Debt Financing and Management for Public Organizations
Final Project
Fall 2024
For this project you will answer questions about an actual municipal issuer, the New York State Thruway Authority (the “Authority”), and a Request for Proposals (“RFP”) issued by the Authority in 2021. At the time, the Authority was seeking banks to serve as underwriters on future bond transactions, as outlined in Section 1 B of the RFP (“Purpose”) and Section 2 (“Engagement Requirements”). They are asking proposing banks to demonstrate two main qualifications:
1. Credentials of the proposing bank that highlight recent experience underwriting similar municipal bonds including impressive rankings, investment banking staff as well as sales/trading capabilities and capitalization of the bank; and
2. Knowledge/deep understanding of the Authority’s structure, debt management strategies and credit strengths.
If you were working at an investment bank that is interested in winning underwriting business with the Authority you would need to outperform all other competing firms on both of the contests above. When reading the RFP, you will note that there are extremely strict requirements for the response materials, formatting and even the font and paper size utilized. Any deviation from these requirements will disqualify a firm from being awarded the underwriting business. Section 4A describes how banks will be selected. The criteria against which proposals will be evaluated is also listed in Section 4C. Note that the scoring rubric for RFP responses is in part tied to New York State procurement rules (because the Authority is a State agency) including an advantage for underwriting firms that are a certified Minority- or Women-Owned Business Enterprise.
To set your firm apart in the stack of proposals, your submission must excel on objective #2 above – proving that you have a thorough understanding of the Authority’s current operations, the structure and relative strength of their individual bond credits, their outstanding debt and future financing needs. To study the Authority you should start by reading the most recent Official Statement for Authority bonds and all of the continuing disclosure documents posted publicly to the MSRB’s EMMA website. At the time, this RFP was released the most recent transaction was the Series O bonds priced in September 2021 via competitive sale. Locate the OS for the Authority Series O bond transaction (CUSIP# 650009W58).
As a study guide to help prepare the best possible underwriting proposal, answer the following questions.
Note: You may perform a google or news search on the Issuer to help describe incurred or expected challenges for this organization but keep in mind that any events which occurred after September 2021 would not have been known or relevant in 2021. Focus on press, rating reports (posted to the Final Project Assignment on Brightspace), and annual continuing disclosure documents posted to EMMA in 2021 or before.
For the calculations discussed in Question 15, please use the Excel file posted to the Final Project Assignment on Brightspace containing information on the Authority’s outstanding debt, including the Series O bonds. This is the same data printed in the Series O Official Statement, transferred to Excel so you do not need to type in the figures. Answers to Questions 1-15 must be submitted in an unlocked copy of this Word document, INCLUDING YOUR FULL NAME AT THE TOP.
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FINAL PROJECT QUESTIONS
Student Name: _____________________
A Study of NY STATE THRUWAY AUTHORITY – The Issuer
1) Is the Authority a conduit borrower or a municipal entity that is able to issue tax-exempt debt directly?
2) Select text from the Official Statement that outlines the mission of the organization, summarized in no more than one paragraph. Include quantitative measurements about the Authority’s assets and operations.
3) There are many different liens that the Authority utilizes for financing of roads and bridges – see RFP Section 1A for a description of each. What type of pledge did the Authority provide for its Series O bonds?
a) Is this a General Obligation or Revenue Bond credit?
b) Are the Series O bonds issued under the most senior lien or a junior (subordinated) lien?
c) What is the Security and Source of Repayment of the Series O bonds? Hint – use the “Revenue” section from “Source of Payment & Security” in the OS [pdf pg 16]
4) There is a Debt Service Reserve Fund provided for the Series O Bondholders (see OS Section “Senior Debt Service Reserve Fund” under “Sources of Payment & Security”). What is the Debt Service Reserve Fund Requirement, in terms of the minimum amount of money that must be maintained in the DSRF?
5) The Series O bonds have a Rate Covenant and an Additional Bonds Test.
(a) Summarize the rate covenant that includes a Debt Service Coverage Ratio. Consider using the very short description provided in the Moody’s Rating Report.
(b) Summarize the terms of the Additional Bonds Test – again, consider using the Rating Agency’s description.
6) Now that we know the debt service coverage ratios required for compliance with the bond covenants, what is the current Debt Service Coverage Ratio (DSCR) at the time the RFP was released? Focusing on Calendar Year 2020 results, the most recent fully completed fiscal year at the time of the RFP/Series O Sale, use $ figures reported in the Official Statement “Results of Operations” [Series O Official Statement PDF pg 30].
a) What are the Authority’s Net Revenues for 2020 (in $ Million)?
b) Bonus Point: What has been deducted from the Total Revenues to calculate Net Revenues?
c) What is the 2020 Net General Revenue Bond Debt Service (in $ Million)?
d) What is the General Revenue Bond Debt Service Coverage Ratio for 2020?
e) How does the 2020 DSCR compare with the minimum ratio for compliance with the bond covenants?
f) What does the Moody’s rating report say is a DSCR for senior bonds (like the Series O) that would put the Authority at risk for a downgrade?
g) Bonus Point: The toll revenues in 2020 were much lower than prior years. Before you interview with the Authority for underwriter RFP you should research why revenues were trending unfavorably and then propose an approach for marketing future bonds to investors in the context of current underperformance – ditto with the approach for maintaining the credit ratings. Read the OS Section entitled “Management’s Discussion & Analysis of Results of Operations” and summarize the Thruway’s explanation of why revenues were down in 2020.
h) Bonus Point: If you have been hired by the Authority as an underwriter, you will be selling new bonds and helping make a market for trades of the Series O bonds in the secondary market. It’s important to keep a close eye on the Authority’s financial performance. What is the DSCR for the Senior Bonds as of today and has performance improved? Hint: look at Continuing Disclosure documents on EMMA for Calendar Year 2023 performance (most recent report available at this time)
7) Now that we know what conditions and financial performance are required for the Authority to issue additional debt, what are the projected future financing needs? Look at the forecast for capital expenditures announced by the Authority at the time of the Series O bond offering; see the Official Statement Section entitled “2021-2025 Capital Program”.
a) State the total amount of spending or “investments” planned over the period of 2021-2025 (in $ Billion).
b) Bonus Point: State the amount of the capital program (in $ Billion) that will be funded with General Revenue Bond Proceeds (the same pledge as the Series O bonds). Hint: Look at the Official Statement Section entitled “Funding of the 2021-2025 Capital Program”
8) The 2021-2025 Capital Program covers three major projects. In order to submit a thoughtful response to the Authority’s RFP you should be aware of all ongoing projects at the Thruway and be able to communicate how these projects might relate to future financing needs, the best type of debt to align with each project’s expected economic life and the Authority’s sources of repayment for related debt. List (but do not describe) the 3 major projects under the 2021-2025 Capital Program.
9) If selected to serve as the Authority’s underwriter, you will be responsible for outlining the Continuing Disclosure Obligations the Thruway has committed to, as well as confirming that the Authority has been in compliance with their other outstanding Continuing Disclosure Obligations at the time you sell any new bonds. Read the OS section entitled “Continuing Disclosure Under SEC Rule 15c2-12”.
a) What are the Authority’s Continuing Disclosure requirements under the Series O Bonds?
b) Bonus Point: Has the Authority been late, incomplete or otherwise materially noncompliant on any Continuing Disclosure Postings? Hint: this is something that must be disclosed in the OS.
10) If you are competing to win the Authority’s underwriting business, you’ll need to demonstrate that you can convince investors to purchase the Thruway’s bonds, which will inevitably entail answering questions investors have about the risks facing the Authority. Read all of the “Investment Considerations” the Authority reports on in the Series O Official Statement. List at least 5 of the main categories of risks, concerns or external factors that impact the Authority’s business but do not go into detail on the status of each.
a) Bonus Point: One of the Authority’s recognized Considerations for Investors stated in the Series O Official Statement is that the Thruway credits could be downgraded. Is the credit rating on the Series O bonds the same, downgraded or upgraded since the bonds were sold in 2021? Hint: Look at EMMA.
b) Bonus Point: Another one of the Authority’s recognized Considerations for Investors stated in the Series O Official Statement is legislative interference. Can the State of New York prevent the Authority from setting or collecting fees or charges?
Series O Bonds as a Proxy for Authority Preferences: Plan of Finance, Bond Structure & Amortization
11) Review the bond maturities on the Series O transaction. Assuming the Series O is typical of the bond structure the Authority is most comfortable selling to finance toll roads and bridge projects, what are the following features of the Series O transaction that you should mimic when proposing future (new money) bond transactions in your RFP response – answer the questions below based on the features observed in Series O:
a) Fixed Rate or Variable Rate Bonds?
b) Longest maturity (in years from the date of sale)?
c) Premium, discount or par bonds?
d) Bonus Point: what do you know about the Authority’s financed projects that make the bond features above a good match for the Thruway’s needs?
12) You are preparing the RFP response which requires competing investment bankers to suggest a plan of finance for future Authority debt issuance. Read all of the intended uses of the Series O bond proceeds to determine if the Authority typically uses tax-exempt bond proceeds to finance the following needs – answer yes or no based on the observed use of the Series O bond proceeds:
a) Deposits to the Debt Service Reserve Fund
b) Costs of Issuance
c) Capitalized Interest
13) Similarly, look at the Series O bonds to determine what tax exemption was awarded to the General Revenue projects to make assumptions about whether or not future bonds sold under the same credit will also likely be granted tax exemption under each of the following jurisdictions - answer yes or no based on the tax status of the Series O bonds:
a) Federally tax-exempt?
b) State tax-exempt?
c) New York City tax-exempt?
14) You need to start modeling bond cashflows for the Authority’s future debt in order to answer some of the RFP questions. Assume that you will use the same interest payment dates as the Series O bonds if future bonds are sold under the same lien. List the semi-annual interest payment dates of the Series O bonds.
15) Generate two graphical summaries of the Authority’s outstanding debt to understand typical amortization preferences at the Thruway:
a) Stacked bar graph of annual debt service on Series O with shading to differentiate principal vs. interest payments. Note that the Series O annual debt service figures have been provided in the Excel file on the Final Project page of Brightspace (see columns C & D). Create a graph in the same style as in the in-class exercise template (posted to Brightspace “Class Sessions” as “IN CLASS 12 Excel Exercises” on the tab called “Graph of Series DS”). Paste the stacked bar graph below. Make sure all legends are labeled as are the graph axes.
b) Stacked bar graph of annual debt service on Series O Bonds separate from the annual debt service on all of the Authority’s other Outstanding Debt with shading to differentiate Series O and the Other Outstanding Indebtedness. Note that you will need to combine the Other General Revenue Bond Debt Service from the Excel file Column B with the Outstanding Junior Indebtedness (Column G) to represent the Authority’s debt OTHER THAN SERIES O. Create a graph in the same style as in the in-class exercise template (posted to Brightspace “Class Sessions” as “IN CLASS 12 Excel Exercises” on the tab called “Graph of Consolidated DS”). Paste the stacked bar graph below. Make sure all legends are labeled as are the graph axes.
c) Bonus Point: based on the observed patterns in the Authority’s Series O debt service, which of the debt management strategies did the Thruway use when structuring the Series O bonds around other outstanding debt? Choose one of the styles we studied in class that most closely resembles the Series O debt service placement with respect to other outstanding debt: Uniform, Fill or Wrapped placement.
d) Bonus Point: Do you have any recommendations for the Authority in your RFP response about a better approach to amortization or debt portfolio management, based on the Authority’s outstanding debt?