Short-term Financing Options
California Debt and Investment Advisory Commission
With
Betsy Kiehn, Vice President, Stifel Nicolaus & Co.
Debra Saunders, Vice President, Fidelity Capital Markets
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Provide interim short term financing for capital projects ... Provide long-term project funding at short-term interest rates ...
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2022/2023
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Short-term Financing Options
California Debt and Investment Advisory Commission
With
Betsy Kiehn,Vice President, Stifel Nicolaus & Co.
Debra Saunders,Vice President, Fidelity Capital Markets
Introduction: Short Term Financing Options
What is “short-term”?
− Obligations that are remarketed or become due over an interim period
• 397-day maximum to meet rule 2a-7 for money market fund eligibility
For what purpose is short-term debt issued?
− Cash flow financing
• Provide working capital to pay operating expenses
− Bridge financings
• Provide interim short term financing for capital projects
− Permanent financings
• Provide long-term project funding at short-term interest rates
TRANs, RANs, and GANs
Notes issued in anticipation of receiving future tax receipts or
revenues
− Purpose: used for cash flow or capital projects
− Benefit: smooth out inconsistent revenue streams like property tax receipts
or grants
− Risks: short term and fixed repayment require careful forecasting of future
cashflows
Bond Anticipation Notes
Notes issued for capital projects. Redeemed with proceeds from
the issuance of long-term bonds
− Purpose: source of interim financing, typically for capital projects
− Benefit: can provide seed financing in advance of a planned long-term
financing
− Risks: market access at maturity, most are structured to rely primarily on the
proceeds of future bonds or note sales for repayment
Variable Rate Debt & Commercial Paper
Variable Rate Demand Obligations (VRDOs or VRDBs)
− Floating rate obligations that have a nominal long-maturity, but a coupon that
resets periodically
- Purpose: used for capital projects
- Benefit: access rates on the short end of the yield curve, retain flexibility to pay off
or restructure debt at any time
- Risks: Third-party liquidity
Commercial Paper
− Short term, unsecured promissory notes, usually backed by a LOC bank, that mature
within 270 days.
Variable Rate Market Update
Market characterized by reduced issuance, historically low rates
Interest rate environment
− Extremely low short-term rates persist; SIFMA
resets at 0.06% week of Jan 11, an all-time low
− Steep yield curve in short end due to
accommodative Fed
Supply and demand
− Significantly diminished overall issuance volume;
indexed bonds increase market share
− Tax-exempt money fund assets decrease by a net
$9bn over past 26 weeks
Credit enhancement landscape
− Liquidity remains more scarce than pre-crisis
− Pricing likely to increase due to Basel III
− Number of providers diminishes and concentration
very high
− Fewer one-stop shops; many providers want
ancillary business
Tax-Exempt Money Market Funds Assets and Fund Flows as of 2/21/
Source: Bond Buyer, ICI & SIFMA. As of 2/21/2012.
0
100
200
300
400
500
600
0
5
10
15
20
25
Feb-08Apr-08Jun-08Aug-08Oct-08Dec-08Feb-09Apr-09Jun-09Aug-09Oct-09Dec-09Feb-10Apr-10Jun-10Aug-10Oct-10Dec-10Feb-11Apr-11Jun-11Aug-11Oct-11Dec-
Fund Assets ($ Billions)
Fund Flows ($ Billions)
Tax-Exempt Money Market Assets
Liquidity Market Update
2011 saw a diminished base of providers and a high volume of facility expirations
Municipal Credit Facilities Schedule of Expirations as of 12/31/
Source: SIFMA.
The field of credit enhancers has
declined from pre-crisis levels
− Major providers: BAML, Barclays, JP Morgan,
Citibank, US Bank, Wells Fargo
− Second tier: Bank of the West, City National,
Northern Trust, RBC, Scotia, Sumitomo
Some credit providers again extending
Standby Agreements in addition to
LOCs
$131 billion of credit facility expirations
in 2011; $68 billion scheduled for 2012
Basel III likely to result in higher costs
and greater scarcity 0
2
4
6
8
10
12
14
16
18
Jan 2011 Aug 2011 Mar 2012 Oct 2012 May 2013 Dec 2013
$ Billions
SBPA LOC
Liquidity Landscape Changes
Top 10 Letter of Credit Providers 2009
Top 10 Letter of Credit Providers 2010
Top 10 Letter of Credit Providers 2011
LOC Bank
Par Amount (Millions)
Number of Issues LOC Bank
Par Amount (Millions)
Number of Issues LOC Bank
Par Amount (Millions)
Number of Issues JP Morgan Chase $3,581.60 50 JP Morgan Chase $1,981.30 28 Citibank $3,618.00 4 Wells Fargo Bank 3,021.30 62 Bank of America 1,550.10 24 JP Morgan Chase 2,769.30 35 Bank of America 2,900.80 59 Wells Fargo Bank 561.2 17 Wells Fargo Bank 1,419.10 22 U.S. Bank 2,848.50 62 TD Bank 431.6 4 Bank of America 901.8 18
SunTrust Bank 1,064.50 16 Citibank 365 5
Gov’t Development Bank of Puerto Rico 699.2 3 BB & T 1,007.90 35 PNC Bank 287.1 9 US Bank 584.7 15 TD Bank 784.3 20 Union Bank 278.1 5 RBC 478.9 5 RBS Citizens 443.6 7 Barclays Bank 210 2 PNC Bank 257.7 11 Citibank 365.5 4 U.S. Bank 207.1 5 Northern Trust 234.4 7 Northern Trust 360 7 RBS Citizens 193.1 2 BNY Mellon 214.2 6
Source: Thomson Reuters
Issuers Continue to Benefit from Short-Term Structures
Illustrative Rates
by Maturity
1 year: 0.18%
2 year: 0.26%
5 year: 0.66%
10 year: 1.86%
30 year: 3.27%
Illustrative Yield Curve AAA-Rated Municipal Market Data (MMD) Index As of February 21, 2012
Source: Thomson.
Maturity
Short-Term Interest Rates Tend to be Lower
SIFMA Index vs. Revenue Bond Index (RBI)
Securities Industry & Financial Markets Association
(SIFMA) Index vs. Revenue Bond Index (RBI)
Source: SIFMA. All bonds in SIFMA Index must be tax-exempt, non-AMT, have $10mm or more outstanding and the highest short-term rating by Moody’s or S&P, and pay interest monthly with interest rate resets occurring on Wednesdays. RBI includes tax-exempt bonds maturing in 30 years with average rating of A1/A+. As of 2/21/2012.
Despite low long term rates, 30-year yield curve is extremely steep
1990 1995 2000 2005 2010
(%)
Bond Buyer 25-Bond Revenue Index SIFMA Index RBI Avg. Since 1989 SIFMA Avg. Since 1989
RBI Average = 5.67%
SIFMA Average = 2.65%
Current RBI = 4.74%
Current SIFMA = 0.17%
Strategies for Issuers of Short-Term Products
Continue to monitor cash positions and revenue trends
− Developing a strategy early on for TRAN issuance helps better position issuers
Evaluate Self-Liquidity Structures
− Market has proven that capacity exists for issuer-balance sheet secured obligations
− Significant cost advantage for strong credits
− Requires indenture flexibility for principal coming due (and put bonds)
− Proven market access required for structures that are remarketed
Continue to solicit new entrants to the credit market
− Fees have declined from peak, but remaining active participants face challenges
- Large market participants face credit capacity with large issuers and market saturation with
investors
- Smaller players can only take on $50-$75mm of any given credit