Bond Issuance Presented by Public School Academies Bond Issuance Presented by Ann Fillingham, Esq. Kathy O’Keefe Danie Lynch Dykema Gossett PLLC Michigan Department of Treasury Bureau of Bond Finance

Bonding Process Negotiated Sale

Select the Team Underwriters: sell/place the bonds with investors Bond counsel: provides legal advice as well as opinions on the legality and taxability of bonds Trustee: manages the flow of funds Financial Advisor: independent third party that advises the borrower regarding the terms and structure of the deal

Finance Team Members Issuer Issuer’s Counsel Financial Advisor Bond Counsel Underwriter Underwriter’s Counsel Trustee Rating Agencies Credit Enhancement Providers

Timing is Everything! Find out when the borrower needs the money Work with team members to develop a schedule to ensure the borrower receives the money when needed

“Size” the Deal Define the project needs Find out how much money the borrower needs

“Structure” the Deal Determine the maturity of the bonds - When the investor is repaid the principal on their investment Determine the security for the bonds - The strength of the security will affect the interest rate on the bonds Ascertain the most cost effective interest rate mode, income tax status, and terms of re-payment

Debt Instruments BONDS (Long-Term Financing) A bond is written evidence of a borrower’s obligation to pay principal and interest at specified times and dates on money borrowed NOTES (Short-Term Financing) A note is essentially the same as a bond except that the debt must be repaid within one year

Types of Bonds Municipal Bonds (when issued for a public purpose project) are exempt from federal and state income taxes. General Obligation (G.O.) Bonds are secured by the “full faith and credit” of the issuer. Full Faith and Credit Bonds are payable as a first budget obligation. Revenue Bonds are payable from specific sources of revenues, other than property taxes, and are not backed by the “full faith and credit” of the issuer.

Forms of Bonds & Notes Serial Bonds - Repayment of principal on an annual basis. Term Bonds - Single repayment (maturity) of principal. Fixed Rate Bonds - Bond with an interest rate that remains constant or fixed during the life of the bond. Variable Rate Demand Bonds (VDRO’s) - Bonds issued with a variable interest rate. Investors have the right to ‘put’ the bonds back to the issuer. VDRO’s require liquidity in the form of a letter of credit. State Aid Anticipation Notes (SANs) - are issued in anticipation of state aid payments.

Additional Security Rating - Obtain a credit rating from an independent third party to verify the credit worthiness of the borrower Insurance - Guaranteed payment of the bonds from a third party Letter of Credit - Guaranteed payment from a bank

Credit Structure Credit Ratings Moody’s Investors Service A credit rating agency evaluates the “credit worthiness” of the borrower or credit support and the ability to repay the debt. Three independent companies publish credit ratings upon request for both corporate and municipal debt. They are: Moody’s Investors Service Standard and Poor’s (S&P) Fitch Ratings

Short-Term Credit Ratings Category S & P Moody’s Fitch Very Strong S&P-1 MIG-1 F-1 Satisfactory S&P-2 MIG-2 F-2 Satisfactory but susceptible MIG-3 F-3 Speculative S&P-3 MIG-4 F-4

Long-Term Credit Ratings Category S & P/Fitch Moody’s Highest AAA Aaa Very Strong AA+ / AA / AA- Aa1 / Aa2 / Aa3 Strong but susceptible A+ / A / A- A1 / A2 / A3 Adequate BBB+ / BBB / BBB- Baa1 / Baa2 / Baa3 Vulnerable - “Junk” Status BB+ / BB / BB- Ba1 / Ba2 / Ba3 B+ / B / B- B1/ B2 / B3 CCC+ / CCC / CCC- Caa1 / Caa2 / Caa3 Lowest Grades CC / C / D Ca / C

Draft the Documents Board Resolutions Official Statement The Bonds or Notes Internal Revenue Service Documents

Sell the Deal Distribute offering document (Official Statement) Underwriters market to banks, funds, and individuals State (Authority) signs the purchase agreement

Sale of the Bonds Competitive vs. Negotiated Sale Competitive Sale: the issuer sets a date for the sale and accepts sealed bids from potential buyers. At a specified date/time the issuer opens the bids and awards the bond sale to the lowest interest cost bidder. Negotiated Sale: the issuer selects an underwriter who then structures and sells the bond issue.

Who Buys Municipal Bonds? Mutual Funds Insurance Companies Commercial Banks Individual Investors commonly called “retail” investors

Holders of Municipal Debt

Close the Deal Sign bond purchase agreement Obtain legal opinions Finalize offering document

Show Me The Money Once the documents have been signed and the deal has been closed, the funds (money) is sent via wire transfer Release bonds to the investors

Bond Issuance Process

Michigan Public Educational Facilities Authority MPEFA Innovative Financing for School Facilities

Innovative Financing for School Facilities MPEFA Innovative Financing for School Facilities MISSION STATEMENT The Michigan Public Educational Facilities Authority is dedicated to providing opportunities for low cost financing and technical assistance for (i) qualified public educational facilities and (ii) public school academies through its bonding and loan programs.

Long-Term Facilities Financing Financing is a challenge to most public schools, for public school academies there are additional challenges to securing financing without access to local property tax. MPEFA This program is designed to provide public school academies with a low cost alternative for the purpose of financing land, facilities, equipment, or refinancing existing debt.

State Aid Note for PSAs The State Aid Note for Public School Academies (PSAs) a short-term financing option for cash flow needs for operating purposes prior to the receipt of October State Aid payments. MPEFA The State Aid Note (SAN) Program for PSAs offers a simplified low-cost borrowing process, equivalent to the program available for public school districts. However, this is a program designed specifically for PSAs with their particular needs in mind.

Qualified Public Educational Facilities Bonds The Qualified Public Educational Facilities (QPEF) Bonds can be used to construct, rehabilitate, refurbish or equip a public school facility. A public-private partnership agreement needs to be entered into between the public school and a private, for-profit corporation (developer) . The bond proceeds are loaned to the developer who owns the school facility and leases it to a public school. The public school leases the school facility from the developer and at the end of the lease term, the facility is transferred to the public school for no additional consideration. MPEFA

MPEFA Credit Definitions Institutional Investor: A firm that purchases large volumes of municipal securities, including mutual funds, banks, insurance and finance companies. Investment Grade Rating: Minimum rating of BBB- or Baa3 Investor Letter: A letter signed by each Institutional Investor acknowledging the risks associated with the securities being purchased and a representation of its financial ability to take such risks, its access to information on the securities and its intent to hold the securities for investment purposes. The letter must state that the Institutional Investors have not relied on information provided by the Authority. Nationally Recognized Agency: Fitch Ratings, Standard & Poor's Ratings Services, or Moody’s Investors Service Underwriter: A registered broker-dealer of municipal securities MPEFA

MPEFA Credit Policy Bonds issued by the Authority should contain at least one of the following attributes: Investment Grade Rating from a Nationally Recognized Agency; or Letter of credit, bond insurance, or guarantee from an organization with an Investment Grade Rating; or Privately placed with Institutional Investors, in minimum denominations of $100,000, which provide an Investor Letter; or Limited offering to Institutional Investors, in minimum denominations of $100,000. The bonds will be sold through an Underwriter with an acceptable disclosure document and legal opinion. MPEFA The Authority reserves the right to grant exceptions to the foregoing upon its determination through a preliminary resolution that the bond transaction does not create unnecessary exposure or risk to the Authority.

MPEFA Issue List 1 State Aid Note (14 PSAs) 2003 $14,750,000 1.40%   CLOSING DATE COLLEGE NAME AMOUNT ISSUED INTEREST RATE SERIES RATING STATUS 1 8/21/2003 State Aid Note (14 PSAs) 2003 $14,750,000 1.40% SP-1+ Fixed 2 12/10/2003 West Michigan Academy of Environmental Science $2,615,000 1.04% variable 3 8/20/2004 2004 $16,385,000 2.07% 4 10/28/2004 Holly Academy $3,800,000 1.77% 5 8/19/2005 State Aid Note (24 PSAs) 2005 $20,325,000 4.25% 6 11/1/2005 Woodland Park Academy $3,750,000 2.66% Variable 7 12/13/2005 C.R. Smith Foundation on behalf of Old Redford Academy 2005 A $10,865,000 multiple BBB- 2005 B $245,000 6.50% 8 2/14/2006 Michigan Technical Academy 2006 $6,950,000 BB $79,685,000

Letter of Credit/Underwriters Fifth Third Bank Michigan Public Finance 2501 Coolidge Road, Suite 203 East Lansing, MI 48823 Brian Lefler Vice President and Manager (517) 324-4058 Stacy Truax Assistant Vice President (517) 324-4040 National City Bank One Woodward Plaza 16th Floor Locator R-J65-4P Detroit, MI 48226 Bill Roche Managing Director (313) 230-1625 Winta Tedla (313) 230-1628 Paul Harris (313) 230-1627 Standard Federal Bank 2600 West Big Beaver Road Troy, Michigan 48084 Rick Van Dresser Vice President (248) 637-2729 Oppenheimer & Co. Public Finance Department 300 River Place, Suite 4000 Detroit, Michigan 48207 Kelli J. Lambrix (313) 566-2330 Jack Brusewitz Vice President and Co-Manager (313) 566-2373 MPEFA

MPEFA

Michigan Public Educational Facilities Authority Contact Information Ann Fillingham afillingham@dykema.com (517) 374-9146 Kathy O’Keefe OKeefeK@michigan.gov 517-373-8885 Danie Lynch LynchDC@michigan.gov 517-241-1765 Dykema Gossett PLLC Michigan Public Educational Facilities Authority 124 West Allegan Street 800 Michigan National Tower Lansing, MI 48933-1707 Location: Austin Building, 1st Floor (Formerly Treasury Building) 430 W. Allegan Lansing, MI 48922 Mail: P.O. Box 15128 Lansing, MI 48901 Phone: (517) 335-0994 www.dykema.com/corporate Treas_MPEFA@michigan.gov www.michigan.gov/mpefa