Municipal Bonds – Credit Enhancement: Ratings and Insurance
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Linda Loup – Southwest Securities, Inc. Allen Douthitt – Bott & Douthitt, P.L.L.C. Jim Binette – Assured Guaranty Lauren Spalten & Todd Helman– Standard & Poor’s Corporation
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Municipal Bonds – Credit Enhancement: Ratings and Insurance. Linda Loup – Southwest Securities, Inc. Allen Douthitt – Bott & Douthitt, P.L.L.C. Jim Binette – Assured Guaranty Lauren Spalten & Todd Helman– Standard & Poor’s Corporation. Municipal Bonds. - PowerPoint PPT Presentation
Transcript of Municipal Bonds – Credit Enhancement: Ratings and Insurance
Linda Loup – Southwest Securities, Inc.Allen Douthitt – Bott & Douthitt, P.L.L.C.
Jim Binette – Assured GuarantyLauren Spalten & Todd Helman– Standard
& Poor’s Corporation
In young districts, the initial installment (or first few installments) of bonds are usually issued as non-rated /non-insured bonds.
As the assessed value in the district grows, the district’s financial health improves and other criteria are met, a district may qualify for ratings and/or insurance on subsequent bond issues (credit enhancement).
The use of the credit of an entity other than the issuer to provide additional security for the repayment of a bond.
Most common types of credit enhancements available to water districts: Investment Grade Ratings Bond Insurance
Evaluations of the credit quality of bonds made by rating agencies.
Intended to measure the probability of the timely payment of principal and interest on municipal securities
Ratings are based on certain criteria (total AV, fund reserves, tax collection %, debt to AV ratio, etc.)
Ratings often are assigned upon issuance of the bonds, are periodically reviewed and may be amended to reflect changes in the issuer’s credit position.
The ratings may derive from the credit worthiness of the issuer itself or from a credit enhancement feature of the security (i.e. the rating of the bond insurer).
Two major rating agencies for municipal bonds: Standard and Poor’s Corporation (“S&P”) Moody’s Investors Service (“Moody’s”)
Investment Grade Ratings
S&P Moody's Description
AAA Aaa Minimal Credit Risk
AA+ Aa1
Very Low Credit Risk
AA Aa2
AA- Aa3
A+ A1
Low Credit Risk
A A2
A- A3
BBB+ Baa1
Moderate Credit Risk
BBB Baa2
BBB- Baa3
Purpose of credit enhancement: to reduce the interest rate on bonds.
Lower interest rates mean reduced interest costs to the district.
Allows district to issue all bonds necessary to reimburse the developer faster;
More M&O allotment of total tax rate; May be able to reduce total tax rate sooner.
Water District Bond Sale Results – Week of February 19, 2013
DistrictWaterwood MUD
No. 1Harris Co. MUD No.
468East Cedar Creek
FWSDFort Bend Co. LID
#15
Par Amount $2,215,000 $4,630,000 $1,435,000 $6,000,000
Insurance No Insurance No Insurance Yes No Insurance
Underlying Rating Non-rated BBB A Non-rated
Insured Rating N/A N/A AA N/A
Sale Date 2/19/2013 2/20/2013 2/20/2013 2/25/2013
Interest Rate 4.112600% 3.797000% 3.257200% 3.9104%
District Name Sold Rated Insured Interest Rate
Harris Co. MUD #172 1/22/13 BBB+ Yes 3.2956%
Shasla PUD 1/17/13 BBB+ No 3.6069%
Interest Cost Savings Due to Bond Insurance:*
Total Interest Cost – Non Insured (3.6069%): $841,489.80
Total Interest Cost – Insured (3.2956%): 764,579.20
Total Savings Due to Bond Insurance: $79,910.60
Calculation based on 20 year bonds and a bond par amount of $2,000,000 for purposes of illustration.
District Name Sold Rated Insured
Interest Rate
Harris Co. ID #18 2/27/13 BBB- No 3.5376%
Waterwood MUD #1 2/19/13 No No 4.1126%
Interest Cost Savings Due to Bond Rating:*
Total Interest Cost – Non Rated (4.1126%): $972,424.38
Total Interest Cost – Rated BBB- (3.5376%): 822,492.00
Total Savings Due to Rating: $149,932.38
Less Cost of Rating: (9,500.00)
Net Savings Due to Rating: $140,432.38Calculation based on 20 year bonds and a bond par amount of $2,000,000 for purposes of illustration.
Once district meets minimum criteria for a rating and/or insurance, the financial advisor makes application to the rating agency and insurance companies on behalf of the district.
General Financial Overview Preliminary Official Statement Past 3 Years Audited Financial Statements Finance Plan Budget / Bookkeeping Report
An important criteria in the assignment of a rating and/or bond insurance is the district’s financial strength
Large tax base (high assessed valuation) No developer advances Sufficient fund reserves High % of taxes collected Overall debt burden and overlapping debt %
Linda Loup: [email protected] 512-320-5859
Allen Douthitt: [email protected] 512-733-0700
Jim Binette: [email protected] 212-408-6005
Lauren Spalten: [email protected] 214-871-1421
