Capital Markets Funding
for Local Authorities
Edward Simons
Senior Director - Public Sector & Charities
June 2013
Local Authority Loans – Summary Statistics
Loan Maturity Profile vs Universe
LOBO Allocation
100%
£100m
90%
Percentage Allocation
£90m
£80m
£60m
£50m
£40m
70%
60%
50%
40%
30%
20%
10%
£30m
0%
£20m
Loan Allocation by Type
£10m
70
65
60
55
50
45
40
35
30
25
20
15
10
5
£0m
0
Benchmark
Maturity (years)
Fixed Rate
2
Variable
100%
90%
80%
70%
60%
50%
40%
30%
LOBO
Structured
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Source: CIPFA’s 2012 Treasury Management Risk Study / Public Sector Live Ltd
20%
10%
Council
0%
Maturing Amount
£70m
80%
2
Issues for Local Authorities to Consider
Key questions to ask
Alternative Funding
•
•
•
Can funding be sourced elsewhere, that is cheaper than the PWLB?
How material is the potential economic benefit if cheaper funding can be obtained?
If cheaper funding is available elsewhere:
– how do the borrowing process and requirements compare with PWLB?
– how do the ongoing obligations compare with PWLB?
– what is the cost of repaying early, compared with PWLB?
•
Do I put any value on the opportunity to diversify funding sources away from PWLB?
Structuring
•
•
•
•
How much debt do I need?
When do I need it?
How do I want to structure it – amortisation / bullet profile? Fixed / floating / index-linked?
Am I prepared to consider funding in advance of the requirement?
Market Conditions
•
•
What is my / my advisor’s view on the likely direction on Gilt yields over the next two years?
What is my / my advisor’s view on market conditions for new bond issues?
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The Capital Markets Spectrum
Bonds
Private Placements
Banks
Lenders
Institutions/Retail
Institutions
Banks
Liquidity
Required
No
No
Range: 2-30
Predominantly: 5-10
Range: 3-50
Predominantly: 7-12
Max 5 years
Limited only by credit
For liquid issue
USD500m/EUR500m/GBP300m
USD1.5bn
USD50m
Limited by credit and range of
relationship banks
None
Bullet maturity
Flexible
(Bullet / Series / Amortising)
Flexible
Immediate
Some delay possible
Flexible
Largely fixed
Largely fixed
Largely floating
Ratings
Strongly preferred
Not usually required
Not required
Covenants
Negative pledge
Cross acceleration
Change of control
Similar structural protections as the
bank market
Financial covenants
Negative pledge
Cross default
Maturities
Max Size
Optimal Min
Size
Structure
Drawdown
Interest Rate
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Current Market Conditions
Yield (%)
Market backdrop – yields and spreads
2.8
80
2.3
70
1.8
60
1.3
50
0.8
40
0.3
Jan-12
30
Jan-12
Apr-12
Jul-12
Oct-12
5 year Gilt
Jan-13
Apr-13
Apr-12
Jul-12
Oct-12
iBoxx.GBP.Overall
10 year Gilt
Jan-13
Apr-13
iBoxx.GBP.Overall.15+
- 2012 saw benchmark gilts reaching
historic lows
- Beginning of 2013 saw a further
continuation of spread compression
- Beginning of 2013 saw a further
continuation of the low rate environment
- Undersupply in sterling market driving
spreads tighter
- More recently, there has been a sharp
spike in underlying gilts as market expects
quantitative easing to end
- Recent volatility has seen spreads rise
Source: RBS, Bloomberg
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Current Market Conditions
Supply and demand conditions
20
2.4
15
2.0
1.7
1.5
10
1.0
1.0
0.5
0.5
35
- In general, the sterling market remains
undersupplied in comparison to 2012,
offering potentially strong execution
technicals once market volatility subsides
30
25
4.0x
20
3.5x
15
10
3.0x
5
2.5x
Jun
May
Apr
Mar
Feb
- The sterling market this year has seen
hybrid, sub-benchmark and linker issuance
highlighting the diversity available in the
market
40
Concession
4.5x
0
Jan
0.0
5
Oversubscription
Concession (bps)
2.7
Oversubscription
Monthly Issuance (GBPbn)
3.0
2.5
5.0x
25
3.2
Cumulative Issuance (GBPbn)
3.5
0
2008
2009
2010
2011
2012
2013
- 2012 was a very strong year in the bond
markets
- This continued into 2013 with high levels
of over subscription and low premiums
- More recently, markets have been more
volatile. However, fundamentals remain in
place
Source: RBS, Bloomberg
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Relative Value
What factors influence price of a bond?
Macro Sentiment
•
•
•
•
•
•
•
•
•
Economic Growth
Inflation
Employment
Housing
Bank Capitalisation
Monetary Policy
Fiscal Policy
Sovereign
Technicals
•
•
•
Investor Fund Flows
Level of Market
Supply
Level of market
redemptions
•
Performance of recent
bonds
•
•
Investor sentiment
The latest headlines
Credit Specific
Currency
Rating
•
•
•
•
•
Debt metrics
Other
Debt levels
•
Brand / Name
recognition
•
•
•
•
Listing
Cash-flow
generation
Sector
Size
Financials
Documentation
Covenants
Domestic Bid
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•
•
Relative Value
PWLB and bond market comparables
5
4.5
4
3.5
Yield (%)
3
2.5
2
1.5
1
0.5
0
Mar-13
PWLB
Maturity
DB
Aug-18
PWLB
Certainty
UKRAIL
Feb-24
Aug-29
Jan-35
Jul-40
Jan-46
Jun-51
EIB
KFW
Cambridge
J&J
EJRAIL
TFL
GLA
Total
UPS
Pfizer
Roche
Wal-Mart
Gilt Yield
Source: RBS, Bloomberg
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No representation, warranty, or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained in this document and no member of the RBS Group accepts any obligation to any
recipient to update or correct any information contained herein. The information in this document is published for information purposes only and does not constitute an analysis of all potentially material issues. Views expressed herein
are not intended to be and should not be viewed as advice or as a recommendation. You should take independent advice in respect of issues that are of concern to you.
This document does not constitute an offer to buy or sell any investment, and nor does it constitute an offer to provide any products or services that is capable of acceptance to form a contract. The products and services described in
this document may be provided by any member of the RBS Group, subject to signing appropriate contractual documentation. No member of RBS shall be liable for any direct, indirect, special, incidental, consequential, punitive or
exemplary damages, including lost profits arising in any way from the information contained in this communication.
In the UK the Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, in Hong Kong by the Hong Kong Monetary
Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation
Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with
an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC
(www.sipc.org) member and subsidiary of The Royal Bank of Scotland Group plc. Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland plc and is directed at “Professional Clients” as
defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of
a "Professional Client”. This document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not
“Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a "Business
Customer” or "Market Counterparty".
•The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland N.V is authorised by De Nederlansche Bank (DNB) and is regulated by
the Autoriteit Financiele Markten (AFM) for the conduct of business in the Netherlands. The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of
Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.
Copyright 2013 RBS. All rights reserved. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without RBS’s prior express
consent"
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Appendix
Credit Rating Considerations
Rating
Request
Receive
Rating
Request
Rating
Assigned
3-4 weeks
Assign Analytic
Team;
Conduct Basic
Research
Meet
Issuer
Rating
Committee
Follow-up
Q&A
Decision
Appeals
Process
Public
Rating
Surveillance
Confidential
Rating
•
Agencies will assign a lead analyst and review publicly available information as well as any materials
provided by the issuer
•
•
The meeting will focus on the economic and financial profile of the issuer
•
•
A rating can improve market access and pricing achieved
The rating is decided by a committee which typically consists of 5-7 members: lead and backup analysts,
managing director of the sector, analysts covering companies with similar credit profiles in other geographies
Rating agency is a new stakeholder and requires ongoing management
A credit rating is not required, but strongly recommended
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Bond Parties
GUARANTOR
(if required)
Guarantee
Promise to Pay
P+i
PAYING AGENT
ISSUER
Bonds
£
P+i
LEAD MANAGER
CLEARING
SYSTEMS
£
TRUSTEE
Bonds
BONDHOLDERS
P+i
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Roles of the Parties
Issuer
Borrows money by issuing bonds
Guarantor
Guarantees payments of interest and principal under the bonds (if required)
Bookrunners
Arrange and underwrite the bonds, and sell the bonds to investors
Bond Trustee
Agent
Lawyers
Auditors
Rating Agency
Common
Depositary
Clearing
Systems
Financial
Printer
Acts on behalf of the bondholders as an intermediary between them and the Issuer, and represents the
bondholders' interests throughout the life of the bonds
Acts as the agent of the Issuer in making payments of interest and principal to the bondholders throughout the
life of the bonds
Draft the bond documents and give the legal opinions (including opinion relating to the Issuer’s capacity and
authority to issue the bonds). The Managers’ Lawyers typically draft the bond documents and the Issuer’s
Lawyers review the bond documents. The Trustee will also instruct Lawyers. The Trustee’s Lawyers are
usually the same as the Managers’ Lawyers (albeit a different team)
Provide comfort letters to the Managers on the signing date of the Subscription Agreement and on the issue
date of the bonds
Assesses the financial position and creditworthiness of the Issuer and assigns a rating to the bonds. The
rating indicates the Rating Agency's views of the likelihood of the Issuer defaulting on repayment and is,
therefore, an indicator of the risk of investing in the Issuer’s bonds
Holds the global bonds as custodian for the Clearing Systems (namely, Euroclear Bank and Clearstream
Banking) and receives payments made by the Issuer to the bondholders
Allows bondholders to hold their bonds in electronic form. These systems enable bonds to be traded by
debiting and crediting accounts on behalf of the bondholders, into which securities or cash can be transferred
electronically without the need for physical delivery
Typesets and prints the Prospectus
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The Life of a Bond
Announce
Intention
& Marketing
Preannouncement
•
•
•
•
•
•
•
•
•
•
What to issue?
What market?
What structure?
Appoint leads and
advisers
Prepare documents
Conduct due diligence
•
•
•
•
Launch
& Price
Announce intention to
issue
•
Book and hold
marketing meetings
•
•
•
•
•
Collect investor
feedback
Monitor markets for
good day to launch
Announce board terms
of issue
Post pricing
•
•
Bonds free to trade
•
Legal documents
finalised and signed
•
Bonds settle and
monies received
Collect investor orders
Build order book
Revise terms if needed
Launch bond with terms
Price bond
All conditions precedent
met
Prepare marketing
Internal approvals
Agree with auditors
Consider rating
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Bond Documentation
•
The key documents are the Subscription Agreement and the Bond Offering Circular / Prospectus
– The Prospectus is prepared by the Issuer and the Guarantor (if any), and is required to contain
all necessary information to enable investors to make an informed assessment of the Issuer, the
Guarantor, and of the rights attaching to the Notes
– The Prospectus must be reviewed and approved by the competent authority which, for a London
listing, will be the UK Listing Authority
– The Subscription Agreement forms the contractual agreement between the Issuer, the
Guarantor (if any) and the Managers. It sets out the basis upon which the Managers will buy the
Notes. It also contains the representations, warranties, undertakings and indemnities to be given
by the Issuer and the Guarantor as well as the conditions precedent which must be satisfied
before any issuance takes place
•
Other main documents are:
– Mandate letter
– Paying Agency Agreement
– Trust Deed
– Legal Opinions, Closing Certificates
– Auditors Comfort Letter
– Listing Documents
– Marketing presentations
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Ongoing Relationship Requirements
•
The bond listing creates ongoing reporting requirements
– Annual Reports must be published as soon as possible after they have been approved and in any event
this must be within 6 months of the end of the financial period to which they relate
•
•
There are no formal relationship requirements going forward for a public bond
•
•
Such investor maintenance should not be burdensome and can reap the rewards upon repeat issuance
However, issuers should adapt a proactive investor management approach – viewing the bond investors as
another set of stakeholders
Such measures could include
– Maintaining a contact list of investors met (regardless of investment decision), and other investors who
invested
– Distributing financial accounts and other news via email
– A debt investor section of the website
– Individual courtesy update calls to the key accounts on any important news
– A regular group fixed income investor update call post any results
– Non-deal investor update meetings
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No representation, warranty, or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained in this document and no member of the RBS Group accepts any obligation to any
recipient to update or correct any information contained herein. The information in this document is published for information purposes only and does not constitute an analysis of all potentially material issues. Views expressed herein
are not intended to be and should not be viewed as advice or as a recommendation. You should take independent advice in respect of issues that are of concern to you.
This document does not constitute an offer to buy or sell any investment, and nor does it constitute an offer to provide any products or services that is capable of acceptance to form a contract. The products and services described in
this document may be provided by any member of the RBS Group, subject to signing appropriate contractual documentation. No member of RBS shall be liable for any direct, indirect, special, incidental, consequential, punitive or
exemplary damages, including lost profits arising in any way from the information contained in this communication.
In the UK the Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, in Hong Kong by the Hong Kong Monetary
Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation
Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with
an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC
(www.sipc.org) member and subsidiary of The Royal Bank of Scotland Group plc. Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland plc and is directed at “Professional Clients” as
defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of
a "Professional Client”. This document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not
“Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a "Business
Customer” or "Market Counterparty".
•The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland N.V is authorised by De Nederlansche Bank (DNB) and is regulated by
the Autoriteit Financiele Markten (AFM) for the conduct of business in the Netherlands. The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of
Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.
Copyright 2013 RBS. All rights reserved. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without RBS’s prior express
consent"
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