Municipal Bonds – Credit Enhancement: Ratings and Insurance

1. Municipal Bonds – Credit Enhancement:Ratings and Insurance Linda Loup – Southwest Securities, Inc. Allen Douthitt – Bott & Douthitt, P.L.L.C. Jim Binette – Assured Guaranty Lauren Spalten & Todd Helman– Standard & Poor’s Corporation

2. Municipal Bonds • In young districts, the initial installment (or first few installments) of bonds are usually issued as non-rated /non-insured bonds. • As the assessed value in the district grows, the district’s financial health improves and other criteria are met, a district may qualify for ratings and/or insurance on subsequent bond issues (credit enhancement).

3. Credit Enhancement • The use of the credit of an entity other than the issuer to provide additional security for the repayment of a bond. • Most common types of credit enhancements available to water districts: • Investment Grade Ratings • Bond Insurance

4. Ratings • Evaluations of the credit quality of bonds made by rating agencies. • Intended to measure the probability of the timely payment of principal and interest on municipal securities • Ratings are based on certain criteria (total AV, fund reserves, tax collection %, debt to AV ratio, etc.)

5. Ratings • Ratings often are assigned upon issuance of the bonds, are periodically reviewed and may be amended to reflect changes in the issuer’s credit position. • The ratings may derive from the credit worthiness of the issuer itself or from a credit enhancement feature of the security (i.e. the rating of the bond insurer).

6. Ratings • Two major rating agencies for municipal bonds: • Standard and Poor’s Corporation (“S&P”) • Moody’s Investors Service (“Moody’s”)

7. Types of Ratings

8. Credit Enhancement • Purpose of credit enhancement: to reduce the interest rate on bonds. • Lower interest rates mean reduced interest costs to the district. • Allows district to issue all bonds necessary to reimburse the developer faster; • More M&O allotment of total tax rate; • May be able to reduce total tax rate sooner.

9. Interest Rate Comparison

10. Insured vs. Non-Insured Municipal Bonds • Calculation based on 20 year bonds and a bond par amount of $2,000,000 for purposes of illustration.

11. Rated vs. Non-Rated Municipal Bonds • Calculation based on 20 year bonds and a bond par amount of $2,000,000 for purposes of illustration.

12. Becoming Rated &/or Insured • Once district meets minimum criteria for a rating and/or insurance, the financial advisor makes application to the rating agency and insurance companies on behalf of the district. • General Financial Overview • Preliminary Official Statement • Past 3 Years Audited Financial Statements • Finance Plan • Budget / Bookkeeping Report

13. District’s Financial Strength • An important criteria in the assignment of a rating and/or bond insurance is the district’s financial strength • Large tax base (high assessed valuation) • No developer advances • Sufficient fund reserves • High % of taxes collected • Overall debt burden and overlapping debt %

14. QUESTIONS • Linda Loup: lloup@swst.com • 512-320-5859 • Allen Douthitt: allen@bottdouthitt.com • 512-733-0700 • Jim Binette: jbinette@assuredguaranty.com • 212-408-6005 • Lauren Spalten: lauren_spalten@standardandpoors.com • 214-871-1421