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© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Harrisburg, Pennsylvania
June 30, 2016
Fundamentals Of Municipal Bond...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
What is a Municipal Bond Or Note?
 Municipal bonds (“munis”) are deb...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Why Use Municipal Bonds?
 If properly structured, interest on munici...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Types Of Municipal Bonds
 Government bonds (general obligation bonds...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
General Obligation Bond/Note
 Pledge of the full faith, credit and t...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Revenue Bond/Note
 Generally, not a tax pledge;
 Supported by the s...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Types Of Municipal Borrowings
 To finance capital projects – new roa...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
What Is a Refunding?
 Issuer issues new debt to refinance an outstan...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Current Refunding
 Redemption or a refinancing within 90 days of cal...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Advance Refunding
 Redemption more than 90 days prior to call date
...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Financing Team Participants
Underwriter /
Investment Banker
Bond Trus...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Principal Documents
Resolution/Ordinance: Prepared by Bond Counsel; l...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Sample Financing Timeline
Weeks 1 – 2
Structure Bond Issue
Weeks 3 – ...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Post Issuance Compliance
 Priority matter for the IRS
 Elements of ...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Post Issuance Compliance Policies
 Adopted by Formal Resolution of G...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Continuing Disclosure
 Under SEC Rule 15c2-12, underwriter must
reas...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Scope Of Continuing Disclosure
 Annual financial information/stateme...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Material Events Include:
 Principal and interest payment defaults;
...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Electronic Municipal Market Access ("EMMA")
 Became effective July 1...
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
© 2016 McNees Wallace & Nurick LLC
www.mcneeslaw.com
Contact Information
Tim is a public finance and tax attorney at McNee...
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Fundamentals of Municipal Bond Finance

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Presented to the Pennsylvania State Association of Boroughs on June 30, 2016, learn about the common elements of municipal finance. Whether you are new to a municipal bond transaction or just looking for a refresher, this presentation provides an excellent foundation.

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Fundamentals of Municipal Bond Finance

  1. 1. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Harrisburg, Pennsylvania June 30, 2016 Fundamentals Of Municipal Bond Finance Pennsylvania State Association of Boroughs 570 Lausch Lane, Suite 200 T 717-581-3723 dkreiser@mcneeslaw.com Donna L. Kreiser, Esquire Financial Services and Public Finance Group Lancaster, PA 17601 100 Pine Street T 717-237-5462 thorstmann@mcneeslaw.com Timothy J. Horstmann, Esquire Financial Services and Public Finance Group Harrisburg, PA 17101
  2. 2. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com What is a Municipal Bond Or Note?  Municipal bonds (“munis”) are debt instruments issued by local governments or their agencies to finance public- purpose projects  A bond is a debt instrument that is typically sold to the public and is negotiable (tradable)  An investor who buys a municipal bond lends money to an issuer who in turn promised to pay the investor a specified amount of periodic interest and to repay the principal amount on a specified maturity date  A note is a loan privately held by a traditional lending institution  Commonly referred to as a note, bank loan or direct bank placement
  3. 3. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Why Use Municipal Bonds?  If properly structured, interest on municipal bonds in most cases is exempt from federal, state and local taxation (depending on jurisdiction of investor)  Investor is willing to receive a lower interest rate because they will not have to pay income tax on the interest  Thus provides a low cost of funding of governmental projects – delivers efficient market-based pricing
  4. 4. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Types Of Municipal Bonds  Government bonds (general obligation bonds) – provide funding for permissible governmental projects  Conduit bonds – issued by government issuers, the proceeds of which may be loaned to authorized third parties
  5. 5. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com General Obligation Bond/Note  Pledge of the full faith, credit and taxing power of municipality  Supported by the government issuer's ability to levy taxes  Bondholders can go to court to force government issuer to raise taxes, if necessary, to pay debt service
  6. 6. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Revenue Bond/Note  Generally, not a tax pledge;  Supported by the specific revenue stream of the facility/enterprise/system being financed;  Most common types: water and sewer systems;  Other types: parking systems, electric systems, airports, transportation systems, toll revenue
  7. 7. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Types Of Municipal Borrowings  To finance capital projects – new roads, new schools new hospitals, etc.  To finance cash flow needs (subject to state law and tax law restrictions)  To refinance outstanding debt (refundings)
  8. 8. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com What Is a Refunding?  Issuer issues new debt to refinance an outstanding obligation  Refundings are used to (i) defease or eliminate restrictive covenants, or (ii) lower debt service payments  Issuers may refinance outstanding obligations under the optional redemption provisions (call date) established during the original financing  Optional redemption permits a borrower to refinance or prepay bonds prior to maturity  Timing of the bond refunding as compared to the call date determines whether the transaction is deemed a “current” or “advance” refunding
  9. 9. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Current Refunding  Redemption or a refinancing within 90 days of call date  Allows an issuer to obtain the benefit of lower interest rates when the outstanding bonds are currently callable o Proceeds from the sale of the refunding bonds (at lower rate of interest) are used to redeem the prior bonds (at a higher rate of interest) o The outstanding debt is considered defeased after the refunding is completed o No restrictions on number of times a particular bond issue can be currently refunded Issuer Refunding Bonds Prior Bonds Retired on call date Proceeds redeem prior bonds
  10. 10. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Advance Refunding  Redemption more than 90 days prior to call date  Allows an issuer to obtain the benefit of lower interest rates when the outstanding bonds are not currently callable o Proceeds from the sale of the refunding are used to purchase securities, which are deposited into an escrow account o The escrow account is structured so that the principal and interest earned on the securities are sufficient to pay all principal and interest on the outstanding bonds up to and including the call date o The outstanding debt is considered defeased after the refunding is completed o Bond issue limited to one advance refunding (Tax Reform Act of 1986) Issuer Prior Bonds Refunding Bonds Escrow Fund Retired on call date Pays principal and interest payments on Prior Bonds until Call Date Proceeds purchase securities for deposit into Escrow Fund
  11. 11. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Financing Team Participants Underwriter / Investment Banker Bond Trustee / Paying Agent / Registrar Bond Counsel  Primary responsibility is the sale and distribution of bonds to investors  Underwrite or purchase unsold balances to lock interest rates for the Issuer  Coordinates Financing Team and closing activities  Drafts underwriting documents  Generates and reviews bond documents required to complete financing  Provides opinions as to tax exemption and issuance of the Bonds.  Coordinates legal activities with Solicitor  Coordinates Closing  Bank which holds the proceeds of the bonds and the funds established under bond documents  Disburses proceeds  Collects payments from Borrower and makes principal and interest payments to bondholders  Enforces Borrower’s obligations for the benefit of bondholders Rating Agency  Reviews structure of transaction and Borrower’s credit strengths and vulnerabilities  Applies a formal rating to the Bonds Borrower’s Counsel (Solicitor)  Lawyer responsible for protecting the interests of the Borrower  Works with Bond Counsel in drafting resolutions/ordinances and certain opinions Bond Insurer  Company that supports a borrower’s credit in exchange for a fee or a premium, in the form of enhancement through a bond insurance policy  May not be applicable depending on underlying credit rating
  12. 12. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Principal Documents Resolution/Ordinance: Prepared by Bond Counsel; lays out the terms of the bonds and all the mechanics of the bond issue and authorizes the issuance of the bonds Bond Purchase Agreement: Prepared by the Underwriter or Underwriter's Counsel. In this agreement, the Underwriter agrees to purchase, or underwrite, the bonds from the Borrower and to offer the bonds to potential investors Preliminary Official Statement (“POS”): Prepared by the Underwriter or Underwriter’s Counsel (and/or the Financial Advisor) and the Borrower. It describes the transaction, the Borrower, and the credit enhancer, if applicable. It is used primarily by the Underwriter to sell the bonds to investors Official Statement (“OS”): Prepared by the Underwriter or Underwriter’s Counsel (and/or the Financial Advisor) and the Borrower. This is the primary disclosure document and reflects the final terms of the transaction such as interest rates and redemption provisions. Essentially the POS but with the final sales results Bond Opinion: Prepared by Bond Counsel, represents the legal interest of bond holders and addresses the main legal issues: that the bonds constitute legal, valid, and binding obligations of the borrower, and that the interest on the bonds is exempt from federal income taxation under applicable tax laws Continuing Disclosure Agreement: Agreement by the borrower to disseminate annual financial information and material event disclosures to the public
  13. 13. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Sample Financing Timeline Weeks 1 – 2 Structure Bond Issue Weeks 3 – 7 Arrange Sale of Bonds Week 8 Conduct Bond Sale Weeks 9 – 12 Coordinate Settlement  Appoint Professionals  Kickoff Meeting to discuss financing parameters and timing  Develop Structuring Options  Begin drafting legal documentation and offering document  Begin preparing Rating Agency credit package  Prepare schedule of events  Develop the terms of the bond sale  Conduct Financial Analysis  Circulate draft bond documents  Submit credit packages to bond insurers (if applicable)  Determine trustee/paying agent/registrar  Begin marketing of bonds  Print and Mail Preliminary Official Statements  Update Issuer on market conditions  Prepricing update on market conditions  Price and Market Bonds  Sign Bond Purchase Agreement  Finalize Official Statement  Submittal of DCED package  Print and Mail Official Statement  Finalize Bond Documents  Pre-Closing and Closing
  14. 14. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Post Issuance Compliance  Priority matter for the IRS  Elements of a Post Issuance Compliance Plan:  Address post issuance tax compliance  Address post issuance disclosure requirements  Address other bond document requirements *GOOD IDEA TO HAVE POST ISSUANCE COMPLIANCE POLICY EVEN IF ISSUER ONLY DOES BANK LOANS, BECAUSE ISSUER MUST INDICATE ON IRS FORM 8038-G WHETHER IT HAS A POLICY
  15. 15. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com
  16. 16. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Post Issuance Compliance Policies  Adopted by Formal Resolution of Governing Body  Appointment of Responsible Party for Monitoring Compliance  Annual Compliance Checks – nature of compliance activity  Retention of Records  Awareness of Remedial Actions
  17. 17. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Continuing Disclosure  Under SEC Rule 15c2-12, underwriter must reasonably determine that the issuer has undertaken in writing to provide continuing disclosure  Issuer executes a Continuing Disclosure Agreement or Continuing Disclosure Certificate (Requirements also stated in Official Statement)
  18. 18. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Scope Of Continuing Disclosure  Annual financial information/statements – annual budgets and other relevant financial information (determined, in part, by nature of financing);  Material event notices  Disclosures must be made within particular time frames
  19. 19. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Material Events Include:  Principal and interest payment defaults;  Non-payment related defaults;  Rating changes;  Defeasance of bonds;  Fifteen total events
  20. 20. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Electronic Municipal Market Access ("EMMA")  Became effective July 1, 2009  Annual financial information and any material event notices must be submitted in an electronic format to the MSRB through its web-based system known as EMMA (emma.msrb.org)
  21. 21. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com
  22. 22. © 2016 McNees Wallace & Nurick LLC www.mcneeslaw.com Contact Information Tim is a public finance and tax attorney at McNees. He is a member of the Firm’s Public Finance Group and also practices in the Corporate & Tax, Municipal Recovery, and Public-Private Partnerships groups. Tim has spent his entire legal career advising clients in matters related to state, local and federal taxation. He advises banks and financial institutions, governmental issuers, school districts and nonprofits on the structuring of taxable and tax-exempt revenue bond and general obligation bond financings for a variety of capital projects, including manufacturing facilities, hospitals and other health care facilities, parking facilities, schools and higher education institutions and water and sewer projects. He has also advised both the buyers and sellers of public assets in the context of public-private and public-public partnerships. Tim writes extensively on matters of interest to the tax-exempt bond community, and has authored articles for publication in a variety of sources, including The Legal Intelligencer. He regularly speaks on topics of municipal finance and tax law at seminars sponsored by various state organizations, including the Pennsylvania State Association of Boroughs, the Pennsylvania Municipal Authorities Association, and the Pennsylvania Bar Institute. Donna is co-chair of the Financial Services and Public Finance group and also practices in the Municipal Recovery and Public-Private Partnerships groups. Donna focuses her practice on municipal and project finance law, including economic development, transportation, government, health care, and education. She serves as bond counsel, underwriter's counsel, trustee's counsel, bank counsel and borrower's counsel for state, county, and municipal clients and for economic development authorities and non-profit entities in the implementation and financing of major capital initiatives that benefit public, private and non-profit entities (including, for example, hotel, hospital and health care facility, university and water and sewer transportation and treatment facility projects) and debt refinancings for public, for-profit and non-profit organizations. In addition, Donna counsels issuers on general obligation borrowings. Donna's practice also includes commercial lending and business transactions. As former deputy general counsel in the Pennsylvania Governor's Office of General Counsel (OGC), Donna was OGC's chief legal liaison with the Pennsylvania Housing and Finance Agency, the Department of Community and Economic Development, and the Pennsylvania Infrastructure Investment Authority. She was OGC's liaison on all public finance transactions, working directly with the issuing agencies. 100 Pine Street T 717-237-5462 thorstmann@mcneeslaw.com Timothy J. Horstmann, Esquire Financial Services and Public Finance Group Harrisburg, PA 17101

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