CDIAC-Application and Execution of Cost-Saving Strategies

Transcription:

Robert Barry (00:05):

Okay, So now our program will shift to putting theory into practice with our second session application and execution of cost saving strategies. We have four very experienced issuers that will walk you through several case studies where they've applied or are expecting to apply many of the cost management strategies that were explored on panel one with their actual financings. So first I'd like to introduce Natalie Perkins. Natalie is Director of Treasury and revenue for the Bay Area Metropolitan Transportation Commission, having joined in October, 2022 for 13 years. Prior to joining MTC, she served as a municipal advisor for utility state and local government municipal Bond issuers on the West Coast. Natalie's experience also includes five years as a public finance investment banker. Joining Natalie is Daniel Wiles. Dan is Assistant Treasurer and tax collector with the Los Angeles County Treasurer and Tax Collector's office. Since his appointment in September of 2019, Dan has overseen the finance branch of the Los Angeles County Treasurer's Office, which includes public finance, cash investments, and defined contribution plan investments.

(01:11)

Prior to his current role, Dan was a principal and chief compliance officer with FIELDMAN rollout for 17 years. We also welcome back Nikolai Sklaroff Capital Finance Director with the San Francisco Public Utilities Commission, and he'll share his experience with some of several of the strategies from panel one. Then lastly, and to begin this session, we welcome Colin Bettis. Colin is the Debt Officer for the County of Sacramento. Colin is responsible for planning, organizing and implementing the activities of the centralized debt management program for the county and coordinating the presentation of the county's capital improvement program, Colin.

Colin Bettis (01:50):

So we're actually going to stay seated for our presentations anyway. So the first one that I want to talk about is the Water Infrastructure Finance and Innovation Act. This is one that we entered into early in 2022, actually I think the WIFIA loan we entered into late 2021, so this is to serve a project area that has pipes that are old and range from 60 to 90 years, and so they've reached the end of their useful life. The pipes were actually also undersized for current fire flow regulations and we need to relocate some of them from some of the backyards in this project area.

(02:42)

So the total project cost was estimated at about 165.7 million, and the WIFIA loan amount was 81.2 million. The project benefits, it reduces water use by an estimated 17% annually, delivers water reliably and efficiently to the community and saves the Sacramento County Water Agency approximately 22 million. By utilizing WIFIA alone instead of long-term publicly issued debt, it enables the county to also meet our requirement of AB 25 72. That requires all customers be metered by January of 2025. Along with this solution, the county also issued our 2022 water revenue bonds. These are short-term bonds. Well, and I say short-term, they're within the construction period of the Arden project area, and we issued these bonds to create additional savings by utilizing that shorter term interest rate. The revenue bonds were issued with a final maturity in 2025, and what we would do with this is we would use the drawdown on the WIFIA loan to create the repayment for the bonds.

(04:03)

This lowered the cost of financing provided during construction. The WIFIA loan carries an interest rate of 1.89. Again, we aren't paying on that interest during the construction time period because we haven't actually drawn on the WIFIA one of the benefits of the WIFIA program and then it provides a cost-effective means of capitalizing all or a portion of the interest payments during the construction period. Again, taking advantage of those premium bonds, the total anticipated savings was about $403,000. That was a reduction from where we were looking at earlier in 2021 when we were looking at this option to begin with because due to the view that interest rates would be increasing in the near future, that was already being priced into the market.

(04:57)

The next project that I wanted to talk about a little bit was our 2023 pension obligation funding bonds. We had an issue with our refunding bonds and that they were tied to LIBOR, so we had to solve that problem. We either followed the federal guidance or we did something to take out the bonds at the county. We issued an RFP for a private direct placement for the bonds that were callable. Actually, we had two maturities, one that was non callable and I'll talk about that a little bit later. Again, with the 2026 maturity, it was a non callable. So in this one we were actually lucky and fortunate that we had only one investor in those bonds. So we were able to reach out to that investor and deal with them directly managing the transition from LIBOR to SOFR. And then for the 2030 bond, we were able to get a positive result from our RFP, which resulted in interest rate savings.

(06:12)

We did actually keep that in a variable rate mode, which you'll see here. The key difference in this one and the greatest savings was in a reduction of the credit spread from the prior credit spread of 1.45 to a 0.45%. Again, keeping this in a variable rate mode did provide for a PV savings of $9 million. And just to talk about this a little bit, we are looking currently at taking advantage of the TIFIA for airports. One of the other benefits is if you are able to achieve that rural designation, it does provide for a half of the treasury rate rather than just the treasury rate plus one, and the interest rate does not accrue until proceeds are drawn, allowing you that opportunity. While it may or may not pan out in the current interest rate environment, especially with a short-term inversion in the yield curve, it may not pan out to issue those shorter term bonds during that construction period.

(07:25)

And so again, we're looking at this option because we are already looking at utilizing the Build America by America requirements to obtain other grant opportunities as well. So matching the TIFIA program along with grants, it really does provide a benefit to the airports. The challenges, this was discussed earlier, one of the challenges is that there is a long time period long lead time to get to a TIFIA lone being one of the first airports because there are a few of them that are looking at this program. We know that that may also add time that needs to be taken into consideration when looking at this program. So with that, I'd like to offer up an opportunity for a few questions. Seeing none, I'm going to go ahead and toss it over to Natalie.

Natalie Perkins (08:28):

So I'm Natalie Perkins, director of Treasury at Metropolitan Transportation Commission. We're the Metropolitan Planning Organization for the Bay Area and responsible for transportation planning in the nine County Bay area. One of our authorities is the Bay Area Toll Authority, which is responsible for administering tolls on the seven state owned Bay Area toll bridges.

(09:21)

So BATA has approximately nine and a half billion in debt outstanding between fixed rate bonds, variable rate bonds, and synthetic fixed rate bonds. And this spring we had 285 million in S FMA floaters maturing with a mandatory tender date of May 1st. They were originally sold 10 years prior at SIFMA plus 90 basis points. I think it's one of the longer SIFMA floaters that was ever issued and they were hedged by fixed to floating rate swaps. So we took a look at a number of short-term products that Galen had went into on panel one in detail. We looked at replacement SIFMA, floaters put bonds, and we also looked at VRDB and ultimately we decided that VRDB or determined that VRDB would be the lowest cost of funding.

(10:19)

We solicited proposals for letters of credit. We were looking for a three to five year term. We provided our existing form of reimbursement as part of the RFP process, which does have some non-standard terms such as a five-year term out and a two-year interest only period. On that term out, we received 11 proposals with three to five-year terms, and we came up with a very broad range of fees as much as 60 basis points difference between the highest and lowest for the same maturity. Ultimately, we decided to stick with the same reimbursement agreement that BATA had and keep it standard across all of our VRDB's. There were some attractive proposals that we did get that weren't able to meet those terms, but there were a number of proposals that allowed us to keep the same reimbursement agreement and we did negotiate the rate on the LOCs that we chose. We ended up using daily VRDBs with four and five year maturities. We split up that 2 85 into 75 million and $110 million piece.

(11:37)

So prior to the transaction in 2022, our VRDBs had been trading at an average of about 20 basis points through SIFMA, and as I had stated, the refunded RNs were at SIFMA plus 90 basis points. As Galen mentioned since the refunding, our VRDBs have been trading at very attractive levels on average 105 basis points through SIFMA giving us an all-in cost of about 65 basis points through SIFMA. This means we are saving about 155 basis points versus the refunded bonds and about 115 to 130 versus the rates we would've gotten on SIFMA index floaters if we had issued them in March. One additional thing we did do on the SIFMA floaters, typically on the refunding we would try to make the escrow period as short as possible, but we did extend it to the final mandatory tender date of May 1st in order to benefit from a small amount of positive arbitrage given that it was a current refunding. So we'd gotten a number of pitches on tender refunding since my short tenure at BATA and MTC, but we didn't want to incur costs for a tender knowing that the results would be pretty uncertain how many investors would elect to tender their bonds and what the relationship would be at the time of the tender. So we waited until we were already preparing an OS to pursue our tender refunding. So as Simon went into in detail, a tender is a transaction where you invite investors to sell back their bonds at a predetermined price.

(13:42)

So the majority of our transaction was taxable bonds that were eligible to be refunded on a tax exempt basis. This is because they were originally used for tax exempt purposes were funded by taxable bonds and the escrow or a portion of that escrow had matured, which allowed us to refund them on a tax exempt basis either the whole series or a portion of a series. And most of those bonds were either non callable or had a long call date, so it didn't make sense to do a straight refunding. As Simon also mentioned, the most important thing for taxable to tax exempt tender refunding is the relationship between the taxable rates and tax exempt rates rather than absolute rates. And then on the right side of the slide we just have a little graphic showing the mechanics of a tender refunding, so existing investors may decide to sell bonds back for cash and then we funded that cash through the issuance of tax exempt bonds.

(14:55)

So we examined our entire portfolio of fixed rate debt for savings opportunities through a tender, so for the taxable debt that involved looking at what bonds would be eligible for tax acceptor fundings and for the ones that were what portion of the series are eligible. We also looked at tax exempt to tax exemptive fundings monetizing the pushback of the call date. Our savings ended up being pretty minimal, so ultimately we did not include those in the tender transaction. We also had some BABs outstanding that had very low savings to neutral savings, but it does eliminate the subsidy risk. So we did end up including our BABs in the tender offer. During our rating meetings, we included a very large universe of candidates, which was in the billions. I think we included about 4 billion in our rating presentation and we did use a spread to a treasury benchmark for each maturity of the taxable tender bonds. For the final tender offer, we included 1.3 billion in bonds, but the maximum we could have accepted was about 800 million due to the only partially advanced or tax exempt refundable piece of some of the series. Investors ultimately offered to sell back 485 million in bonds. We accepted all but 12 million of those tender offers and the ones we didn't accept was because of the issue of the maximum amount that could be refunded.

(16:42)

One important thing about the tender is that you do determine the purchase price of the refunded bonds or the tendered bonds at the same time as you're doing the pricing of the refunding bonds. So you only have to accept the tenders that are in the money and the tenders are officially accepted after the pricing and signing of the BPA for the refunding bonds. So in our case, all of the bonds that were tendered did have savings and we saved overall about $25 million in net present value savings. We were also able to issue a small second refunding to purchase bonds a couple of months later when we had a reverse inquiry offering to sell us some outstanding bonds.

(17:35)

So some of the takeaways, these two transactions happened in March and April this year. So some of the takeaways, we did combine the tender with another transaction in order to benefit from economies of scale, both in professional fees and rating fees and also in our staff time we had already prepared and we were required to prepare a OS for the VRDB transaction. We regularly monitored the savings of the tender in case the savings were going to go away. We didn't want to incur significant fees going forward without being pretty sure that it was going to work out. The tender was somewhat labor intensive. We did need to negotiate a dealer manager agreement, which that I didn't have in place. A lot of our other documents, we did have forms of them that we could work from and there is some work related to identifying existing bond holders. One thing we did do to potentially save money was when we were discussing fees with the rating agencies, we made sure to determine ahead of time what the cancellation fee would be. Since we had sent a rating presentation with 4 billion in potential candidates, we didn't want the cancellation fee to be based on 4 billion. So that was one thing we did that we didn't end up needing to take advantage of. And that's all I have for my prepared remarks, but happy to take questions.

Audience member 1 (19:14):

How hard was it for you to get buy-in on both the tender offer and the VRDB with your board or commission? It's been my experience that there's always one person that says interest rates are going to be awful. We have to get a fixed regardless, however many numbers you show them.

Natalie Perkins (19:36):

Yeah, we didn't have any trouble at all actually. I think because BATA has a pretty sophisticated portfolio, we had swaps that were offsetting or hedging the VRDBs and the tender. We didn't go into too much detail, but that's for savings, so they were happy with that.

Audience Member 2 (19:58):

Hey Natalie, did you keep the swap outstanding then on?

Natalie Perkins (20:01):

We did.

Audience Member 3 (20:12):

Knowing how complicated the whole public tender process is on the one hand and how much cash you guys have on the other hand, did you give any thought to not doing a formal tender, but instead as Simon discussed, pursuing a private secondary market purchase strategy as opposed to the full public tender?

Natalie Perkins (20:36):

You mean with cash?

Audience Member 3 (20:38):

Yeah,

Natalie Perkins (20:39):

That's what all the bankers were pitching, but throughout the pandemic, traffic's gone down, so we have lost some of our liquidity and we did need to use it for rehab and other needs during the pandemic, so we didn't want to pursue a cash tender. If that's it, I will pass it on to Dan.

Daniel Wiles (21:13):

Okay. Well the first thing I have to start with is David, when in the hell did we become the old guys in the room? I don't know. It just seems like that just happened all of a sudden. We're the old guys. Yeah, well sure. No, no, absolutely not. So my colleagues have talked about transactions that they have done by and large, Colin had a couple of things in the hopper. Mine is a live view of the sausage being made. We are still figuring this out. It is the biggest thing. It is the biggest thing that I've had to deal with in almost 40 year career.

(22:03)

It is somewhat of a mess that we are trying to work out. It was decades in the making and the legislature brought it back to life like a monster brought back from the grave and it has its own problems In terms of unpredictability, and I'll go through some of this, this is all relates to AB two 18, which is legislative act that did a few things with regard to child sexual assaults. Now, LA County, big county has a lot of residential facilities. Some we operate, some we contract out and we've done it for a long time. And a lot of these events are things that took place years ago because the changes that AB two 18 made allowed for a great extension of statute limitations where cases would ordinarily not be able to be brought. They were resurrected because now plaintiffs have by the time they're 40 to raise a case, so it could be 30 years old and many of them are within five years of the date if they were an adult, the date they discovered that their psychological injury is a result of sexual assault and there's a three-year window for some other claims that was revived.

(23:28)

So at this point we are talking about LA County is looking at a liability that has been estimated by our county council to be 3 billion or more and we now have a couple of thousand claims in and that's growing helped by the class action bar that tends to go out and solicit cases and the timing and amounts are extremely unpredictable. So this is about trying to figure out a financing structure that can accumulate these and spread them over a period of time because these costs are estimated, these claims and settlements are estimated to be this fiscal year and next fiscal year and $3 billion is more than we can suck up in two years. We've got a lot of cash hanging around but not that much cash and we expect that money sort of pandemic money to be eaten down over time. So we have to extend it out.

(24:33)

So this is going to require both long and short-term financing, particularly short-term interim financing, these settlements, there are some class actions that are larger, but some of these settlements are a million dollars, half a million dollars, that sort of thing. We can't go out issuing long-term bonds every time a settlement comes through and we can't fund them with cash because if we fund them with cash, it's the legally it's not a settlement imposed by law, it goes away. You can't refinance it. Once you fund it with cash, you can't refinance it. So it has to be either done with long-term financing or interim financing right off the bat. What we're looking to do with interim financing is group package these things up in amounts 200 Million 250 where we can sell them off relatively efficiently. There's a certain level, there's only so much we want to go in the market for long-term with these things because there is what I've called an ick factor to it all.

(25:36)

Now we say our point is yes, county employees or county contractors may well have been the bad guys, but that ain't us. We're the cavalry coming in to provide compensation to make good in what was done wrong. We're the good guys. And that's what this financing is about. It's about doing good and being the good guys. Most buyers seem to accept that. Some don't, and we'll find out when we get to a long-term bond situation. So judgment obligation bonds, which is a vehicle to do it legally are like pension obligation bonds. They're imposed by law and so they're covered by refunding provisions of the financing provisions of the California government code. But like POBs, your bond council community will not say, well, but that's airtight. Therefore we can just give you an opinion. It has to go to validation. The more complex the financing structure, and I'll talk about this in another page, the more complex the financing structure, the more complex the validation because you got to submit all your terms, you got to submit all your documents for validation.

(26:53)

We'll talk about that in a second. So what we're looking at doing is an interim financing with two potential alternate forms. One is effectively a revolving loan facility from a major bank and we actually went out with an RFP for that and for underwriting, and we got a bunch of responses. We had nine different banking institutions that offered effectively a base amount of $200 million and then what we call an accordion of 200 million more. That 200 million more is sort of an agreement, a promise, not commitment promise that they'll have that much in reserve if we ask for it, but we're not paying for it right now, which is part of why we're asked for it separately.

(27:49)

So there'd be a fee paid on the unutilized amount of the really committed amount and then an obviously interest paid on whatever's drawn down the alternative, we might be able to work it into our annual tax and revenue anticipation notes. We normally sell between half a billion or 1.2 billion in any given year. We might be able to size that up. I'll talk about that in another page. But that has some tax considerations to it. Cashflow considerations. We don't really don't want to mess up our ordinary financing, but that's potentially one of the things under most market conditions with a positively sloped yield curve, you'd look up and say, well, we want to do interim financing for a relatively longer period because it's cheaper than long-term financing, but that's not really what it looks like today. They're pretty close on top of each other. So if things stay the same, our strategy would be we're going to accumulate these into long-term financings and push them out the door as quickly as we can in relatively larger amounts so that we're not going every 60 days and reminding people that we had this problem every 60 days.

(28:57)

But we do want to see and get them out because we want to use the interim financing vehicles as little as possible. So we look at maybe a three to five year term. I think it's going to be three years. For the interim financing vehicles, we asked for a $200 million commitment with a $200 million accordion from each of the folks and we got a number proposal. We'll do that. We'll probably take two of them. So there'll be four active and four more on the sidelines, which we may or may not need to use, and we'll take those out with long-term bonds. At this point, base case is taxable, straightforward 20 year term level debt service. We're going to need a handful of issues. Our best guess is that next summer we'll have a billion dollars of these coming out. But again, that depends on the lawyer's estimates of when settlements are going to happen and they don't control that either. So is it really going to happen then God knows we expect the ratings to be at or really near our long-term rating, they should be pension obligation. Bonds tend to be rated right on or just below the issuer rating and sort of right where your lease ratings would be. So we expect to get those, which would mean we're in a double a strong AA category, potentially AAA from S and P because that's our underlying S and P.

(30:24)

As I said before, the tax status, the base case is that this is a taxable financing. The difference between taxable and tax exempt, I think it was said earlier by somebody. It's a big spread today. It's a big spread. We're going to look at it. There are some reasons to be optimistic, but we're going to look at it. I've been told by tax consults to not say anything more than that. So that's what I'm going to say. If we didn't go, if we didn't try to get some sort of special exemption to just work with the rules we have today, then we would have to go through an extraordinary working capital rule and we'd have to monitor our cashflow for available amounts and things like that. Los Angeles County is very conservatively managed from a budget standpoint, which is good. I have a table in our rating presentations now for the last four years and it shows what we've told the agencies and cashflow and what we've told the public we're going to have at the end of the year. And then all we have, and the variance has almost every year been more than a billion dollars to the positive. We always underestimate revenues overestimate expenses. So if we have to rely on something that's a cashflow to maintain tax exemption.

(31:51)

I am betting it's not happening, I would bet we're going to blow through it. So that's why taxable status is plan A and that's what we expect to be at. So the validation process, that is another complication of all this. For those of you who've done POBs validation is a good 110, 120 days. And again, the complication here is that we have these interim financing documents, which also have to be validated and therefore they have to be selected and negotiated and they have to be in pretty much final form, not exactly but basically final form before we file the validation. So that's before the clock for 120 days runs. And the 120 days assumes nobody challenges you. So again, it's a little bit of a crapshoot when it all adds up.

(32:52)

We hope to get an initial interim financing done before July 1st, 2024. We hope that we'll have a package up that we could do some long-term bonds right about that time, and this will probably continue for the next three years or so. So like I say, it's going to be a combination of using both the short-term and a long-term to try to solve a pretty vexing problem. And we'll issue something in the neighborhood of under 3 billion. I expect LA County being conservative, there's always more cash than you think there'll be. So I expect that more of this will be funded out of cash than we might project today, but I also know that it's large enough that we're not going to be able to just absorb it. So anyway, that's what I've got for presentation. Do you have any other questions out there? Wow, there is one. Alright, Lester.

Audience Member 4 (Lester) (34:02):

If it were to be a tax exempt judgment obligation bond, would you be limited to a 10 year maturity?

Daniel Wiles (34:15):

We haven't looked at what a delta might be. We might look at shortening it, but I also think we might look at just keeping it out at 20 years and absorb and just simply having a lower interest cost each year. But some of that Lester may depend on what the yield curve looks like right then. Alright, Nikolai, you're up.

Nikolai J. Sklaroff (34:42):

Great. Well thanks. I get to be the wrap up here. And Dan, you were talking about feeling old. I'm also feeling a little bit old here. I can still remember many great conferences here in this hall. I can even remember when it was the investment bankers and the MAs who wore the ties and bow ties and not the other way around.

Daniel Wiles (35:15):

I should say. By the way, for those of you who're going to be here this afternoon, Tim Schafer's being put into the Bond Buyer Hall of Fame. Rob is doing it. This is really for Tim Schafer. This is in fact one of his bow ties that was given to me for whatever.

Nikolai J. Sklaroff (35:36):

Very good. So the whole point of this panel is to share with you ideas that we have each been implementing to try to save money. We're not trying to pitch various products. You've heard certain products mentioned. I'm going to repeat some of them because some of the things that we're currently are common to all of us, but none of this is to suggest that all of you need to go out and do tender or fundings or issue TIFIA bonds. It's just to offer you ideas, some practical advice. Our hope is that between these various panels, each of you will go home with some nuggets that will allow you to help save money for your agency. So for my discussion here, I'd like to touch on a couple of topics. One is tender refunding, then WIFIA Build America Bonds. And then finally, bond proceeds investments and different people have touched on these.

(36:46)

I'll try to hit on these in a little bit different perspective because our previous speakers have done a great job talking about them. And since I have a little bit of time here, let me just take a step back and explain to you how we do financing because it's a little different than other people do it. But I'll give you some context of why we do the things we do. So the SFPUC is really three different enterprises. It's three different issuers, different ratings that we all manage in one department and each of those water wastewater and power benefits from high ratings. But one of the things that we do when we issue our debt is we're financing programmatically. We don't do a plant and issue a bond for a plant. We're doing hundreds of plants. We've got facilities that begin up in Yosemite National Park where we get our water, where we derive our power and those facilities extend all the way here to the Bay Area.

(38:00)

We serve 2.7 million residential customers around the bay. And so we've got literally dozens and dozens of projects going for each of our various enterprises. So we're financing those on a programmatic basis and we use interim financing to do that. And Dan was just talking about some of the challenges with interim financing. We use commercial paper, we've got 1,000,000,005 across our three enterprises of commercial paper and we're borrowing first from that interim financing so that by the time we go to our bond issue, we've aggregated those proceeds and we know what we're financing from those bonds. We know when those bonds have been spent.

(38:51)

This year I joined the PUC last year. This year has been the largest issuance by the SFPUC in our history. All three of our enterprises have issued bonds. We've also done WIFIA, we've also done SRF lending, and so we've got a lot going at once. One of the things as a result of that is that we've refinanced all of our commercial paper with bonds. So we have zero balance of commercial paper as we sit here today. And I think one of the things that comes out of this whole discussion about inverted yield curves in the direction of interest rates is we're going to be spending a lot of time with our MAs and our bankers to figure out what does interim financing look like in a marketplace where we've got inverted yield curve. It could look a little quite a bit different than it's been today.

(39:52)

We've been in the very strange position where we're refinancing commercial paper sometimes with long-term bonds at lower rates this year. So for those of you who are relatively new to this marketplace, I can't underscore enough how just unusual this is in our lifetimes. We've had inverted yield curves briefly in the past, but for it to be this enduring is very highly unusual for interest rates to have risen as quickly as they have has been very unusual and to have as much uncertainty. When we were having the conference a year ago, everyone was expecting rates to have fallen by this past June. Of course they haven't. And in fact, expectations have changed a lot. So it's a very unusual market dynamic that all of us in this room are having to deal with and that's why we wanted to particularly have this kind of forum to talk about how to manage in this turbulent time.

(41:02)

So let me turn specifically to some of these topics, specifically tenders. You've heard great descriptions of them. I am almost embarrassed after Natalie and Simon did such a great job talking about tender refunding. But if I might, let me try to explain some of these things a little more simply and try to give you some practical advice about these as you look up here on the screen. Before I joined the PUC, our team had been working on massive refinancing. Our commission had approved a $950 million taxable refinancing, a $475 million tax exempt financing. But like most of the world had been surprised by how quickly the Fed changed its tune on interest rates. Remember, it's not that long ago that the Fed was saying, oh, this is temporary, and we all expected rates to just blip up for a short time and fall back down. So as a result of that very dramatic rise in rates that the $900 million taxable refunding was non-economic, the $475 million refunding eventually got done as a much, much smaller transaction. And so a lot of energy had gone into that. And of course, the appetite for refunding savings had been established. We've been keeping an eye out for opportunities to save money and have been having discussions with our MAs for a year and a half about those. And eventually after exploring them with our MAs, after hearing many pitches from bankers, we decided to pull the trigger and do a tender refunding.

(43:31)

Very simply, I think the important thing to understand about why are you suddenly hearing about something you've never heard about before, it's because of this dramatic change in interest rates. And for those of you who may do bonds as a very small part of your job or you don't deal with bonds all the time, it may not seem intuitive why when rates go up, bond prices go down. But it's simple to think about if an investor was able to buy 3% bonds and now they're 4% bonds, well today they're not going to pay as much for that 3% bond if they can get a 4% bond on.

(44:22)

It's helped to explain this in public sessions by referring to the Silicon Valley Bank situation. Silicon Valley Bank had perfectly fine bonds, but they needed to sell them after prices had fallen dramatically. And that's essentially the opportunity. We're taking advantage of any of these investors in our bonds can choose to hold the bonds to maturity and they'll get a hundred cents on the dollar plus the interest until then. But some investors, maybe they've got kids going to college, maybe they're ready to buy a yacht or maybe they just have found a better investment, want to have or need to have liquidity. And for those investors, they're selling those bonds at say 86, 87 cents on the dollar. Our opportunity as issuers is that we can make it a win-win situation and say, okay, we will offer you a price a little bit better than what you can get in the public market and refinance that debt.

(45:36)

It's different than our traditional refunding because we can't say, Hey, we're calling these bonds, we want all these bonds to come in, but we can give people a choice. And so what we did is working with our team, we had identified 1.7 billion of candidates, and I think Simon's already done a great job explaining between the taxable and the tax exempt. But the important thing as Natalie alluded to is that going into this process, we didn't know what those investors wanted to do. It's a choice. And we've heard anecdotally from our team about some issuers who've gotten 5% of the bonds back, some who've gotten well over 70% of the bonds back. It depends on who the investors of your particular bonds are, what's going on when you are doing the tender. And so we too made a similar choice to what Natalie decided. We were seeing a lot of these proposals last summer.

(46:43)

We chose not to do it as a standalone. We knew we had all three of our enterprises doing debt, and so we waited until we had new money coming. I don't know about each of you, but for me, coming from the private sector to the issuer side, I was just amazed by what an effort is internally in a large organization to get a POS together. How many people need to touch that document? How many people need to collect information? So anything we can do to minimize that burden that disrupts people across the organization, we try to do, but it's also costly. The legal fees, the time invested. So we waited and when it became time to do new money, we solicited ideas, solicited ideas in conjunction with the new money and the refunding together and selected our team.

(47:54)

I want to say this carefully, but I think one of the things that I would convey to you is as I suggested in the first panel, we have a very competitive process for selecting underwriters. We typically get more than two dozen proposals. And when we're selecting bond underwriters, we typically get very consistently quality proposals, really strong proposals, people who really take the time to understand us as an organization and give us ideas. I think you'll find, and perhaps in the time that's passed since we did this, things have changed. But what we found was that the quality of ideas differed much less uniform in a tender response than in a bond response. And if you think about it, it makes sense. This is a opportunity that most people don't have experience with in their careers. Very few do because it's such an episodic opportunity that we have right now.

(49:17)

So the thing that I would highlight more than anything about this is choose your team wisely. We had a terrific team, but you'll find that the insights about how much variety, how much choice, how many options you have in doing the tender process varies a lot across the spectrum of firms. One of the things that's also unusual about the SFPUC, well, it's unusual about the city and county of San Francisco generally. We tend to all use two MAs for our transactions. In fact, I probably shouldn't joke about it, but I refer to it as our Noah's Ark approach. We have two of everything on our team. So one of the things we also have in our debt policy is that if we choose to do a negotiated sale, we also need to hire an independent pricing consultant. So we have literally three MAs at the table for negotiated sales.

(50:39)

I have generally thought of this as relatively excessive, but I'll tell you for this tender refunding process, it was a huge help. I want to show you here. This is just the taxable bonds. Again, what we did is we looked across the universe of all of our outstanding debt identified bonds that were opportunities billion seven total, and that aggregate was identified. This is just a taxable portion, but then each of those has to be assessed individually, and there's even more complexity involved because we have to make sure that we have savings in every year. But we ended up having MAs pricing consultants, our underwriting team, even within in our senior manager, there were two sets of numbers being run just because of the complexity and making sure that all of this tied out correctly. I want to take a step back as well to talk about market communications.

(52:04)

One of the things that you have to do for this process is communicate multiple times with investors to let them know what you're planning, what sort of prices you're offering them. There are various points where you can make adjustments in that process. But I think one of the things that I'd highlight for you is at our agency, it's great if Edward, Dan, Eric, and I can produce savings and we're eager to find savings. But what's really more important to our agency is that we can deliver the proceeds for new money projects. And so a really key consideration for me and for our team was that as we went through this process, our investors, our investor community was happy with the process, thought it was a fair process. And because we had waited, we had the opportunity to watch what others had done, learned from what others had done in the marketplace.

(53:21)

So for example, a key decision for us was what to do on our term bonds, and particularly thinking about what happens to the investors who are left behind who choose not to take advantage of the tender process. We wanted to make sure that those investors weren't disadvantaged. We could have taken more savings, but we didn't want them to be left with a different average life on their bonds. And so one of the things that I would suggest to you is to think very carefully about your relationships with your investors, what's important to you. And for an agency like us that's in the marketplace every year with multiple transactions, it was very important for us to make sure the investors were happy with our tender process in the end, Simon already gave you most of the punchlines here, so I'll keep this part very brief. But again, for us, the taxable tender was all found money.

(54:37)

It was an opportunity to take advantage of refunding bonds that we normally wouldn't have an opportunity to refund at such dramatic savings. And Simon also did a good job explaining to you, because we were taking taxable bonds to tax exempt, we also added future optionality as well. On the tax exempt side, we tried to be a little more discerning. As Simon pointed out, we already had the call optionality. So we wanted to make sure that if we were taking savings, that they were really substantial savings. So we made sure that we had minimum 5% savings in each piece of that transaction. Even though our policy minimum is 3% overall, we then achieved close to 10% savings. So this was a terrific opportunity for us at a time when interest rates were going up, when we were needing to go in the marketplace and the cost of our new money was going up to produce savings and reduce those costs. And it's not something that you would intuitively expect in this marketplace.

(56:05)

I might also just highlight on this page that a very substantial piece, as you can see in the green on the right side of the page, a substantial piece of this transaction was green bonds. And we haven't really talked about green bonds today. I'll just highlight for the SFPUC issuing bonds as green bonds is pretty core to our program. We've been issuing green bonds since 2015. There's a lot of debate in the marketplace about whether there are savings from green bonds, but for us, it's a way of projecting and explaining to the marketplace what we're doing with our proceeds and the core values of our organization. I think as I mentioned before, we started in Yosemite National Park. We ended at Golden Gate National Recreation Area. I think our users, our customers expect us to be good stewards of this environment, and we've had the additional benefit of attracting more buyers, and we think that we have overall lowered our costs, even if the cost of green versus non-green bonds hasn't been different.

(57:36)

So one of the things that I think I'd highlight for all of you in this for tender finances is allow time. Allow time in your schedule for education of senior management. Allow time of education for those who need to vote on your bonds. You'll have to explain what could be a very jargon filled transaction in terms that the general public can understand. And again, not all of this is intuitive to people who aren't dealing in bonds every day. Be aware that with a tender, there are two sides of the transaction that you need to evaluate. I think any of you who have had experience issuing bonds, you've already exercised your bond pricing muscles, but we all have much less experience with the price for bonds in the secondary market and allow time to really study that with your team. That is more art than science, and I think you'll find that different members of your team can come at it with different perspectives.

(59:11)

That's why it was very useful for us to have those three MAs, the two MAs and the pricing consultant at the table to bring lots of perspectives to bear that having good advice is critical in a transaction that can be as complex and have as many moving pieces as this. And then the point I've already made about investor relations. So let me quickly move on. We've already had some really great explanations about TIFIA and WIFIA. I think all of us in the room should be thinking about opportunities from the federal government right now. There are just tremendous opportunities right now. I think it was somewhere here in the middle, someone was asking about the Army Corps of Engineers. Right now, there's a notice of funding availability for programs specifically for dams and applications will be due by December. Very much on our radar. It's essentially a WIFIA for dams. The WIFIA program for us has been a tremendous tool.

(01:00:43)

We have done three WIFIA loans. Two of these predate my time at the PUC, but you see them at the bottom of the page, the 699.2 and $53.8 million WIFIA loans. Now, the thing about a WIFIA loan that's important to remember is that W i's financing 49% of the eligible project costs. You still have to finance the other 51%, but even for that 49%, it's a reimbursement program. So you need to be able to have a funding source before you can submit your costs to the EPA and get reimbursed. So we've used both our commercial paper. We also have notes that we've used for a highly rated issuer like us. The rate being able to issue bonds at a one basis point over the taxable index is great, but it's not a huge windfall. That's not where we get our advantage. For us, it's the ability to lock in a rate and not have to do it in the marketplace.

(01:02:15)

So for those two outstanding loans, those outstanding loans have an average life of over 30 years and an interest rate of 1.45%. That's the advantage that we are now able to access 1.45 long-term financing in a marketplace where rates have gone up. And so I think if you spoke to EPA, they would share with you that each time we've done something with them, we've been able to do things a little bit differently. I think Brian was talking about various IFFIA programs. Some of them are more difficult and challenging than others. The EPA has been enormously flexible and accommodating and open to innovation. So this spring we closed a 791 million agreement for a programmatic wfi. So we've identified 15 projects across the city. We entered into a first loan of 369 for six of those projects, and we can come back under that document and borrow one or more additional times under that program.

(01:03:50)

Again, a lot of flexibility and innovation in that. And then the other thing about WIFIA, that is such an amazing feature. Again, I don't think any of our banks could rival anything like this. They'll let you come back again and say, okay, interest rates have come down. We'll let you reset the rate as long as you haven't started drawing on the funds. Again, that ability to lock in rates and then have that option to lower the rates down, those are the real advantages in this type of federal financing. I'd share that as we and other agencies in the Bay Area and California generally are looking at climate resilience and what to do. Particularly in the case of droughts, I think you're going to see more collaborative financing efforts, JPA type financings, and we'll see WIFIA and other IFFIA financing for those. I think one of the things that we're thinking a lot about, and I'd encourage you to think about is lean structure.

(01:05:16)

As Bryant alluded to in panel one, the federal government has traditionally taken the position that it doesn't want anyone to be senior to them on the same project. I think your government finance officers Association, PUC and others are looking to try to find more flexibility to be able to do with WIFIA what others have been able to do with TIFIA in terms of using multiple liens even on the same project. And I think as new programs like the Army Corps are introduced, there are opportunities for us all to have more flexibility from those Build America Bonds. Simon did a great job talking about our tenders. He also did a great job talking about build America bonds.

(01:06:30)

I'm going to throw a little cold water though if I might. We have a lot of Build America Bonds. We issued about 1,000,000,001 of them in 2009, 2010. This is not a type of financing that you can do today, but at the time, a lot of us were able to issue taxable bonds at what was effectively a tax exempt rate, where the government simply subsidize the rate instead of allowing us to issue tax exempt bonds odds. And as Simon alluded to and explained because of sequestration, the federal government hasn't been paying us the subsidy that we all banked on when we entered into those transactions. For us, it's cost us roughly $24 million because of that sequestration. And so I think for many of us, the holy grail, so to speak, would be to find a solution to build America bonds. We are seeing a lot of the pitches that Simon was alluding to as well in terms of opportunities to refinance these bonds.

(01:08:04)

I would say that we continue to be open to ideas, particularly as some of those savings were starting to become positive, but without achieving those positive savings, without achieving our threshold savings, it's a challenge. But I think my greater concern, and I think Simon for alluding to this, is that sequestration is not new. It occurred many years ago, and I think there's room for debate with investors about whether it's appropriate to be declaring that extraordinary call provision now. And Simon alluded to some of the concerns that the investors have. Again, my core mission, our core mission as a team is to deliver projects. And if we produce resistance from investors to buying our new money bonds, that's a big problem for us. So I think we're going to continue to evaluate this and tread very carefully. It's not an obvious decision, especially when the market does not yet provide threshold savings within our policy.

(01:09:50)

The last thing I want to touch on this morning is bond proceeds investments. Galen touched on it with questions in the audience. This inverted yield curve where there's such high interest rates on the short term presents a great opportunity to invest differently than we have in the past. I think I won't ask for a show of hands, but I suspect many of you have had funds invested with your trustee in sweep accounts or other low investing funds because there wasn't much of a difference to the strategy. Now it does make a difference. We are working with our city treasurer's office to reevaluate all of the invested bond proceeds and have moved funds. There are opportunities, simple things like shifting between funds that offer lower, lower costs and higher yields to more structured opportunities. For those of you who, for example, have reserve funds or capitalize interest accounts, I'd encourage you to revisit that strategy.

(01:11:19)

Again, it's one of those underused muscles that we haven't been exercising in our marketplace. I think all of us will also need to be much more cautious and consider arbitrage rebate compliance. Our entire team is going to be going to a training session that OR and BLX are presenting. CDIAC is doing an investment program. I'd encourage you to take advantage of opportunities to reeducate on bond reinvestment because we have a whole generation of debt managers who don't know a market of with positive arbitrage because they haven't lived that experience yet. But we now have that opportunity. And with that, I'd like to open up for questions for me or for any of our members of the panel.

Audience Member 5 (01:12:27):

Nikolai. I don't know if you have maybe just a sentence or two to talk about SRF versus the WIFIA, just net cost and that kind of thing?

Nikolai J. Sklaroff (01:12:34):

Yeah, We use both SRF for our water enterprise and for our wastewater enterprise. To date, we've used WIFIA just for wastewater, but we are continuing to evaluate WIFIA as well. And we typically use them in combination. It's not exclusive as well. I don't know if anyone else wants to add anything to that.

Audience Member 4 (Lester) (01:13:16):

It's probably not necessary for the PUC, but I was wondering if you do a second party verification opinion for your green bonds.

Nikolai J. Sklaroff (01:13:26):

I love that question, and I should probably emphasize that we don't do just green bonds. We do climate bond initiative certified green bonds, so we do third party verification on our bonds. I think it's a really interesting topic right now because I think as you listen to what the office of municipal securities at the SEC is saying, we started green bonds with self-certified green bonds for our power enterprise, and then our water and wastewater added green bonds at this, what we'd like to refer to as the platinum standard of CBI certified green bonds, but it is causing us now to go back and rethink what we're going to do for the one enterprise that has historically done self-certification because of the SEC concerns about greenwashing in the marketplace.

Audience member 6 (01:14:42):

Nikolai, you mentioned we all got spoiled with refunding savings and we all started getting comfortable that we should get double digit PV savings. Everybody probably has a policy that has 3% in it, which was made up 40 years ago, and there's not probably a single person alive who knows where that number actually came from. I'm just wondering where everybody is now in terms of what's the new standard or are you like me really not saying because you don't know yet?

Daniel Wiles (01:15:21):

Realistically, I think we're still well north of five. I can't tell you there's a red line, but it's not three. I think I'd have trouble, even with my own staff, have trouble getting something at three and a half or 4% by just be like, what do you want to spend our time doing this for? But some of that is because we are spoiled. The last three, four refunding we've done have all been well into double digits.

Nikolai J. Sklaroff (01:15:52):

I would say from our perspective, and I'm going to sound like a rating agency, it depends because if we're talking about pulling the trigger on a standalone refunding, I think that's one thing. If we're talking about procuring savings from taxable bonds that we couldn't otherwise refund, that's another thing. And if it's tax exempt, a third thing, so I think it really depends on the circumstances. I wouldn't make it a flat percentage for every scenario.

Colin Bettis (01:16:44):

I'll add just a little bit to that as well. I think that it also depends on how much work has already gone into the product. If you've already been working on a deal and you're near pricing and things move away from you, are there still savings to be achieved? If it's still savings, that's still savings. And if you've already done the work, I mean, again, yes, is that threshold as well, and I wouldn't go that low either. But if you've already put in the work and you're losing a little bit of those savings, it's still a deal that provides savings.

Audience Member 7 (Hector) (01:17:22):

Hi, this is Hector. Just a iteration on what David broadly was asking. With respect to the savings, when you did the tender option, you arrived at a 40 something odd percentage of participants. How do you determine when it's worth your while to pursue it? If, for example, you're trying to balance the participation versus the savings, how do you determine that internally to proceed with the tender?

Nikolai J. Sklaroff (01:17:56):

Well, remember the way this all starts, and I'll let Natalie discuss as well, but the way this all starts is we put out the bonds that we're looking for. We offer the price. Now of course there's the potential for movement, but we are in essence setting the stage throughout that process. But in the end, at each of those points, there's a decision to be made, an opportunity to pull back or to make adjustments.

Natalie Perkins (01:18:41):

Is this, yeah, I would say something similar. I think we had a minimum dollar amount. We wanted, obviously we need to adhere to our debt policy and we had check-ins all along the way. Is it still worth incurring additional legal costs and what not? Another piece of it is when you look at the existing bond holders, there are certain types of bond holders that are more likely to be tendering the bond. So that was another data point. I think insurance companies don't typically tender bond funds do so, but it is a risk and we didn't get as much savings as we had seen in some of our pitches. But the market moves and we still got 5 million in savings.

Nikolai J. Sklaroff (01:19:33):

And Hector, one of the things I'd also explain is that we identified the billion seven of candidates, but our team had appropriately tempered our expectations for what we would achieve. We went out to the market with a POS that identified that 1.7, but reflected about 30% participation. So we overachieved, we produce savings more than we presented to our commission. So everyone was very happy with that outcome.

Natalie Perkins (01:20:17):

For us, when we went to the rating agencies, I think we had something like 4 billion in candidates and that was about two months before we sold the bonds. And so for the rating agencies, we said we showed them anything that could potentially ever have savings. And then when we went out for the actual tender, we didn't want a tender for bonds that were marginal or very unlikely to be tendered.

Nikolai J. Sklaroff (01:20:46):

One last question?

Robert Barry (01:20:53):

Alright, that's going to bring us to the close of the pre-conference one last time. To thank all of our presenters today.