By Greg Johnson, Senior Municipal Advisor
and Shelby McQuay, Senior Municipal Advisor | Managing Director

Parameters Sales

There are many different flavors of validly authorizing debt under statute, such as:

• A required public hearing
• Consideration of preliminary legislation that requires super-majority approval
• Preparation and adoption of a study or plan
• Review and approval by a state agency
• A permissive referendum or publication of a notice of a petition period that then introduces permissive referendum if enough lawful signatures are presented

Regardless, there comes a point in time, typically a single day, when the rate(s) and terms for the debt are finalized, and the governing body awards the sale and authorizes the debt issuance.  This action most commonly occurs at a regularly scheduled meeting of the governing body that includes an agenda item to consider a resolution or bond purchase agreement that sets out all issuance details in a tidy package.  Closing takes place just a few short weeks later.

However, as we all know, life isn’t always that simple!

• What if you require funding to pay invoices by a date certain and your Board or Council meeting falls on a holiday when the markets are closed?
• What if the meeting normally held to consider an award resolution falls on a day when the Federal Reserve’s Federal Open Market Committee (FOMC) is concluding a policy meeting?
• Perhaps you’re considering a refinancing transaction solely for the purpose of interest savings, but the market is experiencing high levels of volatility?
• Maybe your municipal advisor recommended a negotiated transaction and, in consultation with the selected underwriter, they believe it’s best to market the bonds over several days when there aren’t as many competing bond offerings before setting the formal order period?

Under all these circumstances, you should avoid trying to arbitrarily match the day of pricing the bonds to a regular meeting of your governing body.  Similarly, scheduling a special meeting on short notice solely to consider financing approval may prove difficult and likely isn’t necessary.

So, how does a governmental entity bound by the restraints of established process achieve a greater degree of flexibility while still adhering to its core principles of governance and accountability?  Enter the parameters sale!

What is a “Parameters Sale?”

At its most basic level, selling debt under a set of parameters is an exercise in the delegation of limited authority.  During the authorization phase of borrowing, the governing body can adopt legislation that delegates authority to specific officials (one or more), allowing them to execute financing documents on dates outside of a governing body meeting if an established set of parameters are met.

What are Parameters?

The nature of the debt issue and financing plan should dictate the specific parameters memorialized in the authorizing resolution.  What’s appropriate for a new money financing for capital projects may not align with a debt issue that refinances existing debt for interest savings.

Some common examples of parameters include:

• Not-to-exceed principal amount of the issue (i.e., dollar amount)
• Not-to-exceed financing rate, typically true interest cost (TIC) expressed as a %
• Maximum stated final maturity date
• Maximum adjustments in dollars to individual maturities or annual installments
• Maximum and minimum purchase prices that create upper and lower bands, both of which can be expressed in dollar terms or as a percent of the principal amount of the issue
• Maximum annual and/or total debt service payments
• “Not-longer-than” optional redemption (call) date, along with a stated redemption price (typically 100% of face value)
• For refundings, minimum savings expressed as a dollar amount (future or net present value) or percent of refunded principal on a net present value basis

It’s important to note that the resolution or ordinance establishing the parameters and delegation of authority must have a stated expiration date; it can’t be indefinite.

How do Parameters Get Established?

Your municipal advisor and bond counsel typically guide governmental entities in the development and adoption of debt sale parameters.

Bond counsel typically weighs in relative to what should be set out in writing, so as to not leave too many items open to discretion or subjective interpretation.  Ideally, the governing body provides a lock-step structure to follow rather than a trail of breadcrumbs that leaves too much latitude to officials authorized to approve a sale. Excessive leeway essentially confers the powers of the elected governing body to individuals, which is not allowed under state statute.

Your advisor offers a different perspective, which complements the matter-of-fact legal point of view.  This includes guidance on effectively setting parameters to meet the issuer’s objectives for the financing, while also considering how much (or how little) flexibility the governing body is willing to give.  For instance, if an issuer enters into a purchase and sale agreement to acquire real estate contingent on financing all or some of the acquisition price, the expectation is that the risk to closing on the financing in a timely manner must be minimized.  Therefore, the parameters shouldn’t be so restrictive that the transaction is almost immediately placed at risk due to any material market movement between the enacting legislation and the intended timeline for pricing the debt .  The governing body should determine the threshold for “affordability,” which is often measured in the context of things like tax impact.  Conversely, a debt issue focused on refinancing to achieve interest savings should err on the side of maximizing those savings.  The governing body should determine the minimum amount of acceptable savings yet be willing to accept the fact that those savings might not be achievable if the market moves away.  Refinancing for savings is an opportunity, not an imperative, which means parameters for these transactions can and should be more restrictive.

Of course, there’s nuance in all situations.  You should be represented by an independent advisor who has a fiduciary responsibility to place your interests ahead of their own.  Sale parameters should reflect your prerogatives as an organization, not those who are paid fees contingent on closing a transaction.

What Else Should We Consider?

• Get comfortable with the “worst-case scenario.” Think of it this way, once you establish something like a not-to-exceed true interest cost, you are essentially accepting it as a possible result.  Make sure you understand the impacts of the potential outcomes you’re agreeing to before committing them to authorizing legislation.  Your advisor can provide impact analysis to help you make informed decisions, regardless of repayment source.
• Conducting a parameters sale is not a set it-and-forget it exercise.  Compliance with the parameters must be monitored over time.  There’s no sense in proceeding with a sale that will knowingly violate the parameters.  In fact, it’s a bad idea.  There are repercussions to conducting the sale and rejecting bids for a competitively offered issue.  For one, it’s not a good use of people’s time, including the underwriters submitting a binding purchase proposal.  And perhaps more importantly, if the transaction is picked back up, additional official statement disclosures will be required to explain the previous marketing of the transaction and why it was unsuccessful.

Your advisor should provide regular updates relative to meeting established parameters.  If it’s known the parameters won’t be met, make sure the sale is removed from the calendar prior to the day of pricing.  Remember, you’ve already built in flexibility around timing of the sale. The bigger problem is holding the sale as planned, then needing to reject proposals versus simply rescheduling.  A preliminary official statement can always be amended, and credit ratings are typically good for 90 days.

• Consider amending the parameters.  There are occasions when markets move swiftly to a new normal that nobody could have anticipated.  In these instances, the finance team may need to revisit the parameters to reflect the current environment and request the governing body to reconsider its authorizing legislation.  Alternatively,  the governing body and appointed officials may simply decide to time the sale of the debt, so that it corresponds with a regular meeting date.  Circumstances change and so should the decision set.

The ultimate goal when issuing debt under established parameters is to create flexibility.  There are pros and cons associated with every choice, so the key is understanding what you might be giving up in exchange for what you are gaining.  That price should be measured against the priority aspects of your financing plan and what risks must be mitigated or even eliminated.  Your advisor and bond counsel can prove valuable resources in helping you make these calculations and guiding you towards a path that will help to ensure a successful outcome.

Important Disclosures:

Ehlers is the joint marketing name of the following affiliated businesses (collectively, the “Affiliates”): Ehlers & Associates, Inc. (“EA”), a municipal advisor registered with the Municipal Securities Rulemaking Board (“MSRB”) and the Securities and Exchange Commission (“SEC”); Ehlers Investment Partners, LLC (“EIP”), an SEC registered investment adviser; and Bond Trust Services Corporation (“BTS”), holder of a limited banking charter issued by the State of Minnesota.

Where an activity requires registration as a municipal advisor pursuant to Section 15B of the Exchange Act of 1934 (Financial Management Planning and Debt Issuance & Management), such activity is or will be performed by EA; where an activity requires registration as an investment adviser pursuant to the Investment Advisers Act of 1940 (Investments and Treasury Management), such activity is or will be performed by EIP; and where an activity requires licensing as a bank pursuant to applicable state law (paying agent services shown under Debt Issuance & Management), such activity is or will be performed by BTS. Activities not requiring registration may be performed by any Affiliate.

This communication does not constitute an offer or solicitation for the purchase or sale of any investment (including without limitation, any municipal financial product, municipal security, or other security) or agreement with respect to any investment strategy or program. This communication is offered without charge to clients, friends, and prospective clients of the Affiliates as a source of general information about the services Ehlers provides. This communication is neither advice nor a recommendation by any Affiliate to any person with respect to any municipal financial product, municipal security, or other security, as such terms are defined pursuant to Section 15B of the Exchange Act of 1934 and rules of the MSRB. This communication does not constitute investment advice by any Affiliate that purports to meet the objectives or needs of any person pursuant to the Investment Advisers Act of 1940 or applicable state law.