july 29, 2013 summer educational event donald j. persinski managing director pnc capital markets llc...
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July 29, 2013
Summer Educational Event
Donald J. PersinskiManaging DirectorPNC Capital Markets LLC
Capital and Finance Market Trends
Presented to:
MSRB G-17 Disclosure
2
PNC Capital Markets (“PNCCM”) is providing the information contained in this document for discussion purposes only in anticipation of serving as an underwriter to the issuer to whom this document is addressed. The information provided herein is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities and Exchange Act of 1934, as amended..
The following disclosures are required by Municipal Securities Rulemaking Board (“MSRB”) Rule G-17, as PNCCM proposes to serve as an underwriter, and not as a financial advisor, municipal advisor or fiduciary to any person or entity, in connection with the issuance and sale of securities for the issuer to whom this is addressed: (i) MSRB Rule G-17 requires an underwriter to deal fairly at all times with both municipal issuers and investors. (ii) An underwriter’s primary role is to purchase securities with a view to distribution in an arm’s-length commercial transaction with an issuer; and an underwriter has financial and other interests that differ from those of such an issuer. (iii) Unlike a municipal advisor, an underwriter does not have a fiduciary duty to an issuer under the federal securities laws and is, therefore, not required by federal law to act in the best interests of that issuer without regard to its own financial or other interests. (iv) An underwriter has a duty to purchase securities from an issuer at a fair and reasonable price, but must balance that duty with its duty to sell those securities to investors at prices that are fair and reasonable. (v) An underwriter will review the official statement, if any, for those securities in accordance with, and as part of, its responsibilities to investors under the federal securities laws, as applied to the facts and circumstances of the transaction.
Three PNC Plaza, 4th Floor
412-762-6227 T 412-762-5129 Fdonald.persinski@pnc.com
Donald J. PersinskiManaging DirectorHealth Care
225 Fifth AvenuePittsburgh, PA 15222-2707
Three PNC Plaza, 4th Floor
412-762-6227 T 412-762-5129 Fdonald.persinski@pnc.com
Donald J. PersinskiManaging DirectorHealth Care
225 Fifth AvenuePittsburgh, PA 15222-2707
Three PNC Plaza, 4th Floor
412-762-6227 T 412-762-5129 Fdonald.persinski@pnc.com
Donald J. PersinskiManaging DirectorHealth Care
225 Fifth AvenuePittsburgh, PA 15222-2707
Three PNC Plaza, 4th Floor
412-762-0254 T 412-762-5129 Fjohn.bartolini@pnc.com
John G. BartoliniAnalystHealth Care
249 Fifth AvenuePittsburgh, PA 15222-2707
Three PNC Plaza, 4th Floor
412-762-0254 T 412-762-5129 Fjohn.bartolini@pnc.com
John G. BartoliniAnalystHealth Care
249 Fifth AvenuePittsburgh, PA 15222-2707
Three PNC Plaza, 4th Floor
412-762-0254 T 412-762-5129 Fjohn.bartolini@pnc.com
John G. BartoliniAnalystHealth Care
249 Fifth AvenuePittsburgh, PA 15222-2707
3
Portfolio Management
Strategies Diversification Risks Duration Liquidity
Debt Portfolio Fixed Rate Variable Rate Short-Term (working capital line) Long-Term (PP&E) Derivatives Public Debt Bank Loans
Investment Portfolio Cash/Money Market Funds Fixed Income – Corporate Fixed Income – US Treasury Equity – US Equity – International Equity – Mutual Funds Alternative Investments
4
Sources of Capital
Operations – Cash Flow
Reserves – Balance Sheet
Philanthropy / Capital Campaign / Grants
Asset Monetization – Sale of Non Core Assets (Land, Skilled Nursing Facility, etc.) Partnerships, Joint Ventures, Mergers
Capital Markets (Tax-exempt and Taxable Rates)
Fixed Rate Bonds
Variable Rate Demand Bonds supported by a Letter of Credit
Floating Rate Notes
Direct Bank Placement Construction Loan
Line of Credit (Working Capital or Project Financing)
Leases (Capital and Operating)
Derivative Products and Strategies
5
Decade of Municipal Bond Finance ($000)2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total $359,747.60 $408,282.80 $388,838.30 $429,893.70 $389,631.80 $409,688.50 $433,268.80 $287,718.40 $379,302.80 $175,451.70
Number of Issues 13,614 13,959 12,766 12,659 10,830 11,721 13,828 10,574 13,102 6,373
Health Care 29,103.70 38,797.40 40,346.50 49,820.50 61,094.10 46,151.80 31,440.70 26,763.50 37,276.30 14,226.10
Development 7,813.40 9,410.20 4,823.30 8,604.90 8,696.00 7,242.20 10,954.00 12,040.20 8,851.20 7,207.30Education 96,607.70 124,322.80 106,241.20 107,257.40 89,941.80 91,470.30 100,801.50 74,470.00 93,450.00 55,079.60Public Facilities 9,569.70 15,228.30 14,806.90 13,203.50 15,222.40 12,913.40 11,281.70 7,245.60 10,069.50 4,741.90Transportation 32,560.60 45,246.30 42,362.00 41,946.00 47,560.40 48,775.20 66,895.00 32,931.70 55,340.20 21,098.00Utilities 32,691.30 31,158.70 33,188.50 36,012.50 37,594.50 40,037.90 44,619.10 31,738.20 45,424.90 18,594.90General Purpose 114,646.40 100,441.80 86,649.50 114,751.10 81,724.10 128,806.20 119,421.80 79,300.80 100,922.80 40,644.80Tax Exempt 312,319.50 352,131.50 323,226.10 362,481.10 341,264.40 323,442.40 275,553.10 247,670.80 333,488.50 146,507.50Taxable 24,122.00 25,751.70 30,131.30 29,381.90 24,252.30 84,666.70 151,877.80 31,926.40 32,779.20 24,232.90Minimum Tax 23,306.10 30,399.60 35,480.90 38,030.70 24,115.10 1,579.40 5,837.90 8,121.20 13,035.10 4,711.30Build America Bonds 0 0 0 0 0 64,151.50 117,347.10 432.9 0 0Other Stimulus 84.3 42.6 39 63.9 11.1 3,441.70 16,787.80 5,264.30 1,576.30 386.4New Money 228,919.00 221,207.30 258,362.70 274,285.00 208,225.00 261,331.60 279,770.80 146,220.40 146,246.20 70,605.80Refunding 88,405.30 130,916.30 79,170.30 75,874.40 108,603.60 86,455.90 98,515.80 90,392.10 157,985.30 70,411.50
Fixed-Rate 260,781.50 306,200.20 288,946.90 320,515.80 262,634.30 362,120.20 392,149.10 256,082.50 345,298.90 160,639.50Variable-Rate (Short Put) 47,018.50 61,799.90 55,899.00 50,391.50 116,345.90 32,333.90 24,969.80 14,384.00 15,005.50 3,235.60Variable-Rate (Long/No Put) 5,864.30 2,772.80 6,115.90 13,177.10 6,440.10 8,565.80 3,593.70 2,572.00 2,530.10 1,395.00
Linked-Rate 227.4 0 0 0 328.4 1,982.10 9,062.20 12,093.40 14,216.20 9,263.20Auction-Rate 42,228.50 33,053.20 32,131.20 38,769.20 0 0 0 0 0 0Bank Qualified 16,644.60 18,511.50 17,392.80 16,312.70 15,302.60 33,147.90 36,876.50 18,821.20 25,093.60 11,785.10Bond Insurance 194,895.30 232,976.10 191,326.20 201,017.80 72,181.10 35,401.20 26,857.40 15,256.50 13,272.70 5,626.40Letters of Credit 23,623.50 27,050.90 21,520.20 20,732.30 71,520.60 20,434.40 11,817.10 9,891.60 6,076.60 805.2Standby Purchase Agreements 3,429.00 12,980.50 14,057.10 17,722.20 28,061.60 4,071.70 3,469.30 1,688.20 1,974.70 566.4
6
Municipal Bond Issuance – Year-to Date Comparison (June 30)
Volume in millions Number of issues Volume in millions Number of issuesChange from previous period
TOTAL 175,451.7 6,373 195,348.5 6,991 -10.20%
January 26,807.5 887 17,438.6 723 53.7February 24,426.3 1,016 27,027.8 1,053 -9.6March 32,248.0 985 34,746.0 1,257 -7.2April 37,144.3 1,184 34,833.2 1,229 6.6May 29,467.7 1,311 37,876.6 1,496 -22.2June 25,357.9 990 43,426.3 1,233 -41.6
First Quarter 83,481.8 2,888 79,212.4 3,033 5.4Second Quarter 91,969.9 3,485 116,136.1 3,958 -20.8
Health Care 14,226.1 248 18,017.2 277 -21.0
Tax-Exempt 146,507.5 5,602 178,091.1 6,382 -17.7Taxable 24,232.9 714 12,768.4 551 89.8
New-Money 70,605.8 2,893 70,154.1 2,881 0.6Refunding 70,411.5 2,875 87,110.7 3,506 -19.2
Fixed-Rate 160,639.5 6,034 183,105.7 6,776 -12.3Variable-Rate (Short Put) 3,235.6 75 5,543.9 101 -41.6Linked-Rate 9,263.2 58 4,374.7 60 111.7
Bond Insurance 5,626.4 561 7,697.4 700 -26.9Letters of Credit 805.2 23 3,654.8 63 -78.0Standby Purch Agreements 566.4 7 833.4 11 -32.0
2013 2012
7
Municipal Bond Issuance – State Rankings
Volume in Volume in Change fromState Rank millions Rank millions previous period
California 1 26,971.80 2 22,430.90 20.2Texas 2 16,178.70 3 16,072.50 0.7New York 3 15,382.40 1 25,295.10 -39.2New Jersey 4 9,334.70 12 5,280.20 76.8Illinois 5 7,360.10 4 8,863.30 -17Florida 6 7,129.40 5 7,924.90 -10Ohio 7 7,104.70 8 6,822.30 4.1Massachusetts 8 5,138.10 13 5,165.60 -0.5North Carolina 9 5,136.00 16 4,029.80 27.5Pennsylvania 10 5,040.50 10 6,477.10 -22.2
2013 2012
8
Healthcare Bond Issuance
The volume of Health Care bond issuance has declined in recent years. Factors contributing to this decline include: uncertainty due to healthcare reform; a tightened credit market; fewer refunding opportunities; and significant growth in bank direct placements.
Note: 2013 data is through June 30.
29.1
38.8 40.3
49.8
61.1
46.2
31.4
26.8
37.3
14.2
$0
$10
$20
$30
$40
$50
$60
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Billi
ons
9
Healthcare Bond Issuance: January 1, 2013 – June 30, 2013
The Washington Hospital
Doylestown Hospital
Catholic Health EastHanover Hospital
St. Luke’s Health System
Total Par Amount: $195,200,000
10
Recent Fixed Rate Healthcare Bond Issues
Obligor Rating1 Par ($MM)AwardDate
Call Provision
Spread to MMD (bps)
Yield % (Final Maturity)
Gross Revenue Pledge? DSRF? Mortgage?
Yavapai Community Hospital Association (AZ) Baa1/nr/BBB+ 32.995 7/18/2013 2023 at par +160 5.34 (2033) Yes No Yes
Palmetto Health (SC) Baa1/BBB+/BBB+ 140.430 7/16/2013 2023 at par +160 5.24 (2031) Pledged Assets No Yes
Cook Children's Medical Center (TX) Aa2/AA/nr 68.950 7/10/2013 2023 at par +90 4.84 (2039) Springing No No
Methodist Hospitals of Dallas Aa3/AA-/nr 189.065 7/10/2013 2023 at par +107 5.08 (2043) Yes No No
St. Joseph Health System (CA) A1/AA-/AA- 324.840 7/9/2013 2023 at par +122 5.05 (2037) No No No
New Hanover Regional Medical Center (NC) A1/A+/nr 56.745 7/3/2013 2023 at par +123 4.20 (2026) No No No
Palisades Medical Center (NJ) nr/nr/BBB 47.555 6/21/2013 2023 at par +202 5.80 (2043) Yes Yes Yes
Cape Cod Healthcare (MA) nr/A-/A- 50.000 6/19/2013 2023 at par +145 4.96 (2041) Yes No Yes
St. Luke's Hospital of Bethlehem (PA) A3/BBB+/nr 25.000 6/19/2013 2023 at par +149 4.75 (2033) Yes No Yes
Ascension Health (WI) Aa2/AA/AA+ 100.000 6/12/2013 2023 at par +113.5 4.625 (2043) Yes No No
Fairfield Medical Center (OH) Baa2/nr/nr 96.600 6/12/2013 2023 at par +169 5.18 (2043) Yes Yes Yes
Beaver Dam Community Hospitals (WI) nr/BBB-/nr 42.995 6/12/2013 2023 at par +210 5.30 (2034) Yes Yes Yes
Day Kimball Healthcare (CT) nr/nr/nr 30.330 6/6/2013 2023 at par +258.5 5.875 (2043) Yes Yes Yes
Memorial Hospital (WY) nr/BBB/nr 26.790 6/4/2013 2023 at par +150 4.59 (2037) Net Revenues Yes No
Nanticoke Memorial Hospital (DE) nr/BB+/BBB- 45.645 5/30/2013 2023 at par +203 4.85 (2032) Yes Yes Yes
St. Luke's Warren Hospital (NJ) A3/BBB+/nr 37.410 5/22/2013 2023 at par +98 4.00 (2043) Yes No Yes
Riverside Health System (IL) A2/A+/nr 32.000 5/16/2013 2022 at par +131 4.28 (2042) Unrest. Rcvbles No No
Cleveland Clinic Health System (OH) Aa2/AA-/nr 62.650 5/15/2013 2023 at par +107 4.04 (2042) Yes No No
Carolinas HealthCare System (NC) Aa3/AA-/nr 127.260 5/15/2013 2023 at par +65 3.56 (2039) Yes No No
Skagit Regional Health (MO) Baa2/nr/nr 27.360 5/15/2013 2023 at par +150 4.35 (2037) Yes Yes Yes
Beacon Health System (IN) nr/AA-/AA- 162.835 5/9/2013 2023 at par +134 4.23 (2044) Yes No Yes
Bowling Green-Warren County Community Hospital (KY) nr/A/nr 42.260 5/8/2013 2023 at par +112 3.80 (2035) Yes No Yes
MedStar Health (MD) A2/A-/A 149.760 5/7/2013 2023 at par +101 3.78 (2038) Pledged Revs No Yes
Maine Health & Higher Ed (pool) (ME) A1/nr/AA 64.030 5/2/2013 2023 at par +100 3.50 (2033) Yes Yes Yes
Genesis HealthCare System (OH) Ba1/BB+/nr 295.000 4/23/2013 2023 at par +230 5.20 (2048) Yes Yes Yes
Hanover Hospital (PA) nr/BBB-/nr 15.610 4/16/2013 2023 at par +180 3.66 (2024) Yes Yes Yes
OhioHealth Corporation (OH) Aa2/AA+/AA 226.000 3/27/2013 2023 at par +104 4.15 (2043) No No No
Doylestown Hospital (PA) Baa2/BBB/nr 26.595 3/13/2013 2023 at par +164 4.19 (2029) Yes No Yes
The Washington Hospital (PA) Baa2/nr/BBB+ 14.570 1/29/2013 2023 at par +152 3.77 (2028) Yes No Yes
11
Segmenting Market RiskFixed Rate Bonds
Hospital RatingBonds with Bank
FacilityDirect Bank
Placement/LoanBonds with Bank
FacilityDirect Bank
Placement/Loan
Interest Rate RiskRisk of change in cost of funding due to fluctuation of interest rates a a
Trading Spread RiskRisk that the interest rate widens from its relative index due to change in investor perception of credit facility provider (bank or self-liquidity)
a a
Put RiskRisk that investors will put the bonds back to the credit provider or trustee
a a
Bank Renewal RiskRisk that the pricing of the credit facility increases or the credit facility is unable to be renewed
a a a a
Counterparty RiskRisk of bankruptcy or deteriorating financial position of a swap counterparty
a a
Termination RiskRisk that a cancellation option is exercised by a counterparty a a
Basis RiskRisk of change in interest rates and the payment/receipt on swaps due to the value of tax exemption or market disruption
a
Tax RiskRisk that changes in U.S. Tax Code could adversely affect trading of bonds
a a
Variable Rate Debt Synthetic Fixed Rate Debt
12
Financing Option – Fixed Rate Bonds
Most conservative structuring alternative; Eliminates ongoing interest rate risk Issue with a maturity of up to 40 years; Bonds typically not callable for 10 years Bonds issued based solely on the credit strength of the borrower Security, covenants and disclosure may include all, or most of the following:
Revenue pledge, mortgage, debt service reserve fund Tightened liquidity and capital structure covenants – additional ratios have emerged, including variable
rate and short term debt ratios/measures Quarterly disclosure Credit rating from multiple agencies
4.14
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 30
07/19/13
07/08/13
05/15/13
11/30/12
Steepening yield curve 1-year yield has not
changed Current 30-year yield
164 basis point increase since the low on November 30, 2012 (approximately 8 months)
100+ basis point increase since May 15, 2013 (2 months)
Current and Historical MMD Rates
13
• Municipal Market Index (MMD) "Municipal Market Data," is a proprietary yield curve for municipal market (tax-exempt) issues published daily by Thomson Financial Services and widely used as a benchmark for determining interest rates on new issue and secondary market tax-exempt issues.
• In November 2012, the 30-year MMD maturity fell to its historic low of 2.47%. As of July 19, 2013, the 30-year MMD maturity was 4.14%.
AAA MMD10, 20 and 30-Year Maturity Historical RatesJuly 2011- July 2013
AAA MMD30-Year Maturity Historical RatesJanuary 7, 2013 to Present
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
06/2
7/20
11
07/2
7/20
11
08/2
7/20
11
09/2
7/20
11
10/2
7/20
11
11/2
7/20
11
12/2
7/20
11
01/2
7/20
12
02/2
7/20
12
03/2
7/20
12
04/2
7/20
12
05/2
7/20
12
06/2
7/20
12
07/2
7/20
12
08/2
7/20
12
09/2
7/20
12
10/2
7/20
12
11/2
7/20
12
12/2
7/20
12
01/2
7/20
13
02/2
7/20
13
03/2
7/20
13
04/2
7/20
13
05/2
7/20
13
06/2
7/20
13
10 Yr MMD 20 Yr MMD
30 Yr MMD
2.79
3.52
4.13
3.83
3.96
4.14
2.00
2.50
3.00
3.50
4.00
4.50
01/0
7/20
13
01/1
4/20
13
01/2
1/20
13
01/2
8/20
13
02/0
4/20
13
02/1
1/20
13
02/1
8/20
13
02/2
5/20
13
03/0
4/20
13
03/1
1/20
13
03/1
8/20
13
03/2
5/20
13
04/0
1/20
13
04/0
8/20
13
04/1
5/20
13
04/2
2/20
13
04/2
9/20
13
05/0
6/20
13
05/1
3/20
13
05/2
0/20
13
05/2
7/20
13
06/0
3/20
13
06/1
0/20
13
06/1
7/20
13
06/2
4/20
13
07/0
1/20
13
07/0
8/20
13
07/1
5/20
13
Credit Spreads – Tax-exempt Healthcare Bonds
14
Municipal Market Data High-Grade Yield Curve Industry standard (Both Buy Side and Sell
Side) Represents where high-grade, natural Aaa
paper is trading The MMD curve serves as a benchmark for
municipal bonds just as Treasury bonds do for corporate bonds
Healthcare Credit Spreads30-year maturity spread to Bloomberg's 30-year AAA General Obligation Index
Source: Bloomberg
0%
1%
2%
3%
4%
5%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
AA Rated Healthcare Spread A Rated Healthcare Spread
BBB Rated Healthcare Spread
16
Municipal Fund Flows vs 20 year MMD
(12,000.00)
(10,000.00)
(8,000.00)
(6,000.00)
(4,000.00)
(2,000.00)
0.00
2,000.00
4,000.00
6,000.00
Dec-10
Jan-11Feb-11M
ar-11Apr-11M
ay-11Jun-11Jul-11Aug-11Sep-11O
ct-11N
ov-11D
ec-11Jan-12Feb-12M
ar-12Apr-12M
ay-12Jun-12Jul-12Aug-12Sep-12O
ct-12N
ov-12D
ec-12Jan-13Feb-13M
ar-13Apr-13M
ay-13Jun-13Jul-13
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Funds Flow 20Y MMD
YTD 2013: $8.5B outflows
June 2013: $10.7B outflows
17
Variable Rate Alternatives – Key Differentiating Factors
Variable Rate Demand Bonds
• Letter of Credit (LOC) or Standby Bond Purchase Agreement (SBPA)
• Renewal Risk• Basel III Regulatory Risk
Bank Purchased Bonds
• Priced as spread to percent of LIBOR or SIFMA
• Limited Put Risk• Longer Tenor than Letter of Credit
Public Floating Rate Notes (FRN)
• Newest Product• Priced as a spread to LIBOR or SIFMA• No LOC or SBPA required
18
Municipal Bond Issuance
Total municipal issuance peaked in 2010 followed by a sharp decline in 2011.
Variable rate issuance has declined following the events of 2008 which heightened awareness of certain risks.264.4
310.7 294.7327.6
266.5
366.8395.6
258.7
345.9
161.6
95.3
97.694.1
102.3
123.1
42.937.6
29.0
27.2
13.9
359.7
408.3388.8
429.9
389.6409.7
433.3
287.7
373.1
175.5
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Billi
ons Fixed Rate
Variable Rate
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13
Billi
ons
2011 2012 2013
19
History of Municipal Variable Rate Bond Issuance
$51,410,123,000
$124,870,154,000
$41,502,630,000
$30,212,967,000
$24,447,686,000 $23,809,480,000
$12,387,902,448
0
20,000,000,000
40,000,000,000
60,000,000,000
80,000,000,000
100,000,000,000
120,000,000,000
140,000,000,000
2007 2008 2009 2010 2011 2012 2013Annualized
VRDB Issuance
% Change 07-08142% increase
% Change 08-0967% decrease
% Change 09-1027% decrease
% Change 11-122% decrease
% Change 12-1348% decrease
% Change 10-1119% decrease
20
Total VRDN Market Size ($000)
$391,844,805
$424,254,920 $417,181,468
$395,934,747
$373,230,665
$344,078,555
$301,454,364
$250,000,000
$270,000,000
$290,000,000
$310,000,000
$330,000,000
$350,000,000
$370,000,000
$390,000,000
$410,000,000
$430,000,000
$450,000,000
Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13
VRDN Market Size
21
Financing Option – Variable Rate Bonds with Bank Letter of Credit
Variable Rate Demand Obligation (VRDO) with Direct-Pay Letter of Credit (LOC) Short-term multi-mode interest rate reset (daily, weekly, monthly, etc.) Exposure to interest rate risk Produces lower cost of debt when yield curve is normal (upward sloping) Provides the most flexible redemption options The bonds will be sold on the credit strength of the bank providing the LOC LOC terms can be extended 3 to 5 years with annual renewal provisions
Interest rates at historically low levels Successful remarketing each week
Bank letters of credit may be challenging to procure Fewer options due to credit deterioration throughout the industry Bank renewal concern Pricing may be tiered to rating and/or financial performance Ancillary business may be required
22
SIFMA Index
0%
1%
2%
3%
4%
5%
6%
7%
8%
Max 5.840 4.480 1.850 1.360 1.990 3.510 3.970 3.950 7.960 0.670 0.340 0.290 0.260 0.180
Min 2.930 1.100 1.010 0.700 0.870 1.480 2.930 3.090 0.850 0.220 0.150 0.070 0.060 0.050
Median 4.190 2.380 1.350 1.060 1.075 2.515 3.475 3.610 1.820 0.380 0.270 0.175 0.160 0.100
10yr Rol l ing Avg 3.415 3.237 3.097 2.958 2.799 2.665 2.667 2.663 2.535 2.246 1.863 1.621 1.500 1.488
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
SIFMA – Median, Maximum and Minimum Rates(2000 to Present)
23
Liquidity and Letter of Credit Trends After spiking in early 2009, liquidity and LOC pricing has declined considerably
Depending on Credit Profile, Term and Structure LOC pricing at 150+ basis point in early 2009, now as low as 60 – 125 basis points
Multi-year commitments now available (1 Year LOCs were common in 2008 and 2009)
Incremental business expectations have lessened, but continue
Greater variation in remarketing rates based on liquidity or LOC provider Variation has settled somewhat, but market extremely sensitive
Fewer acceptable names causing greater concentration Money market eligibility Greater interest in self liquidity issues
Exclusion of “Auction Rate Mode”
Inclusion of a “Bank Mode” Takes advantage of bank qualification Can include “draw down” provisions
Especially beneficial for long construction projects Conversion into public market may require additional work
Rating, Disclosure document, Remarketing agreement
Inclusion of an “Index Mode”
24
Access to Commercial Bank LOC’s
Highly Rated, Relationship Banks = Best Partner/Provider One-off transactions may not prove to be reliable long term (i.e.,
renewal/extension concerns)
Pending Regulations Bank capital reserve requirements Direct Bank Placements may be offered as an alternative
Increased Awareness on Covenants and Other Terms/Conditions More restrictive covenants Increased focus on term out provisions, expiration dates (i.e., long-term
balance sheet classification) Grid pricing, rating triggers Yield protection language
Ancillary Requirements
Capacity/Hold Limits
25
US Banks’ Municipal Holdings – Cost Basis
78.7
78.1
73.8
75.0
76.5
86.6
92.0
93.6
97.7
101.9
109.3
112.2
124.3
137.0
144.2
154.6
158.0
179.6
207.8
254.0
0 50 100 150 200 250 300
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012 As of December 31
1993 to 2012 Increase of $175.3 billion 222.7% increase
2012: 22.3% 2011: 15.7% 2010: 13.7%
26
What is a Direct Bank Placement/Loan?
A Direct Bank Loan is a financing structure in which debt is purchased by a financial institution instead of being publicly sold / remarketed in the capital markets
Tax-exempt Direct Bank Loan structures have been used with increasing frequency over the past two years due to decreased bank capacity for letters of credit and significant number of expiring letters of credit on variable rate bonds
Driven by borrowers’ desire to shed bank trading risk and lock in a fixed spread
Issuer / Borrower
- Proceeds from bank loan used to finance tender of existing bonds or for new money purposes
- Pays a fixed spread over variable index rate for initial purchase period
Bank LoanProceeds Bank Loan
Purchaser
- Buys debt from Issuer under Credit Agreement- Holds debt at a variable index rate plus a fixed spread for a specified period
27
Direct Bank Loan Structures
Similar to variable rate bonds
– Direct Bank Loan is treated as another mode
– Requires a Trust Indenture
– Allows bonds to be converted to variable rate with letter of credit
– Requires a Bond Trustee
– Provides additional flexibility allowing borrower to convert to other modes in the future
– Bank covenants and terms in separate document (i.e. Bondholder Agreement, Funding Agreement– similar to Reimbursement Agreement)
Alternative structure
– No Trust Indenture
– Bank covenants typically in Loan Agreement
– Assumes debt will remain in Direct Bank Loan form
28
Bank Loan as an Alternative to a Public Offering
Direct Bank Loans have become an attractive alternative to public offerings of fixed or variable rate bonds
Bonds are usually placed with a long-term maturity and can have periodic puts/renewals (e.g., 3, 5 or 7 years)
Can be structured as variable or fixed rate (conventionally fixed based on cost of funds or interest rate swap)
Variable rate are priced at a spread to LIBOR and adjusted by a tax factor
– The credit/loan spread is determined by the credit profile of the borrower
– Tax factor is typically 65-70%
– Pricing may look like (70% of 1 Month Libor) + credit spread
29
Upfront Cost Comparison
Direct Bank Loan Capital Markets
Official Statement/Disclosure Requirements NO YES
Rating Agency NO YES
Indenture YES YES
Tax-Exempt Opinion YES YES
Underwriter NO YES
Underwriters’ Counsel NO YES
Bank Counsel YES NO
Bond/Tax Counsel YES YES
30
Direct Bank Loan vs Direct-Pay Letter of Credit
Benefits of a Direct Bank Loan
Reduce remarketing risk by moving outstanding debt out of the capital markets and placing directly with the bank
– Avoid liquidity event caused by a failed remarketing
Reduce bank counterparty risk in uncertain environment for bank ratings– Interest rate paid is tied to underlying index– Rate not affected by changes in bank rating or investor sentiment
Reduce exposure to unexpected market shocks causing bonds to be “put back” by investors
Possible longer tenor on facility, reducing renewal risk
Possibly reduce annual costs by eliminating remarketing and trustee fees
Benefits of Direct-Pay Letter of Credit
Mature structure with full acceptance in the capital markets
Potentially lower up-front costs when switching credit providers due to familiarity of structure and consistency of documentation across transactions. Up-front costs are becoming more comparable
More conducive structure for bonds with bullet maturities
– Direct bank loan may require some level of annual principal amortization
Multi-year term-out provisions typical in the event of a failed remarketing– Term-out provisions are not typical with Direct Bank Loan structures– Full principal is typically due at the end of purchase period if facility is not renewed or replaced
Floating Rate Notes (“FRNs”)
No bank support and no ongoing remarketing
Float relative to an index, typically SIFMA, but can be priced as a percentage of LIBOR. The pricing spread is determined at the time of pricing and fixed for the duration of the Floating Rate Note Period
The Floating Rate Note Period is typically 1 to 5 years in length, but PNCCM has observed periods as long as 10 to 15 years
FRNs can be issued with either a hard put or a soft put. With a hard put structure, upon maturity or the mandatory tender date, outstanding principal is due and failure to pay is an event of default
With a soft put structure, upon maturity or the mandatory tender date, failure to pay at the tender date constitutes a “failed remarketing” and can trigger interest rate escalation to a maximum rate and/or accelerated amortization. An FRN with a soft put could also be structured with an interest rate that gradually “steps up” to the max rate instead of directly defaulting to max rate at the time of the failed remarketing
FRNs generally are not subject to optional redemption until six months prior to the end of the Floating Rate Note Period. If the FRNs are not retired at maturity or at the end of the Floating Rate Note Period, the FRNs may be remarketed into a new Floating Rate Note Period or refinanced by new FRNs, variable rate demand obligations (VRDBs), fixed rate bonds, or other obligations.
2012 through2013 Year to Date
Numberof Issues Issue Amount
Total FRN Market 80 $17.5 Billion
Healthcare 13 $1.3 Billion
BBB Healthcare 3 $306.0 Million
Market Overview of FRNs
The market for FRNs has grown significantly since the auction market collapse in 2008. Initial issuances involved highly rated issuers, but FRNs are now available as a tool for issuers in a broad range of credit quality
The market initially expanded as a result of reduced capacity in the bank market. More recently, the market has grown as long-term municipal investors increase exposure to variable rate products to position for rising rates. FRNs serve as a non-bank alternative to a traditional VRDBs
“Linked-rate” volume increased by 17.56% from 2011 to 2012. Volume increased 123% in the first quarter of 2013 over 2012, and we expect continued growth in this market
FRN Market Stats 2012-2013YTD# Issues 120
# Series 276
Total Par $18.7 B
Ave Deal Size $156 MM
Max Deal Size $964 MM
Min Deal Size $1 MM
Ave Maturity Size $68 MM
Max Maturity Size $964 MM
Min Maturity Size $1 MM
Max Rating Aaa / AAA
Min Rating w/ insurance Baa3 * - / BBB- * -
Min Rating w/o insurance BBB
THOMSON-REUTERS SDC FINANCIAL REPORTED LINKED RATE ISSUANCE (000s)1
1 March 31, 2013
$9,303
$12,340
$14,326
$3,773
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
2010 2011 2012 2013
FRN Considerations
BENEFITS CONSIDERATIONS
Third-party credit and liquidity support is not required – eliminating bank renewal risk, counter-party risk and ongoing remarketing risk
During the Floating Rate Note Period, the bonds can not be tendered by investors
Borrowers can select SIFMA, LIBOR, or a % of LIBOR as the underlying index. This may be beneficial if the borrower has existing swaps that they do not wish to terminate and can use as a hedge for an FRN with a matching index
FRNs can be issued as part of a multi-modal issue providing flexibility at the end of the Floating Rate Note Period to refinance into a variety of alternate structures (or a subsequent Floating Rate Note Period)
Interest rate risk is inherent to this structure and is based on the selected underlying index (SIFMA, LIBOR, or a % of LIBOR)
At the mandatory tender date or maturity, the borrower is subject to refinancing risk and potentially higher spreads to the underlying index based on a change in market conditions, changes in tax law, or the borrower’s credit profile
If structured with a “hard put” the borrower may be required to fund the entire purchase price of the FRNs. If structured with a “soft put” the interest rate could escalate to the maximum interest rate and/or accelerated principal payments (if remarketing is unsuccessful)
Optionality within the structure is achievable but the extent of optionality will be less than what is embedded within a typical VRDB solution
Term on both put structures is getting longer, but price discovery is critical in this phase of the market’s development
Call Date (6 months prior)* Maturity
Nominal
Call Date (6 months prior)*
Mandatory Tender Maturity
-Fixed Rate Bonds
-New FRNs
-Alternative Variable Rate Structure
-Bank Solution
-Event of Default
Call Date Mandatory Nominal(6 months prior)* Tender Maturity
-Fixed Rate Bonds
-New FRNs
SOFT PUT -Alternative Variable Rate Structure
-Alternative Mode
-Bank Solution
-Refinance
* This is feature, not a structural requirement -Accelerated Amortization (term out)
-Floating rate resets to failed remarketing rate (as defined in documents)
Index + Spread
Index + Spread
Index + Spread
HARD PUT w/
mandatory tender
HARD PUT w/
maturity
"Failed Remarketing
Event"
FRNs- Hard Put vs Soft PutHard Put
A hard put can be incorporated in a structure with a mandatory tender or maturity. Both structures typically incorporate a call date 6 months prior to the principal payment date
An event of default occurs if the FRN is not funded on the date of the mandatory tender or maturity
The primary concern for investors is the ability of the borrower to access the market at the mandatory tender date
Soft Put
A soft put is typically structured as part of a term mode remarketing of multi-modal bonds, often with a call date 6 months prior to the soft put date
In soft put structures, investors will also focus on refinancing risks and the maximum rate in the case of a failed remarketing
Soft puts can be structured with a step coupon, where at the time of failed remarketing the interest rate gradually steps up to increasingly penalizing rates until it reaches the max rate
Capital Structure ConsiderationBANK FRN
(Direct Purchase)
FIXED RATE BANK LOAN
FRN PUBLIC OFFERING 67%
of LIBOR
FRN PUBLIC OFFERING
SIFMA
TAX-EXEMPT FIXED RATE
NOTE
VRDB with LETTER OF CREDIT*
Offering Documents Not Required Not Required Required Required Required Required
Costs of I ssuanceBond Counsel + Bank Counsel
Bond Counsel + Bank Counsel
Full Full Full Full
Public Rating Not Required Not Required Required Required Required Required
Optionality FullPrepayment
Penalty
Difficult Given Rating
(Expensive)
Difficult Given Rating
(Expensive)
Difficult Given Rating
(Expensive)
Difficult Given Rating
(Expensive)
Term Short Term Short Term
Market Access Risk Retained Retained Retained Retained Retained Retained
I ndicative Pricing3 Years
5 Years
10 Years
Period Spread to Index
1 2014 + 5 bps
2 2015 + 15 bps
3 2016 +30 bps
4 2017 +45 bps
5 2018 +55 bps
6 2019 +65 bps
7 2020 +75 bps
8 2021 +85 bps
9 2022 +95 bps
10 2023 +105 bps
11 2024 +115 bps
12 2025 +125 bps
13 2026 +130 bps
Floating Rate NotePublic Offering
36
Sources of Capital – Summary of Costs and Risks
AAFixed Rate
AFixed Rate
BBBFixed Rate
VRDB with LOC
VRDB Self Liquidity
Direct Bank Placement
30-Year Bond Yield 5.14% * 5.64% * 5.94% * SIFMA * SIFMA *
Letter of Credit/Bank Rate100 bps
(3 year LOC)70% 1M LIBOR
+ 125 bps
Annual Remarketing 10 bps 10 bps
Cost of Capital 5.14% 5.64% 5.94%SIFMA
+ 1.10%SIFMA
+ 0.10%70% 1M LIBOR
+ 1.25%
Risks
Put Risk No No No Yes Yes No
Bank Renewal Risk No No No Yes No Yes
Bank/Credit Risk No No No Yes Yes No
Interest Rate Risk No No No Yes Yes Maybe
Tax Risk No No No Yes Yes Maybe
Borrower Downgrade No No No Yes Yes Yes
Reserve Fund No Maybe Yes No No No
Mortgage No Maybe Yes Maybe No No
* 30-year Municipal Market Data on July 19, 2013 was 4.14%; SIFMA reset on July 24, 2013 at 0.06%.Note: Yields are indicative estimates.
Capital Structure & Bank Renewal Consideration
Bank Renewal Risk
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Series 2009 A Series 2009 B Series 2009 C Series 2010 Series 2012
Outstanding Average Final LOC LOC Call Call Swap Variable Out. Notional Swap SwapSeries Par (000) Mode Cost Maturity Ratings Provider Expiration Date Price Receipt Amount (000) Fixed Rate Expiration
Fixed Rate
Series of 2012 $10,000,000 Bank Qualified 1.990% 1 12/2032 2 NR
Series of 2010 $23,415,000 Bank Qualified 3.040% 1 12/2017 4 NR
Variable Rate
Series A of 2009 $19,040,000 Weekly VRDB 0.179% 3 12/2039 AA+/A-1 PNC Bank 07/2015 Any IPD 100%
Series B of 2009 $19,040,000 Weekly VRDB 0.179% 3 12/2039 AA+/A-1 PNC Bank 07/2015 Any IPD 100%
Series C of 2009 $20,000,000 Weekly VRDB 0.179% 3 12/2039 AA+/A-1 PNC Bank 07/2015 Any IPD 100%
TOTAL $91,495,000
1 Fixed Rate Bank Loan2 Bank has right to Put the note back on the 5th, 10th and 15th anniversaries3 Average Remarketing Rate Since 7/23/20094 7 Year Maturity Date; 21 Year Amortization.
Capital Structure & Interest Rate Risk Consideration
Outstanding Par Rate ModeFinal
Maturity*LOC Bank/
InsurerLOC
ExpirationCall Date Call Price
Swap Variable Receipt
Outstanding Notional
Swap Fixed Rate
Swap Expiration
Series 2009B $111,530,000 Fixed 2/1/2038 Assured - 2/1/2019 Par N/A N/A N/A N/ASeries 2010 $27,150,000 Fixed 2/1/2018 - Non-callable - N/A N/A N/A N/A
$138,680,000
Series 2009A $34,585,000 Variable 2/1/2035 LOC 4/2/2014 At all times Par N/A N/A N/A N/A
Series 2009C $56,450,000 Variable 2/1/2033 LOC 5/13/2014 At all times Par (65% L) + 145 bps$55,700,000
(as of last audit)
3.51%Through maturity
Series 2009D $18,615,000 Variable 2/1/2039 LOC 5/13/2013* At all times Par N/A N/A N/A N/A
$109,650,000
Total Outstanding $248,330,000
Series
Fixed Rate Bonds
Variable Rate Bonds
*EMMA indicates the LOC on Series 2009D expires May 2013 and LOC for Series 2009C expires in 2014. Bloomberg indicates both LOCs expire in 2013.
Composition of Underlying Debt
Interest Rate Exposure
Fixed Rate$138,680,000
56%
Variable Rate$109,650,000
44%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Fixed Rate,$138,680,000
56%
Synthetically Fixed$56,450,000
23%
Variable Rate$53,200,000
21%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
39
Standard Disclosure
PNC Capital Markets LLC ("PNCCM"), member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. PNCCM is an affiliate of PNC Bank, National Association; however, it is not a bank or a thrift and is a separate and distinct corporate entity from its bank affiliate.
This document is for informational purposes only. No part of this document may be reproduced in any manner without the prior written permission of PNCCM. Under no circumstances should it be used or considered as an offer to sell or a solicitation of an offer to buy any of the securities or other instruments mentioned in it. The information contained herein is based on information PNCCM believes to be reliable and accurate, however, no representation is being made that this document is accurate or complete and it should not be relied upon as such. Neither PNCCM nor its affiliates make any guaranty or warranty as to the accuracy or completeness of the data set forth herein. Opinions expressed herein are subject to change without notice. The securities or other instruments mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; and their value and the income they produce may fluctuate and/or be adversely affected by changes in exchange rates or interest rates or other factors.
PNCCM and/or its affiliated companies may make a market or deal as principal in the securities mentioned in this document or in options or other derivative instruments based thereon. In addition, PNCCM and its affiliated companies, shareholders, directors, officers and/or other employees may from time to time have long or short positions in such securities or in options, futures or other derivative instruments based thereon. One or more directors, officers and/or employees of PNCCM or its affiliated companies may be a director of an issuer of securities mentioned in this document. PNCCM or its predecessors and/or affiliates may have managed or co-managed a public offering of or acted as initial purchaser or placement agent for a private placement of any of the securities for any issuer mentioned herein within the last three years, or may from time to time perform investment banking or other services for or solicit investment banking or other business from any company or issuer mentioned in this document.
PNC Capital Markets is the marketing name used for investment banking and capital markets activities conducted by The PNC Financial Services Group, Inc. through its subsidiaries PNC Bank, National Association and PNC Capital Markets LLC. Services such as public finance advisory services, securities underwriting, and securities sales and trading are provided by PNC Capital Markets LLC. Foreign exchange and derivative products are obligations of PNC Bank, National Association
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