California Debt Issuance PrImer
CaliforniaDebt Issuance PrimerhandbookCalifornia Debt and Investment Advisory CommissionPhil AngelidesState Treasurer and ChairCDIAC #05-06
MTableofC onTenTsPreface. 3Introduction.to.Debt.Financing. 5The.Financing.Team. 9Debt.Structure. 11Types.of.Instruments. 15Selling.Your.Bonds. 21Federal.Tax.Requirements. 27Investing.Bond.Proceeds. 31Index. 35
MPrefaCea supplement to the California debt issuanCe primerThe California Debt and Investment AdvisoryCommission (CDIAC) developed this handbook tobe used as an accompanying guide to the CaliforniaDebt Issuance Primer (Primer).This guide will provide a starting point and “quickreference guide” to many of the general questionsthat arise in the issuance of debt in California, andshould be used in conjunction with the Primer forcomprehensive answers to your inquiries.This handbook is structured to provide a generaloverview of each major area included in the Primeralong with identifying specific sections within thePrimer that will provide comprehensive answers onthe selected subject matters.It presents information on the following: Key elements of the market and structureof municipal bonds, Roles and responsibilities of bond marketparticipants, Basics of how a bond issue is structured, Types of financing instruments available, Steps necessary to sell your bonds, and State and federal regulations and taxlaws affecting debt.This symbol will identify specific subsections withinthe California Debt Issuance Primer (Primer) thatexpand on the information provided in this handbook.Selecting (clicking on) this symbol in the electronicversion of this manual will automatically link you tothe appropriate section within the California DebtIssuance Primer.
InTroduCTIon To debT fInanCIngFundamental procedures and basic terms used in debt FinancingMunicipal bonds represent a promise by state orlocal agencies or other qualified issuers to repay toinvestors an amount of money borrowed, called theprincipal, along with interest according to a fixedpayment schedule. Municipal bonds generally arerepaid, or mature, anywhere from one to 40 yearsfrom the date they are issued.THE MARKET FORMUNICIPAL BONDSBonds are utilized to finance a wide variety ofprojects in addition to satisfying ongoing cashflow requirements. Projects range from streets androads to low-income housing.The municipal bond market consists of the primarymarket, which deals in newly issued bonds and thesecondary market, where securities are bought,sold, and traded after they have been issued. Therewere approximately 2 trillion dollars in municipalbonds outstanding in the U.S. at year-end 2004.The key to understanding the secondary marketfor municipal bonds is recognizing that it differsfrom other security markets. The municipal bondsecondary market, unlike the corporate stock andbond markets, is not a formal market. There are nopublic listings of sale offerings and no institutionssuch as the New York Stock Exchange for thesebonds to be traded. The size of the market, types ofdealers and their function in the market, sources ofinformation determining the market, and uniformregulations governing trading practices all serve tomake this secondary market unique.OVERVIEW OF CALIFORNIA’SMUNICIPAL DEBT MARKETDebt issuance in California, as with the nationalmarket, is governed by a number of factorsincluding the economy, public need, and theavailability of funds. The following charts provideinformation reported to CDIAC on the majorcomponents of debt issued by public agenciesin California for the year 2004.California Local Government Debt Issuance by Type–2004( in millions)Debt revenue.anticipation.notes.Other.notes.Total Local Issues. Issued 945,960266 38,590
The types and issuance of debt involves manyfacets—it includes both long-term and short-termdebt, tax-exempt and taxable debt, as well asdebt issued for the purpose of refunding existingindebtedness.California has been a significant issuer relative toother states and continues to be a prime contributorto the growth in U.S. municipal debt markets. TotalCalifornia debt issuance, including state and localagencies, normally ranges between 40-50 billionannually, but has risen sharply over the three yearsending prior to 2004. The following chart describesissuance over the prior 10-year period.Counties, cities, school districts and joint powersauthorities (groups of counties and/or cities) makeup the majority of issuers. Other issuers includespecial districts that target specific purposes. Thefollowing tables provide an overview of the localissuers, types of debt and purpose for issuing debtfor the year 2004.California Local Government Debt Issuance by Agency–2004( in millions)Government l.Districts.Other.Issuers.Total Issued 4,6845,0464429,6007,87410,944 38,590California law allows for both competitive biddingand negotiated sale in placing debt issues. Overthe ten-year period from 1994-2004, an averageof 70 percent of the issues have been sold throughnegotiated sale. California Local Government Debt Issuance by Project–2004( in millions)Project Type IssuedCapital.Improvement.and.Public.Works. l 38,590Additional California Issuance Statistics areavailable on the CDIAC website under “Currentand Historical Data” and “Publications and PolicyInformation/Annual Reports”.KEY TERMS RELATING TOMUNICIPAL BONDSMunicipal bonds have certain key components thatare described below.Principal. Debt instruments typically have a“principal” component. Principal is the totalamount borrowed and owed. The term principal isalso referred to as the face or par value of the debtinvestment. Interest typically accrues based on theprincipal.Interest. A key characteristic of a debt instrumentis that it bears interest on the outstanding principalamount; the “interest” component is compensationby the debtor to the lender for the use of moneyfor a period of time. Interest is calculated as apercentage of the principal amount borrowedover the time period of the financing. The basis ofcalculating is routinely a defined term of days suchas a 360 day year with 30 days per month (30/360)or a 365 day year with actual days per month(actual/365).Maturity. A key characteristic of a debt instrumentis that principal is typically payable by a certaindate. The term “maturity” means the date that thestated principal amount or face amount of the debtissuance becomes due and payable to the lender.Principal also may “mature” on multiple dates,such as with serial bond issues.
Face Value/Par Value. The face value, also known asthe par value, is the amount of money a bondholderwill receive back once a bond matures. A newlyissued bond usually sells at par value. The parvalue is NOT the price of the bond. A bond’s pricefluctuates throughout its life in response to anumber of variables. When a bond’s price tradesabove the face value it is said to be selling at apremium. When a bond sells below face value,it is said to be selling at a discount.Denomination. Denomination means the minimumincrements by which debt investments may besold to investors. Minimum denominations maybe used for investor and seller convenience.They are also used to limit the types of entitiesthat may be potential purchasers by limitingminimum denominations to those that wouldtypically be purchased by “institutional investors.”Most municipal bonds are sold to investors indenominations of 5,000.Yield. Yield is the annual interest rate paid bya bond, expressed as a percentage of its currentmarket price. Yield calculations are expressedin a variety of ways depending on the investor’sanalytical needs.There is an inverse relationship between the yieldand the price on municipal bonds. As interestrates rise, fixed income municipal bonds becomeless desirable and lose value, and as interestrates decline, they become more valuable. This isimportant to the issuer, as it dictates the cost ofmoney at different times within the economic cycleand must be a consideration in project and debtissuance planning.A detailed review of yields and the time valueof money are available in Chapter 7 under “CapitalMarket Considerations”.Bond Rating. Municipal bond credit ratingsmeasure the issuer’s risk of paying all interest andprincipal back to investors. A bond rating systemhelps investors distinguish a company’s creditrisk. Municipal issuers rely on specialized ratingagencies to determine the overall risk of the issueand assign a “grade” to the bond. The three majorrating agencies are Moody’s Investor Services,Standard and Poor’s, and Fitch Ratings. Ratingshave a significant affect on both the ability of theissuer to raise funds and the price the issuer will berequired to pay. Investors seek high quality issues,while lower quality issues are harder to place, at amuch higher interest cost.See Chapter – 1 “Credit Rating Agencies” fora complete description of the rating process.Bond Insurance. Insurance may be purchased bythe issuer from a bond insurer pursuant to whichthe insurer promises to make scheduled paymentsof interest, principal and the mandatory sinkingfund on an issue if the issuer fails to make timelypayments. When an issue is insured, the investorrelies upon the creditworthiness of the insurerrather than the issuer.Refunding. Generally, the purpose of a refundingis either to reduce the interest rate paid on theoutstanding bonds or to remove or replace arestrictive covenant imposed by the terms of therefunded bonds. The proceeds of the refundingbonds are either deposited in escrow to pay therefunded bonds when subsequently due or appliedimmediately to the payment of the refunded bonds.For additional definitions and terms pleaserefer to Chapter 7 – “Capital Market Considerations”,Chapter 11- “Evaluating Investment Alternatives”,and Appendix C – “Debt Financing Terms andConcepts”.
SOURCES OF INFORMATIONA significant amount of bond issuance informationis available for municipal issuers. Informationprovided by financial institutions, governmentorganizations, trade groups, educators, along withstate and local oversight a gencies is availablethrough traditional published and electronicInternet sources. The following sources contributesignificantly to the understanding of issues relatedto markets, credit ratings, oversight, and currenttrends in the industry.ORGANIZATIONPURPOSEThe Bond Market Association http://www.bondmarkets.com/The main trade association representing firms involved inthe debt markets.The Bond Buyerhttp://www.bondbuyer.com/The daily newspaper serving the municipal bond industry.The Government FinanceOfficers Association (GFOA)http://www.gfoa.org/Principal professional association of state and local financeofficers in the United States.Fitch Ratingshttp://www.fitchratings.com/The three largest nationally recognized credit ratingagencies utilized as sources for credit ratings, researchand risk analysis.Moody’s Investor Serviceshttp://www.moodys.com/Standard and Poor’shttp://www.standardandpoors.com/The Municipal Securities Rulemaking Board (MSRB)http://www.msrb.org/Makes rules and regulations, along with setting standardsfor all municipal securities dealers.The Governmental Accounting Standards (GASB) Boardhttp://www.gasb.org/Establishes and improves standards of state and localgovernmental accounting and financial reporting.California Debt and Investment Advisory s information, education, and technical assistanceon debt issuance and public fund investment to localagencies.Internal Revenue Servicehttp://www.irs.gov/Provides information and technical assistance on tax lawand requirements.Securities and Exchange Commissionhttp://www.sec.gov/Oversees securities markets, including stock exchanges,broker-dealers, investment advisors, and mutual fundscompanies.
MThe fInanCIng Teaman oVerVieW oF the participants and their rolesThe coordinated efforts of a specialized group ofprofessionals all working in concert is required tosuccessfully issue debt. This section provides anoverview of the participants and their roles.Please refer to Chapter 1 – “ Roles andResponsibilities of Principal Participants.”ISSUERThe tax-exempt status of the municipal issuerdistinguishes them from other issuers of debt. Amunicipal debt issuer can be any entity authorizedby the Internal Revenue Service (IRS) to issue taxexempt securities. IRS code defines tax-exemptmunicipal issuers in a variety of ways, but the maintypes of municipal issuers are states, counties,cities, and school districts. In addition to thesetypical government units, there is a category ofentities classified as “special districts”. A specialdistrict is a limited-purpose government unit withthe authority to tax and includes, among others,water districts, sanitation districts, and communityfacilities districts.INVESTORThree classes of investors dominate the municipalmarketplace: (1) households, consisting ofindividuals acting directly or through investmentcounsel; (2) mutual funds typically classifiedas closed-ended funds, open-ended mutualfunds, and money market funds, and (3) financialinstitutions (primarily commercial banks andproperty/casualty insurance companies). Theinvestment market for municipal bonds is oneof the world’s largest securities markets withapproximately 2 trillion worth of municipal bondsin the hands of investors. There are more than50,000 state and local entities that issue municipalsecurities comprising approximately two millionseparate bond issues outstanding. The principalcharacteristic of all buyers of municipal bonds isthat they are in a sufficiently high tax bracket thatthey can benefit from the tax exemption.BOND COUNSELBond counsel is the attorney, firm of attorneys, orgroup of firms that give the legal opinion deliveredwith the bonds confirming that the bonds are validand binding obligations of the issuer and thatinterest on the bonds is exempt from federaland state income taxes.DISCLOSURE COUNSELDisclosure counsel is the attorney or law firmretained by the issuer to provide advice on issuerdisclosure obligations and to prepare the officialstatement and continuing disclosure agreement.FINANCIAL ADVISORA financial advisor is a professional consultantretained to advise and assist the issuer informulating and/or executing a debt-financingplan to accomplish the public purposes chosenby the issuer. The role of or necessity for thefinancial advisor may depend upon the financialsophistication of the issuer and its staff, theworkload capacity of the issuer’s staff and thedivision of labor among the staff and otherparticipants in the debt financing. A financialadvisor may be a consulting firm, an investmentbanking firm or a commercial bank.UNDERwRITERAn underwriter is a firm, or group of firms, thatpurchases bonds directly from a bond issuerand resells them to investors. Underwriters areintermediaries between issuers and investors.
Underwriters fill the void in the marketplace bypurchasing whole bond issues and then resellingthem, ideally for a profit, to investors. Theresponsibilities and functions of the underwriterwill depend primarily on whether the bonds areto be sold at competitive bid or at negotiated sale.UNDERwRITER’S COUNSELUnderwriter’s counsel is customarily selected bythe underwriter to represent the underwriter andits interests in a negotiated sale. Normally, nounderwriter’s counsel is retained in a competitivesale. Underwriter’s counsel will customarily review,from the underwriter’s perspective the documentsprepared by bond counsel, and will negotiatematters relating to those documents on behalf ofthe underwriter.CREDIT RATING AGENCIESDebt issued by governmental entities is ratedto reflect the degree of risk and probabilityof repayment of all interest and principal tothe investor. Investors use the bond ratings todetermine the level of repayment risk associatedwith the specific issue and determine a minimumrate of return for the risk involved. If the bondshave high ratings, they are assumed to havelow risk and the investor will therefore requirea lower yield. Just the opposite will occur for alower rated (riskier) bond. There are four majorinvestment grade ratings assigned to bonds bythe rating agencies - Highest (AAA/Aaa), High(AA/Aa), Above Average (A), and Medium (BBB/Baa). All long-term bonds rated below the fourthcategory are judged to be below investment grade(speculative grade) and are often referred toas “junk” bonds. Most financial institutions areprohibited from lending on any securities ratedbelow (BBB/Baa).TRUSTEEThe trustee is responsible for carrying out theadministrative functions that are required underthe bond documents. These functions includeestablishing the accounts and holding the fundsrelating to the debt issue, authenticating thebonds, maintaining a list of holders of the bonds,10paying principal and interest on the debt, andrepresenting the interests of the bondholdersin the event of default.CREDIT ENhANCEMENT PROVIDERCredit enhancement provider and credit providerare terms describing any entity that guarantees orinsures, in one form or another, the sufficiency ofrevenues to pay the bonds. The credit enhancementprovider will make available, for a fee, additionalsecurity for the bonds. The credit enhancementincreases the credit rating of the issue and thereby,lowers the required yield. Typical forms of creditenhancement include bond insurance and lettersof credit.INVESTMENT ADVISORIn many cases, issuers will wish to retain aninvestment advisor to assist them in investing bondproceeds. Investment advisors are professionalswith experience, training, and special expertise inthe area of investment management.With a few limited exceptions, investment advisorsmust register with the Securities and ExchangeCommission (SEC) or the California Department ofCorporations. However, there is no required licenseexam or certification for investment advisors.Investment advisors receive a fee for their service.Certain investment advisors specialize in themanagement of local agency funds.NON-GOVERNMENT BORROwERIn California, various issuers are authorized toissue bonds and lend the proceeds to one ormore nongovernmental borrowers to finance thedevelopment of facilities which is deemed to servea public purpose. Such financings are often calledconduit financings and the nongovernmentalborrowers are often called “conduit beneficiaries”.Such facilities include, among others, singlefamily housing, multifamily housing, student loanprograms, hospitals and other health care facilities,educational facilitie
This handbook is structured to provide a general overview of each major area included in the Primer along with identifying specific sections within the Primer that will provide comprehensive answers on the selected subject matters. It presents information on the following: Key elements of the market and structure of municipal bonds,
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CALIFORNIA DEBT ISSUANCE PRIMER CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION . 915 Capitol Mall, Room 400 Sacramento, California 94209 Phone: (916) 653-3269
letter to a debt collector you owe money to does not get rid of the debt, but it should stop the contact. The creditor or the debt collector still can sue you to collect the debt. Can a debt collector contact anyone else about my debt? If an attorney is representing you about the debt, the debt collector must contact the attorney, rather than you.
Public Financial Management Act, 2016 3 Act 921 58. Debt management objectives 59. Debt management strategy 60. Annual borrowing and recovery plan 61. Issuance of government debt securities in the domestic debt market 62. Issuance of government debt securities abroad 63. Borrowing from banks and other financial institutions 64. Other market .
Adjusting Journal Entry - To record Series 2019A Debit Credit Debt Service Fund Other financing source Proceeds From Bonds {6} 38,999.73 Debt Service Fund Other financing source Premium On Debt Issuance {8} 57,642.62 Debt Service Fund Asset Debt Service Checking {6 8} 96,642.35
UNIFORM DEBT-MANAGEMENT SERVICES ACT Prefatory Note Background The consumer-credit-counseling industry originated in the early twentieth century in the form of debt adjusters (also known as debt poolers, debt consolidators, debt managers, or debt pro-raters). This first generation of credit counselors consisted of profit-seeking enterprises that
Debt and Equity Risk and Return Return Risk Debt Return limited to interest rate Low risk All equity must be eroded before any loss for debt Equity Unlimited upside More risky than debt Takes the first losses of value The more debt there is, the more risky the equity As long as returns on debt taken on exceed the interest rate on the debt,
Source: SIFMA for Structured Finance issuance; SP LCD, Barclays Research for Corporate issuance Structured Products issuance is a fraction of Corporate issuance post 2008 crisis Structured Finance Issuance US & Europe Structured Finance I
