-12Dec-12Dec-12Dec-12Jan-13Jan-13Jan-13Jan-13Jan-13Feb-13Feb-13Feb-13Feb-13Mar-13Mar-13Mar-13Mar-13Apr-13Apr-13Apr-13Apr-13Apr-13May-13May-13May-13May-13Jun-13Jun-13Jun-13Jun-13Jul-13Jul-13Jul-13Jul-13Jul-13Aug-13Aug-13Aug-13Aug-13Sep-13Sep-13Sep-13Sep-13Oct-13Oct-13Oct-13Oct-13Nov-13Nov-13Nov-13Nov-13Nov-13Dec-13Dec-13Dec-13Dec-13Jan-14Jan-14Jan-14Jan-14Jan-14Feb-14Feb-14Feb-14

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

2,000

Weekly Fund Flow

4-Wk Moving Avg

Fun

d F

low

s (

$ M

illio

ns

)

1/17 1/24 1/31 2/7 2/14 2/21

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

2,000

Source: Lipper Fund Flow Data

Higher Education Financing Trends

Higher Education Financing TrendsPublic Capital Markets

Public Capital Markets

21

• Traditional Fixed Rate Bonds– Tax-Exempt Rates– Taxable Rates

• Bond Insurance– Build America Mutual (NR / AA / NR)– Assured Guaranty Municipal (A3 / AA- / NR)– Municipal Assurance Corporation (NR / AA- / NR)

• Variable Rate Demand Bonds– Bank Letter-of-Credit or Standby Bond Purchase Agreement– Self Liquidity

• Commercial Paper Programs

• Floating Rate Notes– Longer terms; fewer moving parts; less market risk

Higher Education Financing TrendsPrivate Financial Arrangements

Public Capital Markets

23

• Direct Purchases (Commercial Banks and Investment Banks)• Floating Rate Notes• Flexible Drawdown Bonds• Lines of Credit

• Traditional Commercial Bank Loans• Construction Loans• Permanent Project Funding• Fixed Rate Loan, Long Term, Short Term

• Derivative Arrangements– Interest Rate Swaps– Rate Caps– Rate Collars

Becoming more popular as commercial banks and investment banks are utilizing their own balance sheets to provide “credit” to clients

24

Paul M. ClancyHigher Education Finance Group

(215) [email protected]

Contact Information

Disclaimer

25

RBC Capital Markets, LLC (“RBC CM”) is providing the information contained in this document for discussion purposes only and not in connection with RBC CM serving as Underwriter, Investment Banker, municipal advisor, financial advisor or fiduciary to a financial transaction participant or any other person or entity. RBC CM will not have any duties or liability to any person or entity in connection with the information being provided herein. The information provided is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934. The financial transaction participants should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it deems appropriate.

This presentation was prepared exclusively for the benefit of and internal use by the recipient for the purpose of considering the transaction or transactions contemplated herein. This presentation is confidential and proprietary to RBC Capital Markets, LLC (“RBC CM”) and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCM’s express written consent.

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The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CM’s views as of this date, all of which are subject to change.

To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it.

IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.

Financial Markets Update March 2014 RBC Capital Markets, LLC Paul M. Clancy, Director Higher...

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