Bond Refunding 101. Michigan School Business Officials April 28, 2016

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1 Bond Refunding 101 Michigan School Business Officials April 28, 2016

2 Refunding of Debt What is a refunding? A refunding of debt involves the issuance of new debt at lower interest rates to replace debt which is currently outstanding at higher rates. A refunding of debt can also entail the issuance of new debt at either lower or higher interest rates to restructure the payments on existing debt. Budget relief Creates debt service capacity for new money What factors make a refunding work? Lower interest rates Higher short term investment rates Passage of Time 2

3 Lower Interest Rates The chart below shows a history of the municipal tax exempt interest rates as well as the 10 year Treasury rates. 6.00% Historical Interest Rates January March % 4.00% 3.00% 2.00% 1.00% 0.00% AAA MMD GO 15 yr (Tax-Exempt) Treasury 10 yr (Taxable) AAA MMD GO 20 yr (Tax-Exempt) 3

4 Passage of Time If rates are exactly the same 10 years later, a refunding is possible, assuming a positive yield curve where short-term rates are low and long-term rates are high. Initial Bond Issue CURRENT RATES (Assuming a 20 Year Bond Issue) YEAR YIELD Refinancing Bond Issue 10 YEARS LATER (Interest Rates the Same) YEAR YIELD

5 Types of Refunding Current Refunding bond issue which settles less than 90 days before the call date on the bonds being refunded 5/1/16 7/15/16 8/5/16 11/1/16 Authorize Bond Sale Settlement Call Date IRS does not limit number of current refinancing. Advance Refunding bond issue which settles more than 90 days before the call date on the bonds being refunded 5/1/16 7/15/16 8/5/16 5/1/17 Authorize Bond Sale Settlement Call Date IRS permits ONE advance refunding in a new money bond issue. However, the bond issue can be refunded in a number of partial refunding issues. Investment rates in escrow will impact the amount of savings generated. 5

6 Refunding Cash Flow School District Refunds Existing Bond Issue Refunding Proceeds Annual Principal & Interest Payments Escrow Fund (US Gov. Securities) Cost of Issuance New Refunding Bonds Bondholders Bondholders of Refunded Bonds School no longer responsible for amounts to be paid from escrow on refunded bonds

7 Negative Arbitrage Impacts Refunding Savings Advance refunding requires new bond proceeds to be held in an interest bearing escrow until the call date on the old bonds Perfect Scenario* New bond rate = 3.00% 1 year investment rate = 2.46%* Negative Arbitrage = $0 Refinancing Savings = $2,195,809* Current Market New bond rate = 2.91% 1 year investment rate = 0.55% Negative Arbitrage = $178,278 Refinancing Savings = $2,017,531 * Example is hypothetical only. A 2.46% 1 year U.S. Treasury investment rate is not available in the current market. If the 1 year Treasury yield was 2.46%, the overall rate on the bonds would likely be higher and overall savings lower. Employ strategies to maximize investment rate in escrow 7

8 How to Structure Savings Payment Annual Debt Service Payment Projected Millage Rate* Levy Yr. End Before After Before After Year 30-Jun Refunding Refunding Savings Refunding Refunding Savings $8,907,846 $8,814,928 $92, ,474,603 9,385,540 89, ,747,893 9,658,830 89, ,426,533 10,327,470 99, ,785,173 1,686,510 98, ,785,013 1,689,000 96, ,781,258 1,683,145 98, ,777,653 1,680,890 96, ,771,885 1,677,035 94, ,763,735 1,666,485 97, ,743,735 1,649,535 94, ,732,190 1,636,290 95, ,718,795 1,621,645 97, ,558,550 1,460,600 97, , ,200 98, , ,800 98, , ,600 98, , ,600 94, , ,800 95, , ,400 95, , , , $70,198,329 $68,180,798 $2,017, Level savings Assist in leveling overall payments Assist in leveling millage Accelerated (up front) savings Deferred (back loaded) savings Shortened bond term TOTAL CUMULATIVE SAVINGS: $2,017,531 Plus: Estimated SLRF Interest Savings: 273,272 Rate on Refunded TOTAL OVERALL SAVINGS: $2,290,802 Bonds: 4.75% NET PRESENT VALUE (NPV) SAVINGS: $1,562,531 New Refunding NPV Savings as % of Bonds Refunded: % Bond Rate: 2.91% 8

9 Should I Refund? Can I save at least as much as the costs of issuance? Savings shown should always be net of cost of issuance Will the refinancing produce at least 3% savings? Am I using the one advance refunding? If so, what are the chances I may save more if I waited to refund the bonds at a later date? Consider the option value of refunding now Based on the remaining life of the old issue, how many more chances will I have to refund? How will a refunding impact my budget or debt millage in the short and long term? 9

10 Types of Bond Sales Competitive Sold at a specific date and time Any firm may bid on bond offering Bonds awarded to the lowest conforming bid Negotiated Underwriter pre-selected (may be through an RFP process) Underwriter offers bonds for sale to investors (includes local citizens) Pricing date, bond size and maturities are flexible Private Placement Bonds are sold directly to private investor or bank Terms are negotiated with the investor

11 QUESTIONS? If you have any questions or need additional information, please contact us: Kari L. Blanchett Brenda Voutyras Managing Director Senior Vice President

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