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PHOENIX PUBLIC
FINANCE
William C. DavisManaging Director
(602) [email protected]
Peter J. PhillippiManaging Director
(602) [email protected]
James B. Sult, Jr., VP(602) 808-5425
Greg G. Swartz, VP(602) 808-5426
Logan K. McKenzie, Associate(602) 808-5422
Helen Cregger, VP(303) 820-5856
PUBLIC FINANCE
BOND RATING BASICS
May 11, 2007
2
OVERVIEW
OVERVIEW
Understanding Bond Ratings
Understanding the Rating Process
What to Expect from your Banker
A Look at Arizona Ratings
A Surprise
3
BOND RATINGS
A relative measure of risk to bondholders that reflects an issuer’s willingness and ability to repay debt on time and in full.
Measure of financial strength that takes into account all of the resources of an issuer within given security provisions.
A measure of both what is known and unknown – a measure of uncertainty.
Ratings are comparative and relative.
Ratings are highly definitional – Anything Baa and above signifies essentially no probability of default; not just Aaa.
4
BOND RATINGS
While sound financial management is always a positive, rating criteria don’t necessarily correspond with your management priorities or the concerns of your community.
Ratings are certainly not intended to encapsulate all of the qualities of your community.
Ratings are larger than any particular individual, administration or legislative body.
5
BOND RATINGS
Public Finance Ratings
Ratings: Long Term Quality
Investment Grade
Aaa/AAA Highest
Aa1/Aa2/Aa3AA+/AA/AA-
High
A1/A2/A3A+/A/A-
Upper Medium
Baa1/Baa2/Baa3BBB+/BBB/BBB-
Medium
BelowInvestment
Grade
Ba1/Ba2/Ba3/BB+/BB/BB-
B1/B2/B3B+/B/B-
Speculative Elements
Caa1/Caa2/Caa3CCC+/CCC/CCC-
Danger of/in Default
6
GENERAL OBLIGATION BONDS
Full faith and credit of issuer with a pledge of either unlimited or limited property tax revenues
Generally the safest form of bond issue
Implied G.O. Rating = Issuer Rating
7
GENERAL OBLIGATION BONDS
Economy/Taxbase/Socio-economic factors
Management
Debt
Financial Performance
8
LEASE OBLIGATIONS
Typically secured by some form of general fund pledge to make lease payments for an asset
Issuing “shell” corporations
Specific asset lease vs. master lease
Value of asset(s) vs. par amount
9
LEASE OBLIGATIONS
Essentiality
Fixed asset vs. equipment
Rating typically “notched” off the GO/IR
General fund lease payment burden
Other Legal Covenants
• Insurance
• Reserve Funds
10
EXCISE TAX REVENUE BONDS
A gross or specific pledge of excise tax revenues
Excise tax revenue bonds
• Moody’s – rating “notched” off GO/IR
• These are typically general fund revenues
• Operations typically highly dependent upon these revenues for operations
• S&P – strength and consistency of revenue stream more important
• Evaluated separately from GO rating
Dedicated sales tax revenue bonds
• Not typically general fund revenues
• Often voter-approved for specific uses/projects
11
EXCISE TAX REVENUE BONDS
Historical Trend of Revenue Growth
Debt Service Coverage
Additional bonds tests and reserve funds
Non-impairment clauses and other legislative issues
12
ENTERPRISE REVENUE BONDS
Water & Sewer Bonds
Electric Revenue Bonds
Combined System Pledges
Other
13
REVENUE ENTERPRISES – AREAS OF ANALYSIS
Type of System
Economy/Service Area
Financial Performance (Including Key Measures and Ratios)
Management
Capital Needs
Covenants and Other Security Provisions
14
TAX INCREMENT FINANCING
Secured by property tax revenues generated by incremental growth
Redevelopment project areas
Taxpayer concentration and tax appeals
Plan limits
• Sunset date
• Debt limits
• Limits on amounts of incremental revenues which may be collected
15
TAX INCREMENT FINANCING
Additional bonds test
Multiple liens
Pass-through agreements, and housing set-asides
Often a passive revenue stream unless rates can be adjusted
Sometimes backed by broader pledge – other project areas or issuer/parent organization
Legislative issues
16
IMPROVEMENT DISTRICTS
Growing acceptance and activity by rating agencies
Municipal oversight enhances credit quality
Development agreements and step-up provisions can overcome risks
Concentration risks
High debt burden
Competitive tax rates and favorable location also strengthen credit evaluation
17
MMD YIELD CURVE COMPARISON
MMD Yield Curve ComparisonMay 7, 2007
3.50%
3.60%
3.70%
3.80%
3.90%
4.00%
4.10%
4.20%
4.30%
4.40%
4.50%
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
Year
Yie
ld
BAA
A
AA
Insured
AAA
18
MMD YIELD CURVE COMPARISON$100 Million Amortized over 30 Years
19
SELECTED ARIZONA RATINGS*
* Ratings are given in the following order: Moody’s, S&P and Fitch
Municipality GO Excise Tax HURF Water &SewerScottsdale Aaa/AAA/AAA Aa1/AA+ Aa1/AA/AA+Phoenix Aa1/AA+ Aa2/AAA (Sub.) Aa3/AA Aa3/AA (Junior)Tempe Aa1/AAA Aa2/AAA/AAAChandler Aa1/AAA/AAA Aa3/AA-/AA- Aa3/AA/AAGlendale Aa2/AA Aa3/AA+ Aa3/AA A2/AA (Sub.)Tucson Aa3/AA/AA A1 A1/AA+/AA- Aa3/A+/AAFlagstaff Aa3/A+ A1/A+ A1/A+Prescott Aa3/AA- A1Peoria Aa3/AA/AA A1/AA- A2/A/A+Gilbert Aa3/AA- A1/AA- A2/A+/A+Mesa A1/AA- A2/AA A2 A1 (Combined Util.)Prescott Valley A2/A A3/AYuma A2/A/A+ AAvondale A2/A+ A+ A3/A+Sierra Vista A2 A3/AQueen Creek A2AGoodyear A2/A A3 Baa1/BBBCave Creek A2Fountain Hills Aa3 A1Nogales Baa1 Baa2 Baa2Tolleson Baa1Cottonwood Baa1 A
20
ARIZONA CITY MOODY’S RATINGS
0
1
2
3
4
5
6
7
8
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1
# o
f Rat
ings
21
ARIZONA MOODY’S RATINGS
CREDIT CHARACTERISTICS OF ARIZONA CITIES VERSUS NATIONAL MEDIANS
Credits
General Fund
BalanceDebt Ratio
Full Valuation Populati
on
FV Per Capita
Per Capita Income
ArizonaAa Credits
57.0% 3.6% $8,703,087
167,603 $56,583 $22,406
National Aa Credits
24.8% 2.4% $3,010,548
27,324 $108,323
$29,477
ArizonaA Credits
51.2% 3.0% $1,846,444
33,854 $42,038 $19,019
National A Credits
24.0% 2.7% $968,018 13,080 $72,090 $22,488
22
THE RATING PROCESS
Rating committee is not intended to be a mysterious black hole. Rather, its intent is designed to:
• Maintain objectivity
• Maintain consistency among ratings nationally
• Ensure a broad perspective
• Leverage functional expertise of individual analysts
• Ensure quality control
23
THE RATING PROCESS continued
What’s not Fair:
• Asking an analyst what rating he or she is recommending.
• Asking which individuals will comprise the committee.
• Asking how the votes were placed.
24
THE RATING PROCESS continued
What is Fair:
• Asking the analyst for anticipated outcome of committee.
• Asking what credit strengths and weaknesses the analyst intends to highlight to committee.
• Asking the analyst what credits will be presented as comparables to committee.
• Requesting that specific comparables are presented to committee.
• Providing a list of credit strengths to be presented to committee.
• Requesting that a specific individual with unique knowledge of your credit represent at least one member of committee.
• Requesting a site visit or in-person meeting (acknowledging the limits of individual schedules).
25
WHAT TO EXPECT FROM YOUR BANKER
Their assessment of your credit.
Provision of comparable credits.
Benchmarking to enhance decision making.
Assistance in structuring transactions to ensure and maintain credit quality.
An advocate and cheerleader even outside of specific transactions.
Effective intermediary in communications.
26
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