Download Private Placement Financing

New York State Government Finance
Officers’ Association
37th Annual Conference
Private Placement Financing
Thursday, April 7, 2016
2:30 P.M. – 3:20 P.M.
Albany Marriott Hotel
William J. Jackson, Esq.
Hawkins Delafield & Wood LLP
28 Liberty Street, New York, New York 10005
[email protected] - (212) 820-9620 - www.hawkins.com
Introduction

Topics
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Sale of Bonds or Notes in New York State
Applicable New York State statutes and
regulations
Securities Law Issues
Issuer Considerations
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Sale of Bonds and Notes
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Sale of Bonds and Notes

Bonds or notes of a local government in
New York State may be sold using one of
the following methods:

Public Sale – Bonds or notes are sold
competitively with an official statement and in
accordance with terms set forth in a notice of
sale or term sheet
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Sale of Bonds and Notes

Negotiated Sale – Bonds or notes are sold to an
underwriter or bank pursuant to negotiated or
agreed upon terms

Private Placements and Bank Loans are two types of
negotiated sales under applicable New York State
Law
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Applicable New York State
Statutes and Regulations
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Applicable New York State
Statutes and Regulations

Applicable statutes and regulations


Local Finance Law – Section 176.00 states that
the LFL shall be the exclusive law for matters
involving financings by local governments.
Other relevant statutes:
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General Municipal Law
Energy Law (Article IX)
Rules and regulations promulgated by the State
Comptroller
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Applicable New York State
Statutes and Regulations

Sale of Bonds
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Section 57.00 of the Local Finance Law (LFL)
 Bonds must be sold at public sale in accordance
with the procedures set forth in the LFL, unless an
exception applies. (private sales generally prohibited)
General Rules for Public Sales
 Must comply with rules promulgated by the State
Comptroller for public sales
 Bidders submit “sealed bids” at time of sale
 CFO awards bonds or notes to lowest bidder
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Applicable New York State
Statutes and Regulations
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Exceptions to Private Sale Prohibition
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Section 63.00 of the LFL
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Bonds in a principal amount of $5.0 million or less
may be sold at private sale, provided that the
aggregate amount of bonds sold by a local
government at private sale in a single fiscal year
cannot exceed $5.0 million
Where the term of the bonds is greater than 10
years, an approving legal opinion is required
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Applicable New York State
Statutes and Regulations

Special provision in Section 57.00 of the LFL
provides that in certain cases bonds may be sold
at private sale provided several conditions are
met:
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Bonds are sold at a discount (less than par)
Issuer complies with regulations promulgated by
the State Comptroller
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Applicable New York Statutes
and Regulations

Regulations promulgated by the State
Comptroller pursuant to Section 57.10 of the
LFL

New York State Comptroller’s regulations state that
public competitive sales typically produce the
lowest interest costs for issuers and, as a result, the
Comptroller’s office has consistently favored
competitive or public sales unless the local
government would have difficulty utilizing
competitive sale because of one or more factors.
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Applicable New York State
Statutes and Regulations

Factors cited by the State Comptroller in its
regulations
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unstable or volatile market conditions,
conditions of fiscal stress or negative credit factors being
experienced by the issuer,
the large dollar amount of the proposed issue, or
the complexity of the proposed issue.
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Applicable New York State
Statutes and Regulations

Local government may make an application to the State Comptroller in
circumstances where the local government believes that such factors
will render a public sale “impractical or impossible”
 Application takes the form of a letter of the Chief Fiscal Officer of
the local government requesting authority to sell a particular series
of bonds at private sale
 Letter of CFO typically accompanied by supporting letter(s) from
professionals hired by the local government
 State Comptroller can grant or deny application
 If granted, the local government must also comply with certain
additional rules and regulations
 If denied, bonds must be sold at public sale
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Applicable New York Statutes
and Regulations
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Special State legislation authorizing the
private sale of bonds
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Statute enacted on behalf of a local government
authorizing the sale of bonds by private sale
Discount requirement does not apply in these cases
Statute generally contains a “sunset” provision and
must be extended periodically by the State Legislature
Terms and conditions of sale are subject to approval of
the State Comptroller
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Applicable New York State
Statutes and Regulations
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Sections 90.00 and 90.10 of the LFL
authorize refunding bonds to be sold at
private sale

Terms and conditions of sale are again subject
to approval of the State Comptroller
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Applicable New York State
Statutes and Regulations


Section 54.90 of the LFL provides for the
sale of variable rate bonds at private sale,
subject to certain conditions
Sale of Notes

Section 60.00 of the LFL

Notes may be sold at either public or private sale
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Securities Law Considerations
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Securities Law Considerations
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Why is this relevant?
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If a bank loan is not a municipal security,
existing securities laws DO NOT apply
If a bank loan is a municipal security, securities
laws DO apply
Loan vs. Security

Is the instrument a security pursuant to
Securities Exchange Act of 1934?
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Securities Law Considerations
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Reves v. Ernst & Young Inc., 494 U.S. 56 (1990)
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Presumption – the instrument is a security, unless it is of a
type specifically identified as a non-security
 Court identifies several non-security instruments in its
opinion
 States that other instruments may qualify as a nonsecurity instrument if it has a strong family
resemblance to a non-security instrument identified by
the Court
Court outlines a four (4) part test for determining whether
an instrument is a security
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Securities Law Considerations
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Court also states that it will also look to the nature of the
transaction to determine whether it is consistent with a
commercial loan or the issuance of a security
Other factors to consider
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Will CUSIP numbers be obtained?
Will the note/bond be issued in a single
denomination?
Are there transfer restrictions?
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Securities Law Considerations
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Is the debt being purchased with a view toward
distribution?
Are all purchasers treating the transaction in the
same manner?
Private Placement is always a security;
however, in order to reach a determination
as to whether a Bank Loan is a security or a
non-security, one must look to Reves.
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Securities Law Considerations
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Public Disclosure of bank loans
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Currently not mandated, but recommended
Addressed in recent releases by regulators and
industry groups
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Securities Law Considerations
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MSRB Notice 2016-11 (March 28, 2016)
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Proposal to require Municipal Advisors to
disclose information regarding the direct
purchases and bank loans of their clients
Such disclosure could be made to the MSRB’s
Electronic Municipal Market Access (EMMA)
system for public dissemination.
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Securities Law Considerations
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MSRB Notice 2011-52 (September 12, 2011)
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Under existing legal principles certain
financings that are called “bank loans” may, in
fact, be municipal securities
In such cases, parties regulated by the MSRB
that play a role in such financings may
inadvertently violate MSRB rules, as well as
other federal securities laws
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Hawkins Delafield & Wood LLP
Securities Law Considerations
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MSRB Notice 2012-18 (April 3, 2012)
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Encourages local governments to voluntarily
post information about their bank loan
financings to EMMA
Provides recommended procedures
MSRB believes that voluntary posting will
provide timely access for investors and other
market participants to key information useful in
making informed investment decisions
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Securities Law Considerations
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MSRB Notice 2015-03 (January 29, 2015)
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Disclosure of a bank loan and its terms is
beneficial to the continued fairness and
efficiency of the municipal securities market
because:
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Regulatory ambiguities exist regarding bank loans
Inconsistent market practices with respect thereto
Lack of commonly accepted provisions within bank
loan agreements
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Issuer Considerations
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Issuer Considerations
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Is the contemplated transaction authorized
under New York Law?
How will the transaction be treated for
accounting purposes?
What type of disclosure should be given
regarding the transaction and the associated
terms?
What is the financial impact of the
transaction?
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Issuer Considerations
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Consult with your Financial Advisor and
Bond Counsel
Adopt policies and procedures
Review and consult recent releases:
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National GFOA release – “Understanding Bank
Loans” (September, 2013)
White paper prepared by a task force comprised
of various industry groups (May 1, 2013)
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Hawkins Delafield & Wood LLP
New York State Government Finance
Officers’ Association
37th Annual Conference
Private Placement Financing
Thursday, April 7, 2016 – 2:30 P.M. – 3:30 P.M.
Albany Marriott Hotel
William J. Jackson, Esq.
Hawkins Delafield & Wood LLP
28 Liberty Street, New York, New York 10005
[email protected] - (212) 820-9620 - www.hawkins.com
Presentation to
New York State Government Finance Officer’s Association
Direct Bank Purchases
of Tax Exempt Loans
Presented by
Richard Tortora
Capital Markets Advisors, LLC
April 7, 2016
Advantages of Direct Purchase vs. Traditional Debt Financing
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Sold without an Official Statement ‐ costs of issuance are lower and process is faster
No need to prepare and file a Debt Statement with NYS No credit rating required
Borrower can potentially draw down on the loan over time reducing overall interest expense
No fee to underwriter or its counsel
Could be more flexibility on repayment after a fixed period of time on an interest payment date
No dealing with Depository Trust Company (DTC) Disadvantages of Direct Purchase vs. Traditional Debt Financing
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Limited pool of banks participate in direct purchase Banks will be selective
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inclined to work jurisdictions that they’ve had long term relationships with
aren’t interested in jurisdictions that have history of bad disclosure
Failure to file on time or weak disclosure in prior OS is a problem
Aren’t interested in small issues – a lot of work for a little bit of money
Aren’t interested in deals that are too short (< 3 years) or too long (> 10 years) – interest rate generally not competitive
Bank sets one interest rate for the term of the issue
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‐
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‐ Bank will get capital market pricing and then try to price DP better
no interest rate scale
Aa Interest Rates for Tax Exempt Debt Financing 4/1/16
1/4/16
10/1/15
4/1/15
12 Month Change
1 year
0.60%
0.56%
0.27%
0.22%
+38 bps
2 years
0.75%
0.88%
0.63%
0.58%
+17 bps
3 years
0.93%
1.08%
0.89%
0.93%
No change
4 years
1.09%
1.23%
1.13%
1.19%
‐10 bps
5 years
1.23%
1.36%
1.39%
1.38%
‐15 bps
6 years
1.37%
1.48%
1.59%
1.56%
‐19 bps
7 years
1.52%
1.65%
1.81%
1.77%
‐25 bps
8 years
1.68%
1.82%
2.00%
1.92%
‐24 bps
9 years
1.83%
1.95%
2.12%
2.06%
‐23 bps
10 years
1.95%
2.07%
2.23%
2.16%
‐21 bps
15 years
2.48%
2.55%
2.76%
2.67%
‐19 bps
20 years
2.75%
2.79%
3.04%
2.89%
‐14 bps
December 2015 ‐ Fed raises interest rates for first time since 2008 fiscal crisis
Direct Purchase vs. Lease Financing
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Both sold without an Official Statement so costs of issuance are lower and process is faster
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Neither requires a CUSIP number since this is not a security
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Doesn’t count against a jurisdiction’s debt limit
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Neither requires a Debt Statement with NYS
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Neither requires a credit rating
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Borrower can potentially draw down on either loan over time reducing overall interest expense
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No dealing with DTC
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Leases are subject to annual appropriation so deemed less secure than bond debt
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School district leases are not subject to State Finance Law Sec. 99‐b state aid intercept
Municipal Advisor Rule
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Following 2008 financial crisis, the SEC and the MSRB developed a new rule to insure that municipal issuers receive unbiased advice as they plan and issue debt.
The new rule took effect on July 1, 2014 and defines what a “municipal advisor” is: a person who provides advice to a municipal entity with respect to financial products or debt issuance
Limits the way underwriters and other professionals can interact with municipalities ‐ restricts them from giving certain advice on issuance of debt. Only professionals with a fiduciary duty to a municipality, as imposed by the Dodd‐Frank Act, may provide (structuring) advice, unless an exemption is in place
Makes it unlawful to act as a “municipal advisor”, i.e. to provide “advice” to a “municipal entity” in connection with “municipal finance products” or the “issuance of municipal securities” unless you are registered as a municipal advisor or you are exempt from registration
Bankers can not negotiate the terms of a direct purchase directly with a public jurisdiction except if responding to an RFP or has an IRMA letter from issuer
Underwriters’ Exemptions to the Rule
There are three primary exemptions from the MA rule for underwriters:

An underwriter providing advice within the scope of its underwriting engagement
 But only up to the day the issue closes
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Advice given in response to an RFP or RFQ, if it is uncompensated
 RFP’s/RFQ’s can not be outstanding for more than 6 months 
Advice to a person represented by an independent registered municipal
advisor (“IRMA”) on the transaction, if the required representations are
exchanged
 Issuer has to notify underwriter in writing of municipal advisor’s role
 Underwriter must send issuer a letter pursuant to MSRB Rule G‐37
REGULATION, RATES AND OPPORTUNITY – DIRECT BANK FINANCING
STRICTLY PRIVATE AND CONFIDENTIAL
April 2016
Jeff Sirota
Chase, J.P. Morgan, and JPMorgan Chase are marketing names for certain businesses of JPMorgan Chase & Co. and its subsidiaries worldwide (collectively, “JPMC”).
REGULATION, RATES AND OPPORTUNITY – DIRECT BANK FINANCING
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to make a preliminary presentation to the Company regarding certain products or services that might be provided by J.P. Morgan. This document and any related
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1
The Changing Regulatory Environment
Basel III – a comprehensive set of reforms with several goals
 Basel III was developed by the Bank for International Settlements which was established in 1930; goal is to help
REGULATION, RATES AND OPPORTUNITY – DIRECT BANK FINANCING
central banks with monetary and financial stability. Their head office is in Basel, Switzerland.
Strengthen regulation,
supervision and risk
management in the
banking sector
Protect the market and
broader economy from the
impact of an isolated stress
event in a single bank
Basel III
Ensure banks have
reliable, stable sources
of funding in times of
stability and stress
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Improve the banking
sector’s ability to
absorb shocks arising
from financial and
economic stress
Direct Bank Purchase of Tax-Exempt Loans
Additional Considerations
Features of Direct Purchase Loans
 As a requirement of the loan, there is no agency
 With the Direct Purchase structure, tax-exempt bonds
rating on the issue nor is a CUSIP utilized.
are issued through a government authority that will
designate the issue as either bank-qualified or non-bank
qualified.
 In addition, there is no underwriter discount or
remarketing fee as the issue is directly purchased by
the bank as a funded loan.
 A commercial bank purchases the tax-exempt
obligations directly from the borrower.
 In general, there is no letter of credit, municipal
insurance or other credit enhancement necessary in
a bank purchase loan.
REGULATION, RATES AND OPPORTUNITY – DIRECT BANK FINANCING
 The tax-exempt interest rate is set as a percentage of
the borrower’s conventional loan rate and can be
structured on either a fixed or variable rate basis. In the
case of construction or project financing, the borrower
has the ability to draw down the proceeds over a period
of time.
 There are no underwriter’s attorney fees.
 There is no requirement to prepare an Official
Statement.
 Ability to use a forward rate lock or delayed draw feature
 Typical fees considered in these types of
to match up timing of debt with need for funding.
transactions include the following:
 Financial Advisor
 Bank Counsel
 Borrower’s Counsel
 Bond Counsel
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Debt Management Benefits
 Bank purchase structures are flexible and provide effective financing for new projects or for refinancing of existing
loans.
 New infrastructure projects
 Improve economics on existing financing
 Under a bank purchase structure, the upfront costs may be lower than alternative financing.
 As most bank purchase structures are not rated, many ongoing expenses of a publicly issued security may be
REGULATION, RATES AND OPPORTUNITY – DIRECT BANK FINANCING
unnecessary.
 Once the documentation is in place, the loan is considered closed and funds are disbursed as per the loan
agreement.
 In some cases, municipalities may consider financing using direct placement bank debt for some (typically shorter)
tenors combined with public market financing for other (typically longer) tenors.
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Financing Alternatives – Direct Placements
Features of Direct Purchase Loans
Market place changes
 Impact of Regulation
 Private transaction
 Banks demand for funded loans has increased
 Broad pool of financing
 More lenders are willing to provide loans as
 Banks
contrasted to buying securities
 Insurance companies
 Bond insurance
REGULATION, RATES AND OPPORTUNITY – DIRECT BANK FINANCING
 Hedge funds
 Monoline bond insurance as percentage of public
 Tailored borrowing time line
bonds has declined
 Construction draw
 Impact on traditional investors
 Refinancing date
5
New York State Government Finance
Officers’ Association
37th Annual Conference
Private Placement
Financing
Thursday, April 7, 2016
2:30 P.M. – 3:20 P.M.
Albany Marriott Hotel