Bureau of Bond Finance

Issuing the Bonds

BUILT BY BONDSBUILT BY BONDS

““Size” the DealSize” the Deal

Define the project needs Find out how much money

the borrower needs

Bureau of Bond FinanceBureau of Bond Finance

The Bonding ProcessHow does the Bureau accomplish

its mission

Authority/State

Underw riters Bondholders

Borrow er

Bonds Bonds

$$ $

LoanAgreem ent

Negotiated Sale

Timing is Everything!Timing is Everything!

Find out when the borrower needs the money

Work with team members to develop a schedule to ensure the borrower receives the money when needed

Schedule of Events

Completed Event ParticipantsJune 19 Yes Bank approves letter of credit. LOC & BOR

July 15 Yes Conference call with Working Group to describe theProject, plan of finance, and schedule of meetings.

All

Aug - firsthalf of month

yes Borrowers Board of Trustees’ adopts Bond AuthorizingResolution.

BOR & CC

Aug 8th yes Bond Counsel distributes 1st draft of bond and trustdocuments, and TEFRA Notice.

BC

Aug 8th yes First draft of front portion of the Preliminary OfficialStatement (POS) circulated

BC

Aug 18th yes 1:00 pm – First Working Group session at Bond Counsel’soffice, Lansing, MI.

All

Aug 25th

(week of)Distribute 1st draft of Reimbursement Agreement, and formof Letter of Credit.

CB

Aug 22nd yes Circulate 2nd draft of documents to Working Group BC, AG,

Aug 27th 11:00 am Second Working Group session; dial-in conf call. All

Sept 1st

(Week of)Attorney General circulates 1st draft of the Authority’sResolution – 2 weeks in advance

AG

Sept 1st

(Week of)Circulate revised 2nd draft of documents to Moody’s. BC & BC

Sept 3rd Publish TEFRA notice (14-days min. prior to meeting.) AU

Sept Corporate Counsel circulates form of Approving Opinion. CC

Sept 18th TEFRA public hearing – Lansing. AU

Sept 19th Receive rating confirmations UW

Sept 29th

(Week of)Due diligence BC, CC & BOR

Sept 29th

(Week of)If necessary, conference call regarding final form ofdocuments.

All

Sept 23rd 3:00 pm –Authority public meeting - Lansing - adoptParameters Resolution.

BOR, BC, AG, &UW

Oct 2nd Final comments taken for the POS. BC

Oct 3rd Print and mail Preliminary Official Statement BC

Oct 14th 4:30 pm preliminary pricing conference call UW, BOR, AU

Oct 15th 9:00 am pricing conference call10:00 am open order period for the Bonds

UW, BOR, AU

Oct 16th Sign Bond Purchase Agreement BOR, AG, & UW

Oct 22nd Pre-closing @ Bond Counsel All

Oct 23rd Closing & delivery UW, BC, TRU, &AG

Participants:AG Office of the Attorney GeneralBC Bond CounselCC Corporate Counsel -UW UnderwriterBOR BorrowerAU Issuer/AuthorityTRU TrusteeCB Counsel to the BankLOC Letter of Credit Provider

Select the TeamSelect the Team

Underwriters: sell/place the bonds with investors

Bond counsel: provides legal advice as well as opinions on the legality and taxability of bonds

Trustee: manages the flow of funds

Financial Advisor: independent third party that advises the borrower regarding the terms and structure of the deal

Finance Team MembersFinance Team Members

Issuer Issuer’s CounselFinancial AdvisorBond CounselUnderwriter

Underwriter’s Counsel Trustee Rating Agencies Credit Enhancement

Providers

““Structure” the DealStructure” the Deal

Determine the maturity of the bonds - When the investor is repaid the principal on their investment

Determine the security for the bonds - The strength of the security will affect the interest rate on the bonds

Ascertain the most cost effective interest rate mode, income tax status, and terms of re-payment

Debt InstrumentsDebt Instruments

A bond is written evidence of a borrower’s obligation to pay principal and interest at specified times and dates on money borrowed

BONDS (Long-Term Financing)

NOTES (Short-Term Financing)A note is essentially the same as a bond except that

the debt must be repaid within one year

Types of Types of BondsBonds

Municipal Bonds (when issued for a public purpose project) are exempt from federal and state income taxes.

General Obligation (G.O.) Bonds are secured by the “full faith and credit” of the issuer. The holders of a G.O. bond have the right to establish a tax levy or appropriation in order to satisfy the issuer’s obligation.

Revenue Bonds are payable from specific sources of revenues, other than property taxes, and are not backed by the “full faith and credit” of the issuer.

Forms of Municipal BondsForms of Municipal Bonds

Serial Bonds - Repayment of principal on an annual

basis

Term Bonds - Single repayment (maturity) of principal

Capital Appreciation Bonds (CABs) - Bonds that pay no interest prior to their maturity. The difference between the purchase price and the final maturity value represents the interest earned on the bond

Variable Rate Demand Bonds (VDRO’s) - Bonds issued with a variable interest rate. Investors have the right to ‘put’ the bonds back to the issuer.

VDRO’s require liquidity in the form of a letter of credit.

Types of NotesTypes of Notes

Bond Anticipation Notes (BANs) are issued to obtain interim financing for projects that will eventually be financed through the sale of long-term Bonds.

Tax and Revenue Anticipation Notes (TANs) are issued in anticipation of tax receipts or other revenues.

Tax-Exempt Commercial Paper (TECP) is a flexible form of short-term financing that is used to smooth cash flow inefficiencies and has a maximum maturity of 270 days.

More ConsiderationsMore Considerations

Rating - Obtain a credit rating from an independent third party to verify the credit worthiness of the borrower

Insurance - Guaranteed payment of the bonds from a third party

Letter of Credit - Guaranteed payment from a bank

Assist the borrower in considering the purchase of additional security

Credit StructureCredit Structure

Credit Ratings

Moody’s Investors Service Standard and Poor’s (S&P) Fitch Ratings

A credit rating agency evaluates the “credit worthiness” of the borrower and the ability of the borrower to repay the debt.

Three independent companies publish credit ratings upon request for both corporate and municipal debt. They are:

Short-Term Credit RatingsShort-Term Credit Ratings

Category S & P Moody’s FitchVery Strong S&P-1 MIG-1 F-1

Satisfactory S&P-2 MIG-2 F-2

Satisfactory but susceptible MIG-3 F-3

Speculative S&P-3 MIG-4 F-4

Long-Term Credit RatingsLong-Term Credit Ratings

Category S & P/Fitch Moody’s Highest AAA Aaa

Very Strong AA+ / AA / AA- Aa1 / Aa2 / Aa3

Strong but susceptible A+ / A / A- A1 / A2 / A3

Adequate BBB+ / BBB / BBB- Baa1 / Baa2 / Baa3

Vulnerable - “Junk” Status BB+ / BB / BB- Ba1 / Ba2 / Ba3

B+ / B / B- B1/ B2 / B3

CCC+ / CCC / CCC- Caa1 / Caa2 / Caa3

Lowest Grades CC / C / D Ca / C

Draft the DocumentsDraft the Documents

Board Resolutions

Official Statement

The Bonds or Notes

Internal Revenue Service Documents

Sell the DealSell the Deal

Distribute offering document (Official Statement)

Underwriters market to banks, funds, and individuals

State (Authority) signs the purchase agreement

Sale of the BondsSale of the Bonds

Competitive Sale: the issuer sets a date for the sale and accepts sealed bids from potential buyers. At a specified date/time the issuer opens the bids and awards the bond sale to the lowest interest cost bidder.

Negotiated Sale: the issuer selects an underwriter who then structures and sells the bond issue.

Competitive vs. Negotiated Sale

Mutual Funds Insurance Companies Commercial Banks Individual Investors commonly

called “retail” investors

Who Buys Municipal BondsWho Buys Municipal Bonds

Holders of Municipal DebtHolders of Municipal Debt

35%

16%

11%

5%

16%7%

10%

Individuals

Mutual Funds

Insurance Companies

Bank Personal Trusts

Money Market Funds

Commercial Banks

All Others

Close the DealClose the Deal

Sign bond purchase agreement

Obtain legal opinions Finalize offering

document

Show Me The MoneyShow Me The Money

Once the documents have been signed and the deal has been closed, the funds (money) is sent via wire transfer

Release bonds to the investors