Philip Cosson - Ehlers John Mehan - Baird David …...Final Structure Debt Service Coverage 1.20x...
Transcript of Philip Cosson - Ehlers John Mehan - Baird David …...Final Structure Debt Service Coverage 1.20x...
Financing Complex ProjectsPhilip Cosson - EhlersJohn Mehan - Baird David Mullen - Dougherty & Company
• Introductions
• Federal & state regulations
• Security type
• Case study: John Mehan
• Case study: David Mullen
• Q & A
Session summary
• Well-planned debt use can greatly enhance ability to complete projects
• Debt issuance & management is successful only when you:
Understand financing options
Receive clear information on implications of decisions
Have a basic understanding of rules & regulations
Know the players, their roles & for whom they “work”
Understand how bonds are sold
Introduction
• Debt must be secured by something
• Two main security types for municipal debt in Wisconsin:
1. General obligation (G.O.)
Backed by full faith & credit of municipality (subject to 5% of EV)
Commitment to levy a tax if no other revenues available
Typically considered most secure pledge, meaning lowest interest rates
Security type
2. Revenue Backed by specific revenue source, most commonly utilities but
also TID, lease, hospital or other revenues
Interest rates depend on source of financing, source of revenue (essential vs. non-essential service) and revenue history
Security type (continued)
• Maximum term General obligation: 20 years (statutorily defined) Revenue: 40 years (typically market driven)
• Use of proceeds Notes (term of 10 years or less): any public purpose Bonds (term longer than 10 years): restricted purposes
If issued for purpose not specifically enumerated, referendum required
• General obligation debt limit Outstanding G.O. debt can’t exceed 5% of municipality’s EV
State regulations
Tax-exempt financing considers 2 tests:
if either are met = taxable issue
1. Private loan test:
Are there loans to private parties greater than either $5M or 5% of proceeds (which ever is the lesser amount)?
Federal tax-exempt regulations
1. Private activity test: additional considerations:
Private Use: Are 10% of the proceeds used for benefit of private entity?
Private Pay: Are 10% of debt service payments secured by private parties?
Both tests must be met to require taxable issue
Federal tax-exempt regulations
• You determined project doesn’t fit cleanly in either bucket (GO or a Essential Purpose Revenue)
Limited borrowing capacity or don’t want to use GO for TID/Economic Development projects
Local financial institution isn’t willing to participate due to cost of project, credit or term needed
How to fund large water/sewer projects
How to access interim financing for projects with a takeout coming from USDA/CWF & SDW
Financing issues & concerns
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When most of these conditions are met, a negotiated sale may be a better option.
Financing issues & concerns
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Current market issues
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• John Mehan
• Dave Mullen
Case studies
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Financing Complex Projects
Robert W. Baird & Co. Incorporated is providing this information to you for discussion purposes. The materials do not contemplate or relate to a future issuance of municipal securities. Baird is not recommending that you take any action, and this information is not intended to be regarded as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934 or the rules thereunder.
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Financing Initiation
Room Tax Commission
ProjectTimeline Revenues
Convention and Visitors Bureau
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The Project - Fox Cities Champions Center (“FCCC”)
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Project (Fox Cities Champion Center) Timeline
October 2019 Targeted completion date
Premier indoor sports venue 164,000 sq. ft. building Year-round NHL-sized ice rinks Seating for 1,000 people A fieldhouse with four basketball courts or
eight volleyball courts and seating for 800 people
A seasonal arena that can operate as an ice rink or as four basketball or six volleyball courts, depending on the demand for use (seating available for 300-500 people)
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Revenues Supporting Debt ServiceMunicipalities Agreeing to Hotel/Motel Tax
10% Hotel / Motel Tax
Utilized by Municipalities and CVB
FCCC 3%
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Unknowns
Team
Issuer
Tax Treatment
Rating
Structure
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How do we build the financing team?
Revenue SourceConsiderations
Municipal Advisor
Investment Banker
Underwriter’s Counsel
Bond Counsel
Bond Counsel opinion matters
Providing security for the Bonds
Proven experience Issuer
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Will you be my Issuer?
Outagamie County WHEFA
Town of Grand Chute
Grand Chute
CDA (NEW)
Are you willing to take on the project
liability?
Who will manage the project construction?
How to address cashflow constraints
(go beyond 20 years)?
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Members of the financing team
CVB/Room Tax Convention & Visitors
Bureau
Municipal Advisor
InvestmentBanker
Underwriter’sCounsel
BondCounsel
Town of Grand Chute
Champion Center physically located in Grand Chute, WI
Town was willing to partner to create the CDA, and would also be responsible for the debt
Bond pricing benefitted from Town’s underlying rating
Ability to issue debt for beyond 20 years per state statues
Community Development Director
Issuer
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Will the bonds be taxable or tax-exempt?
Tax-Exempt Taxable
Management Contract
Revenue Sourceto Pay Debt
Issuer
Project
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How available revenues effect debt structure?
3% Increase YOY
Factors to Consider:
Hoteliers pay room tax directly to trustee instead of the municipalities.
Debt amortization – beyond 20 years
Project entrusted to the town to manage construction
Will the hotel/motel tax be enough to pay debt service? What if there is a shortfall/surplus?
How will the bonds be secured?
Room Tax – Projecting Revenue
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What is attractive to investors?
How will the structure effect the rating?
How will it effect the timing of debt payments?
What structure achieves the most efficient financing?
What is the best financing structure?
DebtService
Reserve Fund (“DSRF”)
Bond Fund
Room Tax
StabilizationFund
(“RTSF”) Redemption
Fund
RevenueFund
Reimbursementto Town
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How Do Tax Revenues Flow?
Bond Fund • Annual debt service paid• Subsequent calendar year debt service held 1 yr. in advance of Bond Payments
DebtService
Reserve Fund (“DSRF”)
•Trustee tests DSRF balance requirement
Room Tax Stabilization
Fund (“RTSF”)
•Trustee tests RTSF balance requirement•Withdrawals trigger notification to the Town of Grand Chute and Baird
RedemptionFund •Semi-annual redemptions on interest payment dates
•$100,000 minimum redemption
RevenueFund
• All Room Taxes from Hotels Directly Deposited with Trustee • Any Lease Payments & Investment Income• Distributed Quarterly to Each Fund in Accordance with Flow of Funds Below
Reimbursementto Town •Trustee reimburses Town for any advances on Lease Payments
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Which Rating Agency?
S&P Moody’s
Town of Grand Chute’s Underlying Rating
High Grade Bond Rating
Related Rating Experiences
Minor League Stadiums and Expo Centers
Rating Agency Methodologies
Bond Counsel Position
Factors to Consider:
The Town of Grand Chute, WI currently holds
an underlying General Obligation rating of “Aa2” by Moody’s
The Appleton Redevelopment Authority
(“ARA”) currently holds an underlying rating of
“AA” by S&P Global
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Strong economy, with access to a broad and diverse metropolitan statistical area (MSA);
Strong management, with "good" financial policies and practices under our Financial Management Assessment (FMA) methodology;
Strong budgetary performance, with operating surpluses in the general fund and at the total governmental fund level in fiscal 2017;
Very strong budgetary flexibility, with an available fund balance in fiscal 2017 of 35% of operating expenditures;
Very strong liquidity, with total government available cash at 1.5x total governmental fund expenditures and 8.1x governmental debt service, and access to external liquidity we consider strong;
Very weak debt and contingent liability position, with debt service carrying charges at 14.8% of expenditures and net direct debt that is 240.5% of total governmental fund revenue; and
Adequate institutional framework score
“AA” Rating from S&P Global Rating Highlights
Source: S&P Rating Report as of June 13, 2018
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Essential Pre-Marketing Process
Marketing Time Period
Sales Memo (Internal) Investor Presentation/Webinar Timing
Internal, one-page document highlighting key components of financing that serves as a reference for Baird’s sales force
High level overview of project,financing, debt structure, revenue sources, and rating available as a handout and presentation led by Robert Buckingham, Community Development Director, Mike Harrigan, Advisor, and John Mehan, Banker, that was recorded and made available electronically
• 7/10 – Recording of Investor Presentation Webinar• 7/12 – Release of Email “Investor Toolkit” to Baird’s
Institutional Sales Force• 7/13 – Included in Baird negotiated sales calendar
distributed to sales force• 7/19-20 – Bankers fielded investor calls requesting
additional information about the financing• 7/23 – Preliminary Pricing wires released• 7/25 – Order period complete
More than 80 views of investor webinar by Baird Sales force and institutional investor
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Final Structure
Debt Service Coverage 1.20x
Project Amount $30,350,000
Total Estimated Bond Size $33,340,000
Dated Date 8/15/2018
Final Maturity 4/1/2051
All-Inclusive TIC 4.493547%
Interest Payments Semi-annually, commencing October 1, 2018
Security Quiet Enjoyment Lease between Town and CDA
Principal Payments
Annually, beginning April 1, 2020
Amortization 2020 - 2051
Tax Status Federally Taxable.State Tax-Exempt for Wisconsin Residents.
Rating S&P AA Stable outlook
Optional Redemption
8-years
Mandatory Redemption
Funded by surplus room taxes
Financing Highlights
• April 1, 2020 extraordinary call will allow $100,000 of outstanding debt to be paid
• Debt service shortened to 2044 instead of 2051
• $9.0 million in savings
Extraordinary Call Option
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Impactful Community Project
Economic Development projects are possible for any entity regardless of size
Multiple variables must be explored, primarily revenues and structure
Don’t have to be the “issuer” – there are benefits of collaboration
Anticipated $8 million of annual economic activity for the Fox Cities
40 events booked including tournaments
“…a once-in-a-generation tourism facility."
Offering community-based leagues, open recreational time, rentals, camps and clinics
'Premier sports tourism destination in the Midwest'
Key Takeaways
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Important Disclosures
Robert W. Baird & Co. Incorporated is providing this information to you for discussion purposes only. The information does not contemplate or relate to a future issuance of municipal securities. Baird is not recommending that you take any action, and this information is not intended to be regarded as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934 or the rules thereunder. In providing this information, Baird is not acting as an advisor to you and does not owe you a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934. You should discuss the information contained herein with any and all internal or external advisors and experts you deem appropriate before acting on the information.
Unique Financing Structures
• Short Term Bridge Loans
• Small Tax Increment Revenue Bonds
Case Study 1How to finance a sewerage system expansion for a small Wisconsin town related to a single, large
private userChallenges: How to determine future TIF revenues to offset sewerage rate
increase as a result of a project expansion The TIF revenues and sewer rates need to be in place in order
to close the permanent financing through the WI Clean Water Fund
Initial TIF revenues lag the project commencement by approximately two years
Case Study 1 ‐ Solution
• Issue a $6.09 million short term (22 month) Revenue Bond Anticipation Notes to finance the sewerage system expansion for the new project
• The private plant expansion had already commenced• Once the private plant expansion is complete and the TIF
revenues are determined, the WI Clean Water Fund Loan can close
Case Study 1 – Key Underwriting Issues
• Key user of the sewerage system provided 67% of sewerage system revenue
• We needed comfort that the new project was moving forward and the private business was a long term user
• Needed to understand the various “takeout” options
Case Study 2
How to finance the construction of a new hospital that has a USDA permanent financing commitment that
closes upon completion of construction
Challenges The construction loan finances 100% of the construction costs
Minimize capitalized interest during construction
Case Study 2 ‐ Solution
• Find larger, regional banks willing to rely on the USDA takeout and finance 100% of the construction costs
‐ OR –
• Issue Publicly Offered Bond Anticipation Notes
Case Study 2 – Key Underwriting Issues
• A Bank loan offers the advantage of a draw‐down loan, reducing capitalized interest – However, most banks will not offer 100% financing
• Publically offered Bond Anticipation Notes – Likely a lower interest rate but not a draw‐down structure so increased capitalized interest
Case Study 2 – Examples
$22,590,000Roane County, WV General HospitalExpansion and Renovation of Local HospitalRevenue Bond Anticipation NotesTwo Year, 2.55% Interest Rate (Fully advanced at closing)Secured by Hospital Revenues and USDA Takeout
$29,023,000Boone County, NE Health CenterConstruction of a New HospitalTwo Year, 3.52% Interest Rate (Draw Down Loan)Secured by Hospital Revenues and USDA Takeout
Case Study 3 Refinance a high yielding, taxable tax increment
revenue bond secured by a single user in a manufacturing facility
Challenges• Single property tax payer which is a private business
• Bond payments subject to annual appropriation• No minimum assessment agreement, no company guaranty, no access to company financial statements
Case Study 3 ‐ Solution
• Structure a taxable refunding bond• Projected debt service coverage of 1.25x• Visit plant and meet with senior management to obtain long term viability of the tax payer
• Add further security with a subordinate pledge from a separate, single payer tax increment district increasing debt service coverage to 2.0x
Your presenters
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Philip Cosson, CIPMASenior Municipal [email protected](262) 796-6161
John MehanManaging [email protected]
David MullenSenior Vice [email protected]