Governor's Infrastructure Financing Conference - Bank Financing Tools December 10, 2014
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Governor’s Infrastructure Financing Conference Bank Financing Tools December 10, 2014
Notice to Recipient No Fiduciary or Advisory Role Bank of America, N.A.and its subsidiaries and affiliates (“Bank”), is providing the information contained in this document for discussion purposes only in connection with a proposed arm’s-length commercial banking transaction between you and Bank. This information is provided to you pursuant to and in reliance upon the “bank exemption” provided under the municipal advisor rules of the Securities and Exchange Commission, Rule 15Ba1-1 et seq. Bank is acting for its own interest and has financial and other interests that differ from yours. Bank is not acting as a municipal advisor or financial advisor, and has no fiduciary duty, to you or any other person pursuant to Section 15B of the Securities Exchange Act of 1934. The information provided in this document is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934 and the municipal advisor rules of the SEC. Bank is not recommending that you take an action with respect to the information contained in this document. Before acting on this information, you should discuss it with your own financial and/or municipal, legal, accounting, tax and other advisors as you deem appropriate. If you would like a municipal advisor in this transaction that has legal fiduciary duties to you, then you are free to engage a municipal advisor to serve in that capacity. 2
Bank of America Merrill Lynch
Rate Environment is Fluid but Still Attractive
Long-Term Municipal Rates
10Y MMD
Average 3.63%
6.00% High 5.37% 4.50%
Low 1.47%
Current 2.15% 4.00%
5.00%
3.50%
4.00% 3.00%
2.50%
3.00%
2.00%
2.00% 1.50%
1.00%
1.00%
2008
2011
2014
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2009
2010
2012
2013
Bond Inflows and Outflows Rate Forecast
STREET MEDIANS
2
Metric Current 2014Q4 2015Q1 2015Q2 2015Q3
Inflows
$ Billions
1 Fed Fund Rate 0.25% 0.25% 0.25% 0.40% 0.65%
0 3-Month LIBOR 0.24% 0.29% 0.35% 0.52% 0.77%
2YR T-Note 0.52% 0.58% 0.80% 1.05% 1.29%
Outflows
(1)
10YR T-Note 2.24% 2.56% 2.71% 2.89% 3.08%
(2) 30YR T-Note 2.95% 3.24% 3.39% 3.59% 3.74%
(3)
(4)
(5)
Jan-12 Dec-12 Dec-13 Nov-14
__________________
Note: As of 11/25/14
3Municipal Market Update
Current Yield Curve Historical 5-year MMD vs. 65% LIBOR
4.00% 65% LIBOR 5-yr MMD Spread Average Spread
2.00%
UST MMD 65% LIBOR
0.40%
3.00%
1.50%
0.20%
2.00%
1.00%
1.00% 0.00%
0.50%
0.00%
0.00% -0.20%
0 3 5 7 9 11 13 15
01/03/2012 01/22/2013 01/14/2014 11/25/2014
Years to Maturity
Regional Benchmark Municipal Bonds: State General Obligation Tax-Exempt Issues
Current 5-Year Secondary Market Yields Historical Indicative 5-Year Yields (YTD)
Ratings
Issuer (Moody’s/S&P/Fitch) 5-Year Indicative Yield 2.50%
GA TX WA CT CA
State of California Aa3/A+/A 0.87% 2.00%
1.50%
State of Connecticut Aa3/AA/AA 0.98%
1.00%
State of Georgia Aaa/AAA/AAA 0.80%
0.50%
State of Texas Aaa/AAA/AAA 0.86%
0.00%
1/2/2013 6/7/2013 11/8/2013 5/1/2014 11/25/2014
State of Washington Aa1/AA+/AA+ 0.77%
___________________
4 Sources: JJKenny as of 11/25/14Municipal Market Update
Other Market Factors
Yield Curve Remains Steep
“The Headlines”
Meredith Whitney
Tapering
Detroit Bankruptcy
Sequestration
New Fed Chair
Ebola
Market Issuance is Down (4.5% YTD but gap closing)
Emergence of the Bank Municipal Financing Market
5Bank Financing Market
Market has exploded
2004: $ 42.3B*
2014: $216.2B*
Why?
Healthy Bank Balance Sheets
o Overall loan demand is down
o Significant appetite for municipal assets
Bond Market Disruptions
Cost-Efficient Execution
Minimal Disclosure/Rating Requirements
Shifting Regulatory Environment (Basel III)
Unilateral Demand for Taxable and Tax-Exempt Assets
*FDIC Data
6Bank Financing Market
Primary Bank Products (Taxable or Tax-Exempt)
On-Balance Sheet Loans
o “Direct Placements”
o “Private Placements”
o “FRN’s”
Letters of Credit and Liquidity Facilities
o “SBPA’s”
o “VRDN’s” or “Low Floaters”
Leasing
o “Equipment Notes”
o “Private Placements”
o “Moral Obligations” (Subject to Appropriation)
7Bank Financing Market
On-Balance Sheet Loans
Direct Purchase SIFMA & Libor-based Index Floaters
Revolving Credit Facilities
Non-Revolving Short-Term Credit Facilities (Project Support)
Direct Purchase Term Loans
Forward-Starting Direct Purchase Loans
8Bank Financing Market
Direct Purchase Bank Financings (Private Placements)
Purpose New money, refunding, or combined
Security G.O. pledge and revenue pledge, with other structures considered on an individual basis
Structures Traditional fixed rate loans, short-term notes, floating rate index notes, and other structures
Term/Amortization Customarily 10 to 15 years with preference for level amortization
Rate Fixed or floating rate with ability to lock in rates up to 24 months in advance of closing
Tax-Status Taxable or Tax-Exempt
Size $10 to $100 million+
Optional Redemption Variability amongst banks. Multiple options are available.
9Bank Financing Market
Letters of Credit and Liquidity Facilities
Bank’s Credit (Letter of Credit)
Your own Credit (Liquidity Facility or SBPA)
o Market still exists
o Existing deals trading in line with market
o Regulatory Impacts (Basel III)
10Bank Financing Market
“Leasing”
Equipment (3-10 years)
Energy Efficiency Assets (10-15+ years)
o Very efficient execution
o Most banks have a subsidiary that buys these assets
o Deals typically subject to appropriation
o Security interest in the equipment
11Bank Financing Market
Public Sale Direct Placement
• Potentially lower rates at many • Reduced cost of issuance
points across the yield curve • Ease of execution / speed to market
• Longer terms: 20+ yrs are common • No public disclosure
• Pricing transparency • No ratings required
Benefits • Rate lock flexibility (ability to lock in
rates up to 2 years prior to closing)
• Flexible call provisions
• Flexible amortization structure and
term
• Disclosure requirements • Loan may accelerate in the event of
• Rating requirements default
• Longer lead time prior to pricing • Potential increased rating agency
• Potentially less efficient forward scrutiny in the future
Considerations
delivery market in current • Disclosure requirements could be
environment mandated
• Typically higher costs of issuance, • Cost/yield protection
including underwriter’s discount
12Direct Funding Option for Municipalities
Term Loans – Direct Purchase (Fixed or Variable Rate)
Direct Purchase
Summary A County needs to issue a bond with a strong but complicated credit profile, the need
for an aggressive call provision, and the desire to avoid public ratings with a quick
closing.
Advantages Bank purchases the County bond directly as a private placement fixed rate term loan
Financing terms provide desired flexibility:
Five-year call
Bond is funded 30 days quicker than a publicly offered bond issue
No public bond rating is obtained
In addition to meeting the County’s objectives, transaction costs are reduced due to:
No offering document preparation fees, no bond rating, no underwriting fee, no
bond insurance, and no trustee fees
Future time/costs will be reduced, since annual disclosure reports/”material event”
filings are not required
Risks/ Potential increased rating agency scrutiny
Considerations
Interest rate risk if variable
May accelerate in event of default
13Direct Funding Option for Municipalities
Direct Purchase Index Floater
Direct Purchase Index Floater
Summary Wastewater System is concerned about exposure to bank downgrades on variable rate
debt and desires a simpler program to maintain variable rate exposure
Advantages Direct Purchase Index Floater refinances all of the System’s outstanding Variable Rate
Bonds
The facility is issued under the System’s existing indenture.
Structured as a three year soft put tenor with a three year term-out, and priced at an
index interest rate defined as a % of LIBOR plus a spread.
Index floater is purchased directly by bank with no disclosure or ratings required to save
the Authority time/money.
No risk of increased pricing from bank downgrades; no put risk due to market.
disruptions or bank downgrades; reduced exposure to Basel III increased cost provisions.
The System expects significant savings due to favorable credit spreads and elimination of
remarketing fees and rating agency costs.
Risks/ No risks materially different from publicly-offered bank-backed variable rate programs,
Considerations which include:
Rollover/ refinancing risk at term
Interest rate risk
May accelerate in event of default
14Direct Funding Option for Municipalities
Revolving Credit Facility
Revolving Credit Facility
Summary Transportation authority desires to replace existing Commercial Paper program due to
administrative burdens.
Advantages Bank refinances all of the Authority’s outstanding Commercial Paper Program with a Revolving
Credit Facility.
The Revolving Credit Facility issuance is simplified because it is issued under the Authority’s
existing Commercial Paper indenture.
The Revolving Credit Facility provided the following flexibility:
Structured as a three year facility and priced at a % of LIBOR plus a spread, with three-year
term-out feature.
Available rate periods include daily, or one, two, three, or six month LIBOR
Authority may issue, repay, and reborrow over term of facility.
Structure provides for lower cost since fees are divided between drawn and undrawn amounts
Credit Facility is placed directly with Bank, so no disclosure document or ratings required.
No risk of increased rates from bank downgrades. No put risk due to market disruptions or bank
downgrades.
Risks/ No risks materially different from publicly-offered bank-backed CP programs, which include:
Considerations Rollover/refinancing risk at term
Interest rate risk
May accelerate in event of default
15Direct Funding Option for Municipalities
Non-Revolving Credit Facility
Non-Revolving Credit Facility
Summary A Fire Protection District needs to build several fire stations but does not know the amount of
funding needed due to uncertain land costs. It is expected that the design/construction period
will last at least two years.
Advantages Bank provides a Non-Revolving Credit Facility that allows the District to draw down funds as
needed for construction.
The bond size will be set with certainty once construction is finalized.
Negative arbitrage is eliminated.
District is able to benefit from lower variable interest rates instead of higher long-term fixed
rates during the construction period.
The Non-Revolving Credit Facility provided the following flexibility:
Structured as a three year facility and priced at a % of LIBOR plus a spread, with three-year
term-out feature.
Available rate periods include daily, or one, two, three, or six month LIBOR.
Structure provides for lower cost since fees are divided between drawn and undrawn amounts.
Risks/ Rollover/refinancing risk at maturity
Considerations Interest rate risk
May accelerate in event of default
16Direct Funding Option for Municipalities
Leasing
Leasing
Summary A School District has an old heating/cooling system that is inefficient and costly to
operate. They don’t have the funding to replace the entire system.
Advantages Working with an energy consultant who calculates the savings associated with a
new efficient HVAC system, Bank provides a fix rate term loan to fund the new
system.
No upfront costs to the school district.
The debt service costs on the lease are paid for out of the energy savings, with
additional annual savings flowing to the district.
District may be able to utilize local and federal energy efficiency rebate
programs.
No initial or on-going bond costs.
Risks/ Interest rate risk, if variable rate used.
Considerations
17Questions?
Kevin M. Larkin Mark Tanis
Senior Vice President Senior Vice President
Bank of America Merrill Lynch Bank of America Merrill Lynch
757-213-8243 540-983-4826
kevin.larkin@baml.com mark.tanis@baml.com
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