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Summer Educational Event. Presented to:. Capital and Finance Market Trends. July 29, 2013. Donald J. Persinski Managing Director PNC Capital Markets LLC. MSRB G-17 Disclosure.

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July 29 2013

Summer Educational Event

Presented to:

Capital and Finance Market Trends

July 29, 2013

Donald J. Persinski

Managing Director

PNC Capital Markets LLC

Msrb g 17 disclosure
MSRB G-17 Disclosure

PNC Capital Markets (“PNCCM”) is providing the information contained in this document for discussion purposes only in anticipation of serving as an underwriter to the issuer to whom this document is addressed. The information provided herein is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities and Exchange Act of 1934, as amended..

The following disclosures are required by Municipal Securities Rulemaking Board (“MSRB”) Rule G-17, as PNCCM proposes to serve as an underwriter, and not as a financial advisor, municipal advisor or fiduciary to any person or entity, in connection with the issuance and sale of securities for the issuer to whom this is addressed: (i) MSRB Rule G-17 requires an underwriter to deal fairly at all times with both municipal issuers and investors. (ii) An underwriter’s primary role is to purchase securities with a view to distribution in an arm’s-length commercial transaction with an issuer; and an underwriter has financial and other interests that differ from those of such an issuer. (iii) Unlike a municipal advisor, an underwriter does not have a fiduciary duty to an issuer under the federal securities laws and is, therefore, not required by federal law to act in the best interests of that issuer without regard to its own financial or other interests. (iv) An underwriter has a duty to purchase securities from an issuer at a fair and reasonable price, but must balance that duty with its duty to sell those securities to investors at prices that are fair and reasonable. (v) An underwriter will review the official statement, if any, for those securities in accordance with, and as part of, its responsibilities to investors under the federal securities laws, as applied to the facts and circumstances of the transaction.

July 29 2013

Portfolio Management


  • Diversification

  • Risks

  • Duration

  • Liquidity

Debt Portfolio

  • Fixed Rate

  • Variable Rate

  • Short-Term (working capital line)

  • Long-Term (PP&E)

  • Derivatives

  • Public Debt

  • Bank Loans

Investment Portfolio

  • Cash/Money Market Funds

  • Fixed Income – Corporate

  • Fixed Income – US Treasury

  • Equity – US

  • Equity – International

  • Equity – Mutual Funds

  • Alternative Investments


July 29 2013

Sources of Capital

  • Operations – Cash Flow

  • Reserves – Balance Sheet

  • Philanthropy / Capital Campaign / Grants

  • Asset Monetization – Sale of Non Core Assets (Land, Skilled Nursing Facility, etc.)

  • Partnerships, Joint Ventures, Mergers

Capital Markets (Tax-exempt and Taxable Rates)

  • Fixed Rate Bonds

  • Variable Rate Demand Bonds supported by a Letter of Credit

  • Floating Rate Notes

  • Direct Bank Placement

  • Construction Loan

  • Line of Credit (Working Capital or Project Financing)

  • Leases (Capital and Operating)

  • Derivative Products and Strategies


July 29 2013

Healthcare Bond Issuance 30)

The volume of Health Care bond issuance has declined in recent years. Factors contributing to this decline include: uncertainty due to healthcare reform; a tightened credit market; fewer refunding opportunities; and significant growth in bank direct placements.

Note: 2013 data is through June 30.


July 29 2013

Healthcare Bond Issuance: January 1, 2013 – June 30, 2013 30)

Total Par Amount: $195,200,000

St. Luke’s Health System

Doylestown Hospital

Catholic Health East

The Washington Hospital

Hanover Hospital


July 29 2013

Recent Fixed Rate 30)Healthcare Bond Issues


July 29 2013

Most conservative structuring alternative; Eliminates ongoing interest rate risk

Issue with a maturity of up to 40 years; Bonds typically not callable for 10 years

Bonds issued based solely on the credit strength of the borrower

Security, covenants and disclosure may include all, or most of the following:

Revenue pledge, mortgage, debt service reserve fund

Tightened liquidity and capital structure covenants – additional ratios have emerged, including variable rate and short term debt ratios/measures

Quarterly disclosure

Credit rating from multiple agencies

Steepening yield curve

1-year yield has not changed

Current 30-year yield

164 basis point increase since the low on November 30, 2012 (approximately 8 months)

100+ basis point increase since May 15, 2013 (2 months)

Financing Option – Fixed Rate Bonds


Current and historical mmd rates
Current and Historical MMD Rates ongoing interest rate risk


10, 20 and 30-Year Maturity Historical Rates

July 2011- July 2013


30-Year Maturity Historical RatesJanuary 7, 2013 to Present

  • Municipal Market Index (MMD) "Municipal Market Data," is a proprietary yield curve for municipal market (tax-exempt) issues published daily by Thomson Financial Services and widely used as a benchmark for determining interest rates on new issue and secondary market tax-exempt issues.

  • In November 2012, the 30-year MMD maturity fell to its historic low of 2.47%. As of July 19, 2013, the 30-year MMD maturity was 4.14%.


Credit spreads tax exempt healthcare bonds
Credit Spreads – Tax-exempt Healthcare Bonds ongoing interest rate risk

Municipal Market Data High-Grade Yield Curve

  • Industry standard (Both Buy Side and Sell Side)

  • Represents where high-grade, natural Aaa paper is trading

  • The MMD curve serves as a benchmark for municipal bonds just as Treasury bonds do for corporate bonds


July 29 2013

10YR AAA MMD versus 10YR US Treasury Yields ongoing interest rate risk

5/2MMD: 1.66UST: 1.62102%

7/12MMD: 2.66UST: 2.58103%


July 29 2013

Municipal Fund Flows ongoing interest rate riskvs 20 year MMD

  • YTD 2013: $8.5B outflows

  • June 2013: $10.7B outflows


July 29 2013

Variable Rate Alternatives – Key Differentiating Factors ongoing interest rate risk

  • Variable Rate Demand Bonds

  • Letter of Credit (LOC) or Standby Bond Purchase Agreement (SBPA)

  • Renewal Risk

  • Basel III Regulatory Risk

  • Bank Purchased Bonds

  • Priced as spread to percent of LIBOR or SIFMA

  • Limited Put Risk

  • Longer Tenor than Letter of Credit

  • Public Floating Rate Notes (FRN)

  • Newest Product

  • Priced as a spread to LIBOR or SIFMA

  • No LOC or SBPA required


July 29 2013

Municipal Bond Issuance ongoing interest rate risk

Total municipal issuance peaked in 2010 followed by a sharp decline in 2011.

Variable rate issuance has declined following the events of 2008 which heightened awareness of certain risks.





July 29 2013

Total VRDN Market Size ($000) ongoing interest rate risk


July 29 2013

Financing Option – Variable Rate Bonds with Bank Letter of Credit

Variable Rate Demand Obligation (VRDO) with Direct-Pay Letter of Credit (LOC)

  • Short-term multi-mode interest rate reset (daily, weekly, monthly, etc.)

  • Exposure to interest rate risk

  • Produces lower cost of debt when yield curve is normal (upward sloping)

  • Provides the most flexible redemption options

  • The bonds will be sold on the credit strength of the bank providing the LOC

  • LOC terms can be extended 3 to 5 years with annual renewal provisions

    • Interest rates at historically low levels

    • Successful remarketing each week

  • Bank letters of credit may be challenging to procure

    • Fewer options due to credit deterioration throughout the industry

    • Bank renewal concern

    • Pricing may be tiered to rating and/or financial performance

    • Ancillary business may be required


Sifma median maximum and minimum rates 2000 to present
SIFMA – CreditMedian, Maximum and Minimum Rates(2000 to Present)



July 29 2013

Liquidity and Letter of Credit Trends Credit

After spiking in early 2009, liquidity and LOC pricing has declined considerably

  • Depending on Credit Profile, Term and Structure

  • LOC pricing at 150+ basis point in early 2009, now as low as 60 – 125 basis points

    Multi-year commitments now available (1 Year LOCs were common in 2008 and 2009)

    Incremental business expectations have lessened, but continue

    Greater variation in remarketing rates based on liquidity or LOC provider

  • Variation has settled somewhat, but market extremely sensitive

    Fewer acceptable names causing greater concentration

  • Money market eligibility

  • Greater interest in self liquidity issues

  • Exclusion of “Auction Rate Mode”

  • Inclusion of a “Bank Mode”

    • Takes advantage of bank qualification

    • Can include “draw down” provisions

      • Especially beneficial for long construction projects

    • Conversion into public market may require additional work

      • Rating, Disclosure document, Remarketing agreement

  • Inclusion of an “Index Mode”


July 29 2013

Access to Commercial Bank LOC’s Credit

Highly Rated, Relationship Banks = Best Partner/Provider

  • One-off transactions may not prove to be reliable long term (i.e., renewal/extension concerns)

    Pending Regulations

  • Bank capital reserve requirements

  • Direct Bank Placements may be offered as an alternative

    Increased Awareness on Covenants and Other Terms/Conditions

  • More restrictive covenants

  • Increased focus on term out provisions, expiration dates (i.e., long-term balance sheet classification)

  • Grid pricing, rating triggers

  • Yield protection language

    Ancillary Requirements

    Capacity/Hold Limits


July 29 2013

US Banks’ Municipal Holdings – Cost Basis Credit

  • As of December 31

  • 1993 to 2012

    • Increase of $175.3 billion

    • 222.7% increase

    • 2012: 22.3%

    • 2011: 15.7%

    • 2010: 13.7%


July 29 2013

What is a Direct Bank CreditPlacement/Loan?

  • A Direct Bank Loan is a financing structure in which debt is purchased by a financial institution instead of being publicly sold / remarketed in the capital markets

  • Tax-exempt Direct Bank Loan structures have been used with increasing frequency over the past two years due to decreased bank capacity for letters of credit and significant number of expiring letters of credit on variable rate bonds

  • Driven by borrowers’ desire to shed bank trading risk and lock in a fixed spread

  • Purchaser

  • Buys debt from Issuer under Credit Agreement

  • Holds debt at a variable index rate plus a fixed spread for a specified period

Bank Loan


Bank Loan

Issuer / Borrower

- Proceeds from bank loan used to finance tender of existing bonds or for new money purposes

- Pays a fixed spread over variable index rate for initial purchase period


July 29 2013

Direct Bank Loan Structures Credit

  • Similar to variable rate bonds

    • Direct Bank Loan is treated as another mode

    • Requires a Trust Indenture

    • Allows bonds to be converted to variable rate with letter of credit

    • Requires a Bond Trustee

    • Provides additional flexibility allowing borrower to convert to other modes in the future

    • Bank covenants and terms in separate document (i.e. Bondholder Agreement, Funding Agreement– similar to Reimbursement Agreement)

  • Alternative structure

    • No Trust Indenture

    • Bank covenants typically in Loan Agreement

    • Assumes debt will remain in Direct Bank Loan form


July 29 2013

Bank Loan as an Alternative to a Public Offering Credit

  • Direct Bank Loans have become an attractive alternative to public offerings of fixed or variable rate bonds

  • Bonds are usually placed with a long-term maturity and can have periodic puts/renewals (e.g., 3, 5 or 7 years)

  • Can be structured as variable or fixed rate (conventionally fixed based on cost of funds or interest rate swap)

  • Variable rate are priced at a spread to LIBOR and adjusted by a tax factor

    • The credit/loan spread is determined by the credit profile of the borrower

    • Tax factor is typically 65-70%

    • Pricing may look like (70% of 1 Month Libor) + credit spread


July 29 2013

Direct Bank Loan vs Direct-Pay Letter of Credit Credit

Benefits of a Direct Bank Loan

  • Reduce remarketing risk by moving outstanding debt out of the capital markets and placing directly with the bank

    • Avoid liquidity event caused by a failed remarketing

  • Reduce bank counterparty risk in uncertain environment for bank ratings

    • Interest rate paid is tied to underlying index

    • Rate not affected by changes in bank rating or investor sentiment

  • Reduce exposure to unexpected market shocks causing bonds to be “put back” by investors

  • Possible longer tenor on facility, reducing renewal risk

  • Possibly reduce annual costs by eliminating remarketing and trustee fees

    Benefits of Direct-Pay Letter of Credit

  • Mature structure with full acceptance in the capital markets

  • Potentially lower up-front costs when switching credit providers due to familiarity of structure and consistency of documentation across transactions. Up-front costs are becoming more comparable

  • More conducive structure for bonds with bullet maturities

    • Direct bank loan may require some level of annual principal amortization

  • Multi-year term-out provisions typical in the event of a failed remarketing

    • Term-out provisions are not typical with Direct Bank Loan structures

    • Full principal is typically due at the end of purchase period if facility is not renewed or replaced

  • 30

    Floating rate notes frns
    Floating Rate Notes (“FRNs”) Credit

    • No bank support and no ongoing remarketing

    • Float relative to an index, typically SIFMA, but can be priced as a percentage of LIBOR. The pricing spread is determined at the time of pricing and fixed for the duration of the Floating Rate Note Period

    • The Floating Rate Note Period is typically 1 to 5 years in length, but PNCCM has observed periods as long as 10 to 15 years

    • FRNs can be issued with either a hard put or a soft put. With a hard put structure, upon maturity or the mandatory tender date, outstanding principal is due and failure to pay is an event of default

    • With a soft put structure, upon maturity or the mandatory tender date, failure to pay at the tender date constitutes a “failed remarketing” and can trigger interest rate escalation to a maximum rate and/or accelerated amortization. An FRN with a soft put could also be structured with an interest rate that gradually “steps up” to the max rate instead of directly defaulting to max rate at the time of the failed remarketing

    • FRNs generally are not subject to optional redemption until six months prior to the end of the Floating Rate Note Period. If the FRNs are not retired at maturity or at the end of the Floating Rate Note Period, the FRNs may be remarketed into a new Floating Rate Note Period or refinanced by new FRNs, variable rate demand obligations (VRDBs), fixed rate bonds, or other obligations.

    Market overview of frns
    Market Overview of FRNs Credit

    • The market for FRNs has grown significantly since the auction market collapse in 2008. Initial issuances involved highly rated issuers, but FRNs are now available as a tool for issuers in a broad range of credit quality

    • The market initially expanded as a result of reduced capacity in the bank market. More recently, the market has grown as long-term municipal investors increase exposure to variable rate products to position for rising rates. FRNs serve as a non-bank alternative to a traditional VRDBs

    • “Linked-rate” volume increased by 17.56% from 2011 to 2012. Volume increased 123% in the first quarter of 2013 over 2012, and we expect continued growth in this market

    Frns hard put vs soft put
    FRNs- Hard Put Creditvs Soft Put

    • Hard Put

    • A hard put can be incorporated in a structure with a mandatory tender or maturity. Both structures typically incorporate a call date 6 months prior to the principal payment date

    • An event of default occurs if the FRN is not funded on the date of the mandatory tender or maturity

    • The primary concern for investors is the ability of the borrower to access the market at the mandatory tender date

    • Soft Put

    • A soft put is typically structured as part of a term mode remarketing of multi-modal bonds, often with a call date 6 months prior to the soft put date

    • In soft put structures, investors will also focus on refinancing risks and the maximum rate in the case of a failed remarketing

    • Soft puts can be structured with a step coupon, where at the time of failed remarketing the interest rate gradually steps up to increasingly penalizing rates until it reaches the max rate

    Capital structure consideration
    Capital Structure Consideration Credit

    Floating Rate Note

    Public Offering

    Capital structure interest rate risk consideration
    Capital Structure & Interest Rate Risk Consideration Credit

    Composition of Underlying Debt

    Interest Rate Exposure

    July 29 2013

    Standard Disclosure Credit

    PNC Capital Markets LLC ("PNCCM"), member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. PNCCM is an affiliate of PNC Bank, National Association; however, it is not a bank or a thrift and is a separate and distinct corporate entity from its bank affiliate.

    This document is for informational purposes only. No part of this document may be reproduced in any manner without the prior written permission of PNCCM. Under no circumstances should it be used or considered as an offer to sell or a solicitation of an offer to buy any of the securities or other instruments mentioned in it. The information contained herein is based on information PNCCM believes to be reliable and accurate, however, no representation is being made that this document is accurate or complete and it should not be relied upon as such. Neither PNCCM nor its affiliates make any guaranty or warranty as to the accuracy or completeness of the data set forth herein. Opinions expressed herein are subject to change without notice. The securities or other instruments mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; and their value and the income they produce may fluctuate and/or be adversely affected by changes in exchange rates or interest rates or other factors.

    PNCCM and/or its affiliated companies may make a market or deal as principal in the securities mentioned in this document or in options or other derivative instruments based thereon. In addition, PNCCM and its affiliated companies, shareholders, directors, officers and/or other employees may from time to time have long or short positions in such securities or in options, futures or other derivative instruments based thereon. One or more directors, officers and/or employees of PNCCM or its affiliated companies may be a director of an issuer of securities mentioned in this document. PNCCM or its predecessors and/or affiliates may have managed or co-managed a public offering of or acted as initial purchaser or placement agent for a private placement of any of the securities for any issuer mentioned herein within the last three years, or may from time to time perform investment banking or other services for or solicit investment banking or other business from any company or issuer mentioned in this document.

    PNC Capital Markets is the marketing name used for investment banking and capital markets activities conducted by The PNC Financial Services Group, Inc. through its subsidiaries PNC Bank, National Association and PNC Capital Markets LLC. Services such as public finance advisory services, securities underwriting, and securities sales and trading are provided by PNC Capital Markets LLC. Foreign exchange and derivative products are obligations of PNC Bank, National Association