CSMFO MININEWS Bua On the Road with Jack, Freddie and Sallie? Considerations for a Government Sponsored Entity to Access Foreign Capital for State and Local Government Infrastructure Projects By Mark H. Vacha, Partner, Public Finance, Dilworth Paxson LLP, PI ideiphia, Pennsylvania General Background; Basic Premises; Factors Limiting Foreign investment Historically, there has been litle need ‘for US. state and local governments to ‘access taxable debt markets outside ‘the Upited States. US. state and local govermments (with a few noted excep- ‘This article analyzes fund- tons) are not well known or understood ing infrastructure needs in in foreign capital markets and have not the United States through had significant experience with foreign the formation of national capital markets regulatory require- infrastructure bond poo! ments. Consequently, the transection (or bond bank) that would costs for a state or local government buy municipal bonds is- to issue in these markets (particularly sued by state and local ‘on an occasional basis) have rendered govemments (le. poo! these markets inaccessible or, atleast, Participants) in the United ‘Second, access to foreign capital in sig not a very desirable source of capital. ‘States (the “State/Local Government nificantly greater amounts will be neo- Bonds" or the “Local Bonds"). This essary or very useful for funding these Basle Bond Program Mechanics of “bond bank" would be formed pursu- needs. Recent events raise concerns the @SE ‘antto a federal charter" and would be a__that instability and a lack of capital in government sponsored entity for infra the USS. markets may be with us for @ The GSE would publicly offer and issue Structure purposes (the “Infrastructure long while. Moreover, there likely will debt into the foreign capital markets, GSE" or “GSE"). It would issue taxable continue to be substantial pools of use the proceeds from these issuane- ‘bonds (the “GSE Bonds”) principally funds (includingsovereign wealthfunds) _@ to purchase and oreate, in effect, to foreign investors to access foreign available overseas with apreference for _@ portfolio of the Local Bonds issued capital markets for state and local gov- US. investment. Third financing public substantially simultaneously with the fomments and possibly reduce future infrastructure through municipal bonds GSE Bonds in private placements to the Needs for direct federal funding of basic _~has certain efficiency benefits! GSE. The GSE would use the payments infrastructure. The structure described itreoeived on those municipal bonds to herein borrows heavily from traditional Certain factors tend to limit foreign in- repay the GSE Bonds. The GSE Bonds ‘municipal bond poo! structures. vestment in municipal bonds. The ben- would be secured by the trust hold- efts of taxexempt interest income gen- ing the Local Bonds. The Local Bonds An Infrastructure GSE should become erally do net benefit forelgn investors would have payment terms that cor increasing relevant based on the folow- _like they do domestic investors. Thus, responded closely the GSE Bonds and lng three assumptions. First besicinfra- the loweryields correspondingtotaxex- could be pooled in various ways accor- structure needs (e.g. transportation and _empt municipal bonds (in comparison _ing to investor interest. The GSE would Water and sewer projects) wil continue _t0 taxable bonds) are not as attractive buy bonds from pool participants at @ to increase within the United States, {or foreign investors, Yield in excess ofthe yild on the GSE "Tn arte solely for infomation) and cscusslon purposes on. This not eso advie. “annough net natyzd ints arte, tis expected tat Federal enabing legislation woul be necessay. * mese tenets tend to acer asthe incidence ofthe benefits and burdens o projec fll among the same group of people, Muncpal nance (petcuorly (naa! ev can often coloeateto some significant aibeltimperfet) degree te information holders, decision maors, payers, sers ond affected thd, aries fora parteularoroject. gy Continues on net pageCaos) CSMFO MININEWS Infrastructure Projects, continued Bonds. For example, ifthe Infrastruc- municipal bond pool participants (in Local Government Bonds into a senior ‘ure GSE issued a bond at a 5.00% in- effect, the Infrastructure GSE could non-guaranteed tranche while using the ‘terest rate payable each January Land become a significant shortterm institu» limited US. Treasury guarantee on a July 4, st would buy Local Bonds from tional investor which may function as a pool of weaker (or unrated) State/Local pool participants at an interest rate of | _-money market or other mutual fund for Government Bonds}; (2) establishing a 5.00% plus @ spread of a certain num- short-term investments for the pool par- debt serve reserve fund for the GSE's ber of basis points payable each June ticipants); and (5) avoid project restrio- bonds whith would be supported by an 15 and December 15. Some of that tions imposed by the Internal Revenue appropriation or pledge of the United spread would fund some transaction/ Code for taxexempt bonds (such as States to make-up any deficiency in the ‘administrative costs. The time inter arbitrage investment regulations and SRF; or (3) establishing and capitalize val between the debt service payment private activity bond regulationg, which _a related government sponsored finan- dates on the two levels of bonds would inhibit publicprivate partnership (*P3") lal surety enterprise which would issue allowtimeto usecreditenhancementin structures). ‘bond insurance policies relating to cer- time to avoid @ default on GSE Bonds. tain GSE Bonds or State/Local Govern- ‘Methods for Credit Enhancement ment Bonds held within the pool. Such ‘The Infrastructure GSE would not need ‘premiums, and the Investment earn- ‘0 impose any substartial costs on the The infrastructure pool bond structure ings thereon, coud further build up the Federal goverment other than certain can pass through a lower cost of funds capitalization ofthe insurer entity or te- ‘transaction and administrative costs in for mary pool participants (when com- _imurse the federal Tressury for some getting this bond program running and pared to the cost of funds available to portion ofthe initial federal capital inf managing it The GSE need notneces- them through issuing directly) due t sign, sarily be involved actively with the man- the diversification of municipal bond agementoof projects. Its debt could, but issuers within the pool. Thus, the risk _Aghieving a Tax-Exempt (or below eed not necessarily, be given any spe- premium that Investors would seek taxable market) Cost of Funds cial tax treatment. There are at least should be somewhat smaller because two enhancements (with additional concentration riskis lessened? Thisd- The Infrastructure GSE program could ‘costs) that could be made. First is to versification could improve overtime as be combined with Federal infrastruc- provide certain credit enhancement to a wider range of issuers joins the pool ture grants to state/local governments, ‘the bond program to reduce borrowing bond program. A portion of the mark- sized to. synthetically achieve tax-ex ‘costs which could be passed through in up expected to be charged to the bond ©—_empt rates, The grants could equal on subsanal measure tothe isuers of pool pariopents (eg fr Musveton present vate bests the erence the Local Bonds. Second, some fom sake, 10.26 bis pots) could be used beeen the taxable rates at wich the of substy could be crested 0 thet inparttobuldupwhatwould be enea- bonds are Eouod and preveingtaver Imuncpl bond sues could issue at _ut-funded debtservoe reserve fund! empt rates and be required to leo be cost of funds that was effectively te the nfastrucre GSE. Anoher forme spantoninatvture, ecuialent of taxeremt ets, credvenhancement would be to allow the GSE (ors bond tste) the abit Potential Advantages of the ‘to have certain federal funding to state ** ADVERTISEMENT ** Infrastructure Pool Bond Program — and local governments presumaby Imted to some nes to ifestructre} ——— The poo bond program may) echeve, _nterepted shoud a state o oa gor lost certain benefits for credit enhancement’ ‘ernment pool bond participant default pecialists, LLC (deoussed under the next caption in onan obligation othe SE. sowy i Caer Ser 178 treater etal; (2) provide or expand say (ote scm reckcx meron Ths Feel versa nn pase commen ee oa costs of issuance for State/Local Gov- ‘credit enhancement by: (1) providing a ‘+ Master Facilities Plans. ernment Bond issuers: (4) provdo ef ful ath and cre guaran fom the + cent ncn Pa Erp lalinysen feionis and beter purchasing over Uned States Weasur onal of the GSE SS regarding the investment of proceeds of Bonds" or on a subordinate tranche of 1819 8, Chapman Avenue, Suite © the State/Local Government Bond esu- the GSE Bands (he Infastusure GSE charm does ts prior to their expenditure by the ‘could pool stronger underlying State/ Continues on next page 79 |CSMFO MININEWS eee) Infrastructure Projects, continued Conclusion and Summary This article analyzes an option for in- ‘rastructure finance which expands the reach of municipal bond financing into {oreign capital markets through a GSE pool bond issuer. Although Federal ‘unds might be employed in connection with such a pool bond program, this article suggests that there are certain benefits (evidenced in cost of funds) that the GSE could achieve with ttle oF no commitment of Federal funds. The GSE could achieve such benefits for ‘state and local governments by creat: ing economies of scale, reducing trans- ‘action costs, facilitating creative public. private partnership structures, creating ‘2 known “brand” in the international debt markets and diversifying risk for {foreign investors through the pool. The GSE is envisioned as a supplement to ‘vaditional tax-exempt financing. “Unite otter GSEs, an nrasouctwe GSE woul have the bene ofan undering asset cas ‘Sate aed focal government bons sued obo ‘Se govemumental purposes) which sory ras ad a roatety ow ceraut te "varius ypescfcveseatoncoulbe shied ond fom aiferen regions within the United ‘States; a mix of genera ablation bonds, ether ‘ax supported bonds and revenue bonds: and iversty among revenue supported bonds sun 8 for ros projects transi projec, and wate oF sewer rejects. "nis eises points Deana the scope of this 3 thle since such bonds would begin to compete with ctr cleans wich were guarantd ty the Unted Sates Govemmant. The Denes 9 ‘ese inastncure GSE bonds may be aft 0 some matorial extent by the impacto te de ‘markets or other secures. Presentation Skills for Finance Professionals A One-Day Skills-Based Workshop Presented by Nell Kupchin, Kupchin Training Associates Wednesday, April 18, 2009, 8 a.m. +5 p.m. West Basin Munlclpal Water District 117140 South Avalon Boulevard Suite 210, Carson, CA 90746 Registration Fee: $250 (Includes workshop, materials and lunch) Registration Deadline: Wednesday, April 11, 2009 ‘The workshop to be presented is skil-based, in that technique and strategies will be presented and discussed in detail uring the moming session, while in the afternoon Participants vil have the opportunity to plan and deliver a presentation, which wil be video-taped. Participants will receive constructive feedback and suggestions from the Consultant and other participants. The opportunity to view your own presentation on videotape and receive positive feedback and suggestions is critical to your success in making presentations. ‘The Workshop will be presented in three phases: + Preparing and Organizing the Presentation + Wrting Presentation Pian + Delivering and Evaluating the Presentation ‘Workshop topics include: ‘The Four Essentials of Effective Presentation Defining and preparing Objectives Analyzing and Assessing Your Audience/Determining Sivle Writing a Presentation Plan: Introduction, Body/Content, Conclusion Positive Presenter Characteristics: Voice, Body Movement Enthusiasm, Eye Con- tact and Building Confidence + Rehearsing, Presenting and Evaluating the Presentation ‘+ Practice Presentation of Financial Information, among others Register online through the CSMFO Web site ‘Attendance will be limited to 15 people. All fees must accompany your registration and be received by the April 11, 2009 deadiline. There will be a $35 processing fee for any changes or cancellations made prior to the April 11, 2009 deadline. No refunds, changes or cancellations will be processed after that date (9 hours of CPE credit are available). Questions regarding the seminar should be directed to Kim Nakamura at 805.388.5322 or knakamura@ci.camarillo.ca.us. er