THURS-EARLY-AFTERNOON-Breakout-Session-1-How-Could-the-Proposed-Changes-in-LIBOR-affect-Your-Bottom-Line

Impacts on the Municipal Bond Market: Tax Reform Act of 2017 and LIBOR Changes▪ Limits Tax-Exempt Refinancing ▪ Reduction In Corporate Tax Rates Results In Increase Interest Rate for So

OACUBO 2018

Impact on the Municipal Bond Market: Tax Reform Act of 2017 and LIBOR Changes

April 26, 2018

2018 Panel

Samuel M Gruer

• Sam Gruer is a Managing Director at Blue Rose Capital Advisors He has over 30 years of municipal market experience Prior to joining Blue Rose, Mr Gruer co-founded Cityview Capital Solutions, served as Director of derivative structuring at Deutsche Bank, and worked in the municipal

• His previous roles with PNC include debt capital markets, loan syndications and equity derivatives sales and trading Prior to joining PNC, Mr Goff worked with Federated Investors, Inc in Pittsburgh

as a mergers and acquisitions analyst and later as a capital markets research analyst focusing on quantitative investment strategy and product development

• Mr Goff holds an MBA in Finance from Carnegie Mellon University and a Bachelor of Science in Accounting (Summa Cum Laude) from the University of Pittsburgh

2018 Panel

Marc Kamer

• Marc, a partner in the Columbus, Ohio office, handles a wide variety of project financings for

traditional governmental purposes, like water and wastewater projects including pooled loan financings, roads and bridges, and tax-exempt financings for 501(c)(3) organizations such as healthcare providers, institutions of higher education and private K-12 schools

• His experience also includes authoring legislation relating to finance and construction initiatives and amendments to modernize existing finance and construction programs He devotes a substantial amount of his time to economic development (tax incentives, tax abatements and tax increment financing), as well as industrial development projects and energy-related transactions Marc has represented parties on P3 transactions including design-build-finance-operate-maintain agreements and related alternative project delivery/finance models for infrastructure projects In addition to

representing governmental bodies and investment banks, he represents lenders on a variety of financing transactions, many of which are related to project finance the direct purchase of tax-exempt bonds or in connection with credit enhancements and liquidity facilities for issues of tax-exempt bonds He is Peer Review Rated AV in Martindale-Hubbell

2018 Panel

Brad K Leigh

• Brad currently serves as BGSU’s Executive Director of Business Operations Brad joined BGSU in May of 2008 and has oversight and responsibility for the University’s cash, debt and investments, Business Operations, Risk Management and Environmental Health and Safety, Falcon Outfitters (campus store), BG1 Card operations, the Student Union, BGSU Dining and Purchasing

• Prior to BGSU, Brad spent more than sixteen years with the Northeastern Ohio Medical University (NEOMED) serving in a variety of financial and business operation positions Brad’s professional background includes experience working in various auxiliary units, facilities, accounting, and seven years of law enforcement while serving in Army

• Brad has an undergraduate degree in Finance and a MBA from Kent State University

Stephen R Storck

• Steve is currently working as an independent contractor for The Registry, a firm which placed retired higher education officials in interim positions His initial assignment is serving as the Interim CBO for Xavier University Prior to that he served as the Vice President & CFO at Ashland University He served as Sr Associate Vice President for Finance and Administration for Kent State University and as CFO for Otterbein University, Heidelberg University, and Lycoming College His education includes a

Impacts on the Municipal Bond Market: Tax Reform Act of 2017 and LIBOR Changes

▪ Limits Tax-Exempt Refinancing

▪ Reduction In Corporate Tax Rates Results In

Increase Interest Rate for Some Borrowers

▪ Overall Impact on Market

Tax Cuts and Jobs Act Provisions and

Implications on the Municipal Market

Tax Bill – Eliminated Tax-Exempt Advance

Refundings

▪ A tax-exempt refinancing transaction (typically “high to low” refinancing for debt service savings)

▪ New bonds are issued.

▪ Proceeds of the new bonds are then invested

▪ Invested proceeds pays debt service on outstanding

bonds to the call date.

▪ On the call date, invested proceeds used to pay-off old bonds.

▪ There is a 90-day separation between the issue date of the new bonds and the call date of the old bonds.

Case Study 1 – Xavier University

▪ Case Study 1 – Xavier University

▪ $44,405,000 Outstanding 2010 Bonds

▪ Average Interest Cost – 4.996%

▪ 2010 Bonds not “callable” until 2020

▪ Current Interest Rates would Permit Xavier University to match the duration (weighted average maturity) and realize significant present value savings

▪ But Tax Reform Act of 2017 Eliminates Tax-Exempt Advance Refundings

Case Study 1 – Xavier University (cont’d)

▪ Taxable Rate Advance Refunding

▪ Pros and Cons

▪ “Cinderella Bonds”

▪ Start out “taxable rate” and converts to “tax-exempt” status upon the occurrence of a condition (refunding within 90 days of the call date)

▪ Combination of Taxable and Tax-Exempt where the exempt rate is used to fund “new-money” projects

tax-instead of equity that would have been used to fund

those projects; equity and taxable bonds used for

advance refunding

Post-Tax Reform Refunding Alternatives

Tax Bill – Eliminated Advance Refundings

Borrowers/Issuers

▪ Just Wait

▪ Negotiate with Bond Investor

▪ Sell the Optional Redemption Right

Tax Bill – Eliminated Advance Refundings

Options

▪ Shorter Call Period

▪ Make-Whole

Tax Bill – Reduced Corporate Tax Rates

greater of 25 basis points or 5% of the annual yield

of the modified bond

2017 Tax Act – Reissuance Determination Margin Rate

Factor Adjustment For Tax-Exempt Bonds

Documents Provide for Change to

Interest Rate SHALL occur if

Corporate Tax Rate Changes

Effective Upon Notice

Documents Provide Bank MAY elect to Change the Interest Rate If Corporate Tax Rate Changes (and Issuer/Borrower Has No

Prepayment Right)

Documents Provide Change to

Interest Rate SHALL occur if

Corporate Tax Rate Changes

Documents Provide Bank MAY elect to Change the Interest Rate

Tax Bill – Reduced Corporate Tax Rates

Direct Bank Placement

▪ Balance LT borrowing needs for strategic purposes

▪ Replaced Letters of Credit

▪ Series 2012, 2014 and 2017A

Bowling Green State University

Tax Bill – Reduced Corporate Tax Rates

▪ Margin Rate Factor Language – if corporate tax rate

decreases, the interest rate shall increase by multiplying the interest rate by a fraction:

1 – New Corporate Tax Rate

1 – Corporate Tax Rate in effect on Issuance Date

Margin Rate Factor

Tax Bill – Reduced Corporate Tax Rates

Sample Language from Indenture

▪ “In the event of a change in the Corporate Tax Rate (as hereinafter

defined) during any period where interest is accruing on a tax-exempt basis causes a reduction in the tax equivalent yield on the Bond, the

interest payable on the Bond would be increased to compensate for

such change in the effective yield to a rate calculated by multiplying the bond interest rate by the ratio equal to (1 minus A) divided by (1 minus B), where A equals the Corporate Tax Rate in effect as of the date of the corporate tax rate adjustment as announced by the IRS and B equals the Corporate Tax Rate in effect on the date of the original issuance of the Bond The “Corporate Tax Rate” means the highest marginal statutory rate of federal income tax imposed on corporations and applicable to the Purchaser (expressed as a decimal).

Tax Bill – Reduced Corporate Tax Rates

▪ BGSU issued Series 2017A, $35M, fixed rate 1.60%

a 21% increase and we would pay an additional 120K in interest each year for the 4 year term

Margin Rate Factor – Case Study

Case Study 2-Bowling Green State University

▪ BGSU language was quite vague

▪ We tried to maintain original covenants in our negotiations with banks

▪ Banks are willing to consider the relationship

▪ Current refunding is an option

▪ Where is the language generally found

▪ Indenture, BPA, Continuing Covenants and Bond Form

▪ Negotiate the terms

Margin Rate Factor – Mitigate Impacts

Case Study 2 – BGSU (continues)

Municipal Issues Pre-and Post-Tax Reform

Federally Tax-Exempt Municipal Issues and Post-Tax Reform

Source: Bloomberg MSRC data as of April 2 nd , 2018.

Municipal Private Placements Pre-and Tax Reform

Post-LIBOR Changes

▪ LIBOR – London Interbank Offered Rate

▪ Measures wholesale interbank lending rates

▪ Primary use:

▪ Borrowing Rate

▪ Use in Derivatives and other financial instruments

▪ Resets in London every day

▪ U.S Dollars, Euros, Pounds, Yen, Swiss Franc

▪ Overnight, 1-week, 1,2,3,6-month, 1-year

LIBOR Changes

▪ July 2017, the regulator of LIBOR indices, announced a plan

to phase out LIBOR by the end of 2021.

▪ Why is LIBOR Phasing Out?

▪ Markets supporting LIBOR are no longer representative

of current conditions.

▪ Example, one currency-tenor in 2016 only had 15

observable transactions in 2016.

▪ Scandals?

LIBOR Changes

▪ SOFR was selected as the best LIBOR alternative.

▪ Reflects the cost of borrowing cash overnight secured by U.S government debt

▪ Fully transaction-based

▪ Robust underlying market

▪ The Fed began publishing the SOFR rate on 4/3/18

▪ The CME will start trading SOFR futures on 5/7/18

▪ ISDA is working on amendments to the 2006 ISDA

definitions and a new protocol to facilitate amendments