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Presentation to the Michigan Association of School Administrators
Overview of QZAB Funding for Energy Conservation Projects
May 25, 2011
Stephen D. Flaherty
Director
RBC Capital Markets
2101 Oregon Pike
Lancaster, PA 17601
Tel: (717) 519-6052
E-mail: [email protected]
Royal Bank of Canada: Snapshot
Diversified
Business Mix
Q1 2011
Capital Markets
27%
Insurance
12%
Wealth
Management
16%
Retail Banking
37%
Financial Stability
and Strong Results
Q1 2011
International
Banking
8%
Total Revenue:
$7.4 billion
Net Income:
$1.8 billion
Assets:
$720 billion
Tier 1 Capital Ratio:
13.2%
Market Capitalization(1):
5th largest in North America
$86 billion
Credit Ratings (Moody’s / S&P):
Aa1 / AAOne of the highest ratings among financial institutions
Broad Footprint
Q1 2011
Countries of Operations:
58
40% of Revenue Generated Outside of Canada
Employees Worldwide:
Clients Worldwide:
1
79,000
18 million
C$/US$ period average conversion rate of 0.992 per Royal Bank of Canada First Quarter 2011 Report to Shareholders
C$/US$ period-end conversion rate of 0.999 per Royal Bank of Canada First Quarter 2011 Report to Shareholders
(1) Source: Bloomberg as of 05/16/2011
RBC – A Leader in U.S. Municipal Finance
Municipal Product
Offerings
Core Services
Specialty Sectors

Credit products and balance sheet solutions

Access to a global distribution network

Commodity risk management and financing

Tax credit distribution

Interest rate derivatives

Dedicated municipal research team

Tax-exempt direct purchase program

Creative bond financing

Credit services such as liquidity facilities, letters of
credit and tax-exempt direct lending

Investment banking

Full range of derivative products for issuer & investor
clients

Financial advisory

Global Public Private Partnerships

Full range of investment & cash management products

Healthcare

Public Power

Higher Education

Infrastructure / P3

K-12 Education

Student Loans

Charter Schools

Transportation
Key Municipal Origination Statistics
Year
2010
2009
2008
2007
2006
2005
Lead
Manager
CoManager
Financial
Adviser
(US$ Bils.)
$19.1
$17.4
$14.7
$15.2
$16.9
$20.2
(US$ Bils.)
$76.5
$71.0
$55.3
$83.1
$58.4
$54.0
(US$ Bils.) (US$ Bils.)
$9.2
$104.8
$ 9.6
$97.9
$14.7
$84.7
$11.4
$109.7
$11.5
$86.8
$10.0
$84.2
Notable Achievements in 2010
2
›
Joint bookrunner for the largest long-term municipal bond issue
›
Sole manager for the two largest VRDN transactions
Total
# of
deals
1,290
1,019
913
1,243
1,309
1,403
›
Joint bookrunner for the largest linked rate issue
›
Sole manager for one of the largest competitive deals
›
Senior manager for three Bond Buyer Deal of the Year
nominations
K-12 Historical Rankings
(source – Thompson Financial)
2010 National K-12 Lead Manager League Table
Negotiated: Full Credit to Book Runner
Par Amount
(US$ mil)
RBC Capital Markets
2009 National K-12 Lead Manager League Table
Negotiated: Full Credit to Book Runner
Number of
Issues
Rank
Par Amount
(US$ mil)
$4,027.6
1
270
Bank of America Merrill Lynch
3,630.4
2
26
Citi
2,953.2
3
34
Stifel Nicolaus & Company Inc
2,141.5
4
172
Piper Jaffray & Co
2,094.8
5
168
Morgan Keegan & Co Inc
1,789.6
6
72
Robert W Baird & Co Inc
1,662.7
7
D A Davidson & Co
1,587.2
George K Baum & Company Inc
Stone & Youngberg
Industry Total
$5,348.2
1
216
Banc of America Merrill Lynch
3,821.3
2
37
Citi
3,115.7
3
23
Piper Jaffray & Co.
2,523.4
4
145
Goldman Sachs & Co.
2,245.4
5
13
George K Baum & Company
2,171.5
6
109
251
Morgan Keegan & Co. Inc.
1,332.5
7
52
8
187
Barclays Capital
1,210.1
8
4
1,436.9
9
133
Robert W. Baird & Co.
1,171.2
9
163
1,348.8
10
101
Wells Fargo & Co.
1,158.8
10
29
$40,728.4
2,752
RBC Capital Markets
Industry Total
2008 National K-12 Lead Manager League Table
Negotiated: Full Credit to Book Runner
Par Amount
(US$ mil)
RBC Capital Markets
Number of
Issues
Rank
$39,752.9
2,150
2007 National K-12 Lead Manager League Table
Negotiated: Full Credit to Book Runner
Par Amount
(US$ mil)
$4,906.0
1
182
Banc of America Merrill Lynch
3,942.9
2
54
Wells Fargo & Co.
2,259.2
3
106
UBS Securities LLC
1,831.3
4
JP Morgan Securities Inc.
1,649.5
First Southwest Securities
1
197
UBS Securities LLC
4,367.2
2
113
Merrill Lynch & Co.
3,619.9
3
17
17
Citigroup
3,512.8
4
33
5
15
Wachovia Securities
2,706.9
5
126
1,515.8
6
49
Bear Stearns & Co.
1,777.6
6
9
Southwest Securities
1,400.0
7
41
Morgan Keegan & Co. Inc.
1,681.4
7
44
Morgan Keegan & Co. Inc.
1,286.9
8
40
City Securities Corporation
1,582.8
8
52
Stone & Youngberg
1,203.8
9
58
Stone & Youngberg
1,571.7
9
95
Goldman Sachs & Co.
1,190.7
10
4
Goldman Sachs & Co.
1,390.8
10
6
$35,578.2
1,721
RBC Capital Markets
Number of
Issues
Rank
$4,651.6
Industry Total
3
Number of
Issues
Rank
Industry Total
$46,613.2
2,038
QZAB Benefits
 Low to zero interest rates
 Interest on bonds is taxable at market rates
 Issuer receives direct reimbursement/subsidy from U. S. Treasury for lessor of bond rate or published rate (updated daily)
 Example :
Bond rate equals 5.00% and published rate equals 5.25%, issuer pays zero (5.00% - 5.00% = 0.00%)
Bond rate equals 5.50% and published rate equals 4.75%, issuer pays 0.75% (5.50% - 4.75% = 0.75%)
 Current indicative market rate is 6.20% and published rate equals 5.01% for a net rate of 1.19%
 Ability to invest sinking fund payments to further reduce interest cost and possibly even principal cost
 Debt is typically marketed as a single “bullet” maturity due at end of term (15 year term with 14 years of interest only
payments and one single payment of principal for full amount borrowed
 District will make annual sinking fund payments of principal to bond trustee to ensure funds available at maturity to pay full
amount of bullet due
 IRS rules allow interest earnings on sinking fund deposits which are above net rate of borrowing, rate is established
monthly
 Sinking fund earnings effectively reduce interest cost an depending on market conditions may allow District to repay less
than actual amount borrowed
 Current permitted earnings in sinking fund is 4.68%
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QZAB Combined with Energy Savings Project
 Energy project produces annual ongoing savings from higher efficiency and conservation resulting in less annual cost for
utilities
 Savings used to fund costs of project; thereby requiring no out of pocket expenditure for District to upgrade facilities and
conserve energy
 The lower the cost of the funding for the energy project, the larger a project the energy savings can support
 Combination of energy project with low to no cost QZAB funding is “best of both worlds” outcome for District resulting in
being able to fund larger project at no out of pocket cost to District
5
Example
Example makes the following assumptions:
1) QZAB bond interest rate equal to current rate of 6.20% for “A” rated credits
2) Treasury subsidy rate equal to current 5.01%
3) Sinking fund earnings invested at rate of 3.50%
4) $5,000,000 Total Borrowing
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Example
Date
12/01/11
06/01/12
12/01/12
06/01/13
12/01/13
06/01/14
12/01/14
06/01/15
12/01/15
06/01/16
12/01/16
06/01/17
12/01/17
06/01/18
12/01/18
06/01/19
12/01/19
06/01/20
12/01/20
06/01/21
12/01/21
06/01/22
12/01/22
06/01/23
12/01/23
06/01/24
12/01/24
06/01/25
12/01/25
06/01/26
(A)
(B)
(C)
( D)
( F)
( G)
(H)
(I)
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(A)
Principal -deposited in
Sinking Fund
357,143
357,143
357,143
357,143
357,143
357,143
357,143
357,143
357,143
357,143
357,143
357,143
357,143
357,143
5,000,000
(B)
Payment Example
Series of 2011 - QZAB w/ sinking fund offset -- assumes issuance date of 6/1/11
(C)
( D)
( F)
( G)
(H)
Interest
Total Payment
Federal Interest
Subsidy
103,333
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
155,000
4,598,333
103,333
155,000
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
155,000
512,143
9,598,333
-83,504
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-125,256
-3,715,913
Sinking Fund
Balance
Sinking Fund
Earnings
12,500
25,000
37,500
50,000
62,500
75,000
87,500
100,000
112,500
125,000
137,500
150,000
162,500
1,137,500
Net Payment
19,830
29,745
29,745
386,887
29,745
374,387
29,745
361,887
29,745
349,387
29,745
336,887
29,745
324,387
29,745
311,887
29,745
299,387
29,745
286,887
29,745
274,387
29,745
261,887
29,745
249,387
29,745
236,887
29,745
224,388
4,744,920
(I)
Annual Net
Payment
49,574
416,632
404,132
391,632
379,132
366,632
354,132
341,632
329,132
316,632
304,132
291,632
279,132
266,632
254,132
4,744,920
Principal component of each payment, will aggregate to pay $5,000,000 prinicipal due at maturity. Will be deposited into interest earning sinking fund.
Semi - annual interest expense based on $5,000,000 payment at maturity using current interest rate of 6.20 % determined by 10 yr Treasury rate plus credit spread
Equals A + B
Federal QZAB direct pay subsidy determined by lessor of bond rate of 6.20% or federal published rate of 5.01%. Changes daily as IRS updates federal published rate
Total of principal component deposited into sinking fund to date.
Earming on sinking fund balance at 3.50%. Current permitted yield of 4.68% as published by IRS. Will change monthly as IRS adjust maximum permitted yield.
Total semi-annual payment due
Total annual payment due.
8
April-11
March-11
February-11
January-11
December-10
November-10
October-10
September-10
August-10
July-10
June-10
May-10
April-10
March-10
February-10
January-10
December-09
November-09
October-09
September-09
August-09
July-09
June-09
May-09
April-09
Historical Reimbursement and Permitted Sinking Fund Rates
(source – Treasurydirect.gov)
9.00%
8.00%
Reimbursement Rate
Permitted Sinking Fund Yield
7.00%
6.00%
5.00%
4.00%
3.00%
9
April-11
March-11
February-11
January-11
December-10
November-10
October-10
September-10
August-10
July-10
June-10
May-10
April-10
March-10
February-10
January-10
December-09
November-09
October-09
September-09
August-09
July-09
June-09
May-09
April-09
Historical Maximum Maturity
(source – Treasurydirect.gov)
20
19
18
17
16
15
Maximum Maturity
14
13
12
Disclosure
All information contained in this communication constitutes RBC Capital Markets’ judgment as of the date of this
communication, and is subject to change without notice and is provided in good faith but without legal responsibility. The
information contained in this communication has been compiled by RBC Capital Markets from sources believed to be
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