Presentation is loading. Please wait.

Presentation is loading. Please wait.

Report on Investment Strategy for the Commercial Paper Program Vernon D. Evans Vice President for Finance/ Treasurer Item 7 January 3, 2008.

Similar presentations


Presentation on theme: "Report on Investment Strategy for the Commercial Paper Program Vernon D. Evans Vice President for Finance/ Treasurer Item 7 January 3, 2008."— Presentation transcript:

1 Report on Investment Strategy for the Commercial Paper Program Vernon D. Evans Vice President for Finance/ Treasurer Item 7 January 3, 2008

2 Agenda General features of Commercial Paper Notes Overview of the current program New borrowing under this program Investment Strategy Arbitrage Rebate Regulations 2

3 Tax-Exempt Commercial Paper Program One of the lowest cost, most versatile short term instruments in the marketplace Used as funding vehicle for short lived assets (e.g., equipment) or as interim construction funding for long lived capital programs Each issue of Commercial Paper is individually priced on the basis of its maturity Each issue must mature within 270 days, but can be continually rolled for the term of the program A draw on the Letter of Credit (LOC) provided by the highest rated commercial bank pays principal and interest at each maturity Authority repays the LOC draw from proceeds of new roll of CP, or from its net revenues 3

4 Commercial Paper Has Always Provided the Lowest Cost of Funds 4

5 Authority’s Current Program $49.3 million currently outstanding $250 million authorized Letter of Credit, provided by Lloyds Bank TBS, expires on September 1, 2014 –A British bank with the highest credit ratings from all three rating agencies –The best trading profile of any LOC provider according to a variety of market traders who were canvassed on their views –Lloyd’s aggressive bid: basis points (utilized) and 8 basis points (unutilized). A basis point is 1/100 of a percent Commercial Paper Notes are subordinate in lien to our current senior, fixed rate bonds 5

6 Commercial Paper Program: Proposed Uses Proposed uses include: - Refinancing of $50 million of expiring CP until permanent debt is issued in early $125 million of interim funding of Capital Improvement Projects - A portion ($75 million) may remain outstanding to provide a “revolving credit line” Commercial Paper will be retired from proceeds of permanent, fixed rate bonds as they are issued 6

7 Commercial Paper $40 Million - New Borrowing 7

8 Investment Strategy Within compliance of US Treasury (Internal Revenue Service) rules, the Authority is allowed to borrow funds at tax-exempt rates and reinvest these funds in advance of actual construction spending. Authority currently can borrow commercial paper at 3.25% and invest the proceeds at 4.5%. –Less additional letter of credit fees of 9 basis points (.09%), investment management fees of 8 basis points (.08%), and other cost of issuance –Potential to earn a spread of 1.00 to 1.10% On an average balance of $20 million of bond proceeds during the next six month period, the Authority could earn approximately $100,000 to $110,000 of net revenue during this period. This investment revenue will be used to offset a portion of the overall project costs. 8

9 Arbitrage Rebate Regulations This practice is subject to very strict IRS arbitrage guidelines –6 Month Spending Exception - All proceeds are spent within a six month period beginning on the issue date –18 Month Spending Exception - Fifteen percent (15%) of the proceeds are spend within 6-months, 60% are spent within 12 months, and 100% are spent within 18 months –2 year Spending Exception - At least 75% of the “available construction proceeds” are to be used for construction expenditures and are spent as follows: a. 6 months 10% b. 12 months 45% c. 18 months 75% d. 24 months 100% Available construction proceeds is generally calculated as the amount received from the underwriters from selling bonds to the public, earnings thereon, less amounts (if any) deposited in a reasonably required reserve and amounts applied to issuance costs. 9

10 Investment Strategy Conservative Approach The Authority’s risk is that it fails to meet the spending exception rules either due to project delays or delayed payments The Authority must have a high degree of certainty regarding project startup and completion of construction work Our policy is to limit excessive borrowing to protect against unanticipated events Current cash flow forecasts indicate that $40 million will be spent in six months VS The 18 Month Spending Exception that mandates the 15% or $6 million be spend by six months and $24 million spent by one year Conclusion : The Authority should easily be able to meet this standard A failure to meet the IRS standard will result in the Authority rebating to the IRS any excess investment earnings to the US Treasury 10


Download ppt "Report on Investment Strategy for the Commercial Paper Program Vernon D. Evans Vice President for Finance/ Treasurer Item 7 January 3, 2008."

Similar presentations


Ads by Google