Bond Issue Basics:Bond Issue Basics:A Debt and PlanCon PrimerA Debt and PlanCon PrimerAgainst the Backdrop of the Against the Backdrop of the
Great RecessionGreat Recession
ByBy
Christopher Brewer, Esq.Christopher Brewer, Esq.
Dinsmore & Shohl LLPDinsmore & Shohl LLP
All Debt is a Loan of MoneyAll Debt is a Loan of MoneyReturned in InstallmentsReturned in Installments
at a cost -- of Interestat a cost -- of Interest
If you have ever taken a home If you have ever taken a home mortgage, then you have mortgage, then you have
experienced all of the elements of experienced all of the elements of any bond issue.any bond issue.
The difference is one of amount and The difference is one of amount and the mechanics needed to the mechanics needed to
accommodate large amounts.accommodate large amounts.
Finding Your LenderFinding Your Lender
Is Financing packaged with Asset?Is Financing packaged with Asset?(Xerox, GE Capital, Dell)(Xerox, GE Capital, Dell)
Is Amount under $1.5 MM?Is Amount under $1.5 MM?
Is Term under 5 years?Is Term under 5 years?
Survey/Seek Proposals from BanksSurvey/Seek Proposals from BanksRecognize Bank’s Own Tax Position/Portfolio Recognize Bank’s Own Tax Position/Portfolio
NeedsNeeds
Variable Rate (Under 70% of Taxable)Variable Rate (Under 70% of Taxable) Rate Reset (3 to 5 years)Rate Reset (3 to 5 years) Make whole provision on prepaymentMake whole provision on prepayment Transfer of accountsTransfer of accounts Bank FeesBank Fees
If not a Bank Loan, perhaps a Bond Pool?If not a Bank Loan, perhaps a Bond Pool?
Uneeda Uneeda Bond Issue?Bond Issue?
If so, you need bond investors.If so, you need bond investors.
How do you find them?How do you find them?
Taxpayers
School District
Investment Banking FirmBond Investors
BANK LOANBANK LOAN – Single Creditor, Single – Single Creditor, Single Interest Rate, Monthly Cycle, Equal (Level) Interest Rate, Monthly Cycle, Equal (Level) Payments, Standard Period (Term)Payments, Standard Period (Term)
PRIVATE OFFERINGPRIVATE OFFERING – Limited Number of – Limited Number of Investors, Blend of two AlternativesInvestors, Blend of two Alternatives
BOND ISSUEBOND ISSUE – Multiple Investors, Multiple – Multiple Investors, Multiple Interest Rates, Semi-Annual Cycles, Interest Rates, Semi-Annual Cycles, Customized Payments, Customized TermCustomized Payments, Customized Term
Alternative Methods of Alternative Methods of FinanceFinance
Direct Source Direct Source vs. vs.
Brokered SourceBrokered Source
Public Offering of School District Public Offering of School District BondsBonds
Terminology TranslatorTerminology TranslatorHome MortgageHome Mortgage
Mortgage ApplicationMortgage ApplicationCollateralCollateralCo-signerCo-signer
Credit ScoreCredit ScorePaymentPayment
Principal AmortizationPrincipal AmortizationInterest RateInterest Rate
APRAPRPrepaymentPrepayment
PenaltyPenaltyBank FeeBank Fee
PointsPointsTitle OpinionTitle Opinion
Servicing AgentServicing Agent
Bond IssueBond IssueOfficial StatementOfficial Statement
SecuritySecurityBond Insurance/Letter of Bond Insurance/Letter of
CreditCreditCredit RatingCredit RatingDebt ServiceDebt Service
Principal MaturityPrincipal MaturityCoupon (Rate)Coupon (Rate)
YieldYieldRedemption/CallRedemption/Call
PremiumPremiumDiscountDiscount
Original Issue DiscountOriginal Issue DiscountBond OpinionBond OpinionPaying AgentPaying Agent
Alternative AmortizationAlternative Amortization StructuresStructures
Level PrincipalLevel Principal Level Debt ServiceLevel Debt Service Wrap Around Debt ServiceWrap Around Debt Service Phasing (first 2 to 3 years)Phasing (first 2 to 3 years) Match Debt to Useful Life; other Match Debt to Useful Life; other
Capital Needs/BorrowingsCapital Needs/Borrowings Expected Financial CircumstancesExpected Financial Circumstances
PNC CAPITAL MARKETS 1-Mar-10SAMPLE PA SCHOOL DISTRICT
Table of Sources and Uses Series of 2010 New Money Debt Service
A B C D E F G HPayment Fiscal Par Coupon Debt Capitalized Gross Annual
Years Date Year Amount Rate (%) Interest Service Interest Debt Service
15-Sep-10 88,822.50 88,822.50 0.001 15-Mar-11 2011 220,000.00 1.150% 88,822.50 308,822.50 397,645.00
15-Sep-11 87,557.50 87,557.502 15-Mar-12 2012 220,000.00 1.400% 87,557.50 307,557.50 395,115.00
15-Sep-12 86,017.50 86,017.503 15-Mar-13 2013 225,000.00 1.650% 86,017.50 311,017.50 397,035.00
15-Sep-13 84,161.25 84,161.25
4 15-Mar-14 2014 230,000.00 2.050% 84,161.25 314,161.25 398,322.5015-Sep-14 81,803.75 81,803.75
5 15-Mar-15 2015 230,000.00 2.450% 81,803.75 311,803.75 393,607.5015-Sep-15 78,986.25 78,986.25
6 15-Mar-16 2016 240,000.00 2.800% 78,986.25 318,986.25 397,972.5015-Sep-16 75,626.25 75,626.25
7 15-Mar-17 2017 245,000.00 3.150% 75,626.25 320,626.25 396,252.5015-Sep-17 71,767.50 71,767.50
8 15-Mar-18 2018 250,000.00 3.400% 71,767.50 321,767.50 393,535.0015-Sep-18 67,517.50 67,517.50
9 15-Mar-19 2019 260,000.00 3.600% 67,517.50 327,517.50 395,035.0015-Sep-19 62,837.50 62,837.50
10 15-Mar-20 2020 270,000.00 3.850% 62,837.50 332,837.50 395,675.0015-Sep-20 57,640.00 57,640.00
11 15-Mar-21 2021 280,000.00 4.200% 57,640.00 337,640.00 395,280.0015-Sep-21 51,760.00 51,760.00
12 15-Mar-22 2022 290,000.00 4.200% 51,760.00 341,760.00 393,520.0015-Sep-22 45,670.00 45,670.00
13 15-Mar-23 2023 305,000.00 4.200% 45,670.00 350,670.00 396,340.0015-Sep-23 39,265.00 39,265.00
14 15-Mar-24 2024 320,000.00 4.200% 39,265.00 359,265.00 398,530.0015-Sep-24 32,545.00 32,545.00
15 15-Mar-25 2025 330,000.00 4.600% 32,545.00 362,545.00 395,090.0015-Sep-25 24,955.00 24,955.00
16 15-Mar-26 2026 345,000.00 4.600% 24,955.00 369,955.00 394,910.0015-Sep-26 17,020.00 17,020.00
17 15-Mar-27 2027 360,000.00 4.600% 17,020.00 377,020.00 394,040.0015-Sep-27 8,740.00 8,740.00
18 15-Mar-28 2028 380,000.00 4.600% 8,740.00 388,740.00 397,480.0015-Sep-28 0.00 0.00
19 15-Mar-29 2029 0.00 0.00 0.0015-Sep-29 0.00 0.00
20 15-Mar-30 2030 0.00 0.00 0.0015-Sep-30 0.00 0.00
21 15-Mar-31 2031 0.00 0.00 0.0015-Sep-31 0.00 0.00
22 15-Mar-32 2032 0.00 0.00 0.0015-Sep-32 0.00 0.00
23 15-Mar-33 2033 0.00 0.00 0.0015-Sep-33 0.00 0.00
24 15-Mar-34 2034 0.00 0.00 0.0015-Sep-34 0.00 0.00
25 15-Mar-35 2035 0.00 0.00 0.00
Totals $5,000,000.00 $2,125,385.00 $7,125,385.00 $0.00 $7,125,385.00
Term Bonds 2024 $1,195,000.00
2028 $1,415,000.00
Level Annual Debt Service
PNC CAPITAL MARKETS 1-Mar-10SAMPLE PA SCHOOL DISTRICT
Table of Sources and Uses Series of 2011 New Money Debt Service
A B C D E F G H I JPayment Fiscal Par Coupon Debt Capitalized Gross Annual Existing Annual Combined
Years Date Year Amount Rate (%) Interest Service Interest Debt Service Debt Service Debt Service
15-Sep-11 116,688.75 116,688.75 0.001 15-Mar-12 2012 35,000.00 1.150% 116,688.75 151,688.75 268,377.50 395,115.00 663,492.50
15-Sep-12 116,487.50 116,487.502 15-Mar-13 2013 30,000.00 1.400% 116,487.50 146,487.50 262,975.00 397,035.00 660,010.00
15-Sep-13 116,277.50 116,277.503 15-Mar-14 2014 30,000.00 1.650% 116,277.50 146,277.50 262,555.00 398,322.50 660,877.50
15-Sep-14 116,030.00 116,030.00
4 15-Mar-15 2015 35,000.00 2.050% 116,030.00 151,030.00 267,060.00 393,607.50 660,667.5015-Sep-15 115,671.25 115,671.25
5 15-Mar-16 2016 35,000.00 2.450% 115,671.25 150,671.25 266,342.50 397,972.50 664,315.0015-Sep-16 115,242.50 115,242.50
6 15-Mar-17 2017 35,000.00 2.800% 115,242.50 150,242.50 265,485.00 396,252.50 661,737.5015-Sep-17 114,752.50 114,752.50
7 15-Mar-18 2018 40,000.00 3.150% 114,752.50 154,752.50 269,505.00 393,535.00 663,040.0015-Sep-18 114,122.50 114,122.50
8 15-Mar-19 2019 40,000.00 3.400% 114,122.50 154,122.50 268,245.00 395,035.00 663,280.0015-Sep-19 113,442.50 113,442.50
9 15-Mar-20 2020 40,000.00 3.600% 113,442.50 153,442.50 266,885.00 395,675.00 662,560.0015-Sep-20 112,722.50 112,722.50
10 15-Mar-21 2021 40,000.00 3.850% 112,722.50 152,722.50 265,445.00 395,280.00 660,725.0015-Sep-21 111,952.50 111,952.50
11 15-Mar-22 2022 45,000.00 4.200% 111,952.50 156,952.50 268,905.00 393,520.00 662,425.0015-Sep-22 111,007.50 111,007.50
12 15-Mar-23 2023 45,000.00 4.200% 111,007.50 156,007.50 267,015.00 396,340.00 663,355.0015-Sep-23 110,062.50 110,062.50
13 15-Mar-24 2024 45,000.00 4.200% 110,062.50 155,062.50 265,125.00 398,530.00 663,655.0015-Sep-24 109,117.50 109,117.50
14 15-Mar-25 2025 50,000.00 4.200% 109,117.50 159,117.50 268,235.00 395,090.00 663,325.0015-Sep-25 108,067.50 108,067.50
15 15-Mar-26 2026 50,000.00 4.600% 108,067.50 158,067.50 266,135.00 394,910.00 661,045.0015-Sep-26 106,917.50 106,917.50
16 15-Mar-27 2027 55,000.00 4.600% 106,917.50 161,917.50 268,835.00 394,040.00 662,875.0015-Sep-27 105,652.50 105,652.50
17 15-Mar-28 2028 55,000.00 4.600% 105,652.50 160,652.50 266,305.00 397,480.00 663,785.0015-Sep-28 104,387.50 104,387.50
18 15-Mar-29 2029 455,000.00 4.600% 104,387.50 559,387.50 663,775.00 0.00 663,775.0015-Sep-29 93,922.50 93,922.50
19 15-Mar-30 2030 475,000.00 4.800% 93,922.50 568,922.50 662,845.00 0.00 662,845.0015-Sep-30 82,522.50 82,522.50
20 15-Mar-31 2031 495,000.00 4.800% 82,522.50 577,522.50 660,045.00 0.00 660,045.0015-Sep-31 70,642.50 70,642.50
21 15-Mar-32 2032 520,000.00 4.800% 70,642.50 590,642.50 661,285.00 0.00 661,285.0015-Sep-32 58,162.50 58,162.50
22 15-Mar-33 2033 545,000.00 4.950% 58,162.50 603,162.50 661,325.00 0.00 661,325.0015-Sep-33 44,673.75 44,673.75
23 15-Mar-34 2034 575,000.00 4.950% 44,673.75 619,673.75 664,347.50 0.00 664,347.5015-Sep-34 30,442.50 30,442.50
24 15-Mar-35 2035 600,000.00 4.950% 30,442.50 630,442.50 660,885.00 0.00 660,885.0015-Sep-35 15,592.50 15,592.50
25 15-Mar-36 2036 630,000.00 4.950% 15,592.50 645,592.50 661,185.00 0.00 661,185.00
Totals $5,000,000.00 $4,829,122.50 $9,829,122.50 $0.00 $9,829,122.50 $6,727,740.00 $16,556,862.50
Term Bonds 2025 $185,000.00
2029 $615,000.002032 $1,490,000.002036 $2,350,000.00
Wraparound Debt Service
$ in 000's
SAMPLE PA SCHOOL DISTRICT
Annual Debt Service Requirements
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Series of 2010 (Level) Series of 2011 (Wraparound)
Alternative Credit StructuresAlternative Credit Structures
General Obligations – TaxesGeneral Obligations – Taxes
Special Obligations – Enterprise Special Obligations – Enterprise RevenuesRevenues
Non-appropriation – Asset BackedNon-appropriation – Asset Backed
Alternative IssuersAlternative Issuers
School District ItselfSchool District Itself
State Public School Building Authority*State Public School Building Authority* Local Authority (Vo-Tech or Swap)*Local Authority (Vo-Tech or Swap)* Local Bond Pool Authority*Local Bond Pool Authority*
*School District delivers note/loan agreement*School District delivers note/loan agreement
Uses and SourcesUses and SourcesConstruction Bids/EstimatesConstruction Bids/Estimates Cash ContributionCash Contribution
Land or Interest in LandLand or Interest in Land GrantsGrants
Construction Construction Manager/ArchitectManager/Architect
Bond ProceedsBond Proceeds
Furniture Fixtures & Furniture Fixtures & EquipmentEquipment
Interest EarningsInterest Earnings
Planning/PermitsPlanning/Permits
Bond DiscountBond Discount (One-Time vs. Draw- (One-Time vs. Draw-
Bond InsuranceBond Insurance Down Funding)Down Funding)
Legal (Bond and Local)Legal (Bond and Local)
Rating AgencyRating Agency
Financial AdvisorFinancial Advisor
PrintingPrinting
Paying AgentPaying Agent
Designing Your Bond IssueDesigning Your Bond Issue
School DistrictSchool District vs. vs. Bond InvestorBond InvestorNeeds/Abilities/Goals Needs/Abilities/Goals
Needs/Abilities/GoalsNeeds/Abilities/Goals
Market ReceptionMarket ReceptionCase in Point : BABs in EuropeCase in Point : BABs in Europe
Yield Curve PositioningYield Curve Positioning
Case in Point : Short tax-exempts; Long BABsCase in Point : Short tax-exempts; Long BABs
Alternative Bond Sale Alternative Bond Sale MethodsMethods
Negotiated (Private) Competitive Negotiated (Private) Competitive (Public)(Public)
[Design / Build] [Design / Bid] [Design / Build] [Design / Bid]
More Trust by School District Less Trust by School More Trust by School District Less Trust by School DistrictDistrict
Less Risk on Banker More Risk on BankerLess Risk on Banker More Risk on Banker
Components of DiscountComponents of Discount
Management (35%) / Underwriting (65%)Management (35%) / Underwriting (65%)
Planning for Construction Planning for Construction WorkbookWorkbook“PlanCon”“PlanCon”
Capital Cost Reimbursement is “Pay-As-You-Go”Capital Cost Reimbursement is “Pay-As-You-Go”Little to no PDE input to bond structureLittle to no PDE input to bond structure
Payment must be from School District RevenuesPayment must be from School District Revenues(Not accrued or capitalized interest)(Not accrued or capitalized interest)
Full Cash by District = Full Cash by PDE (1 year Full Cash by District = Full Cash by PDE (1 year rule)rule)
Debt Amortization by District = Debt Amortization by District = Debt Service Reimbursement Debt Service Reimbursement
by PDEby PDE
Eligible Project CostsEligible Project Costs
($ x students adjusted by certain costs)($ x students adjusted by certain costs)
Divided ByDivided By
Total Project CostsTotal Project Costs
Project Eligible % x MVAR equals Effective ReimbursementProject Eligible % x MVAR equals Effective Reimbursement
*Not available until receipt of bids (PlanCon G/H),*Not available until receipt of bids (PlanCon G/H),
but PDE will reimburse prior paymentsbut PDE will reimburse prior payments
*Temporary Percentage until Final Accounting (PlanCon J)*Temporary Percentage until Final Accounting (PlanCon J)
Net Debt Service SolutionsNet Debt Service Solutions
*Watch assumptions*Watch assumptions
*Changes in Project Eligible % or MVAR*Changes in Project Eligible % or MVAR
will distort net debt solutionswill distort net debt solutions
PlanCon D – Project Accounting PlanCon D – Project Accounting Based on EstimatesBased on Estimates
Fiscal ConstraintsFiscal Constraints
D-17 D-17 25% of Local Revenues25% of Local RevenuesD-17D-17 Test for Fiscal DistressTest for Fiscal DistressD-18D-18 Mills on Market Value Mills on Market Value
(Local vs. Statewide)(Local vs. Statewide)
Problematic for Poorer School DistrictsProblematic for Poorer School DistrictsProblematic for Debt Free School DistrictsProblematic for Debt Free School Districts
PlanCon G – Project Accounting Based on PlanCon G – Project Accounting Based on BidsBids
PlanCon H – FinancingPlanCon H – Financing
PlanCon K – RefinancingPlanCon K – Refinancing
* “Never-Pay-More” Rule* “Never-Pay-More” RuleInclusion of New Money or Increase of Total Debt Service will Inclusion of New Money or Increase of Total Debt Service will
reducereduce Project Eligible % Project Eligible %
* Pure Savings* Pure Savings (whether up-front, over time or back-end) will (whether up-front, over time or back-end) will
retainretain Project Eligible % Project Eligible %
* Cost of Issuance on School District* Cost of Issuance on School District
* New debt service schedule may interrupt * New debt service schedule may interrupt reimbursementreimbursement
Act 1 ConstraintsAct 1 Constraints
Act 1 does not limit what you can Act 1 does not limit what you can borrow; it limits whether you can borrow; it limits whether you can pay for it.pay for it.
ReferendumReferendum Qualified Costs LimitationQualified Costs Limitation Phase-in/Wrap-Around StructuresPhase-in/Wrap-Around Structures
(Capital Appreciation Bonds?)(Capital Appreciation Bonds?)
(Creative use of Build America Bonds?)(Creative use of Build America Bonds?)
Local Government Unit Debt Local Government Unit Debt ActAct
LimitationsLimitationsPrincipal Amount LimitsPrincipal Amount LimitsTotal School District Debt Total School District Debt ≤ Last 3 years’ Average ≤ Last 3 years’ Average
Revenues Revenues x 2.25x 2.25PlanCon Subsidized Debt May be ExcludedPlanCon Subsidized Debt May be Excluded
Pay–Back LimitsPay–Back LimitsCapitalized Interest – construction plus 1 yearCapitalized Interest – construction plus 1 yearPrincipal Deferral – 2 years or construction period plus 1 Principal Deferral – 2 years or construction period plus 1
yearyearFinal Maturity ≤ Useful LifeFinal Maturity ≤ Useful LifeTotal Debt Service – Level or Wrapped to LevelTotal Debt Service – Level or Wrapped to Level(Downward Cascading Permitted)(Downward Cascading Permitted)
Local Government Unit Debt Local Government Unit Debt ActAct
ProceduresProcedures 3 Day Advance Notice3 Day Advance Notice
Board ResolutionBoard Resolution Covenant to Budget, Appropriate and PayCovenant to Budget, Appropriate and Pay
““Acceptable” Purchase ProposalAcceptable” Purchase Proposal Post Adoption NoticePost Adoption Notice
15 Calendar day approval cycle15 Calendar day approval cycle Appeal to Commonwealth CourtAppeal to Commonwealth Court
Advent of “Parameters” ResolutionAdvent of “Parameters” Resolution
Federal Tax LawFederal Tax Law
Interest earned on obligations of a state or Interest earned on obligations of a state or local government are excluded from gross local government are excluded from gross income.income.
In 1914, a right of federalism?In 1914, a right of federalism?
In 2010, a federal subsidy and privilegeIn 2010, a federal subsidy and privilege
IRC Sections 103 and 141 through 150 contain IRC Sections 103 and 141 through 150 contain innumerable limits and conditions on the innumerable limits and conditions on the privilege.privilege.
Primary Restriction - ArbitragePrimary Restriction - Arbitrage
Arbitrage is the practice of making Arbitrage is the practice of making money by moving an item between money by moving an item between marketsmarkets
Marco Polo - tea ; Dutch colonists – Marco Polo - tea ; Dutch colonists – beadsbeads
Local Governments – tax-exempt bond Local Governments – tax-exempt bond proceeds into taxable investmentsproceeds into taxable investments
Abusive Device – issuing bonds Abusive Device – issuing bonds sooner, or in an amount larger, sooner, or in an amount larger, or allowing them to remain or allowing them to remain outstanding longer, than is outstanding longer, than is necessary to accomplish the necessary to accomplish the governmental purpose.governmental purpose.
Three Point “Reasonable Three Point “Reasonable Expectations” TestExpectations” Test
Substantial Binding Obligation to Substantial Binding Obligation to expend 5% incurred within 6 monthsexpend 5% incurred within 6 months
85% of proceeds expended within 3 85% of proceeds expended within 3 yearsyears
Proceed with Due DiligenceProceed with Due Diligence
““Reasonable” does not mean possible or Reasonable” does not mean possible or promised; it means “likely, as assessed by a promised; it means “likely, as assessed by a third party observer”third party observer”
Arbitrage RebateArbitrage Rebate
Small issuer exemption ($5MM or Small issuer exemption ($5MM or $15MM Construction)$15MM Construction)
Spending exemptionSpending exemption
- 6 month- 6 month
- 18 month- 18 month
- 24 month construction- 24 month construction
RefundingsRefundings
Use of proceeds of new issue to Use of proceeds of new issue to prepay previous issueprepay previous issue
Keys are Interest Rate and Keys are Interest Rate and Redemption PeriodRedemption Period
Current Refunding : Old BondsCurrent Refunding : Old BondsPaid off within 90 days of issuePaid off within 90 days of issue
Advance Refunding : Old BondsAdvance Refunding : Old BondsPaid off later than 90 days of issuePaid off later than 90 days of issue
Build America BondsBuild America Bonds
Must meet all regular Tax Exempt Must meet all regular Tax Exempt QualificationsQualifications
Interest is TaxableInterest is Taxable
Federal Government will ReimburseFederal Government will Reimburse
35% of Interest Expense35% of Interest Expense
Qualified School Construction Qualified School Construction BondsBonds
Primary compensation to investor is a Primary compensation to investor is a
tax credittax credit
““Supplemental Coupon” approximately Supplemental Coupon” approximately
1.5 to 2.0%1.5 to 2.0%