Contacts
Mark Galvin
Senior Vice President
[email protected]
450 S. Orange Avenue
Suite 460
Orlando, FL 32801
407.426.9611
407.426.7835 Fax
Utility System Workshop
Preliminary Financing Plan
February 12, 2012
CITY OF PALM COAST, FLORIDA
Credit Considerations – Importance of Bond Ratings
City has an opportunity to refinance their Series 2003 Utility Revenue Bonds and save approximately
$500,000 per year and $11 million over the life.
As part of the refunding the City will prepare an official statement that describes the Utility System
financial position, the condition of the Utility System, its Capital Improvement Plan, regulatory
issues, legal covenants, its financial position and its outstanding and projected utility rates along
with estimated debt service coverage. This part of the document includes the engineering and
feasibility study currently be prepared by and PRMG.
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Since the City has identified significant capital improvements the City has the opportunity to finance
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a portion of these CIP improvements at today’s historical low interest rates
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to water and sewer rate payers.
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Goal is to keep debt service as low as possible while maintain flexibility in order to lessen the impact
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O A S T
As part of this refinancing the City will need to update the existing Utility bond ratings.
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L O R I D A
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Member FINRA & SIPC
© 2013 First Southwest Company
Credit Considerations – Importance of Bond Ratings
Outstanding Utility System ratings: The City’s current unenhanced / underlying rating is
“A1” from Moody’s Investors Service (Moody’s),” A+” from Fitch Ratings (Fitch) and
“A” from Standard & Poor’s Rating Services (S&P).

The Series 2003 Bonds originally had underlying ratings of A3, A-, A- from Moody’s,
Fitch, and S&P respectively.
To improve the marketability (interest rates) of the
Bonds the City also purchased a bond Insurance policy (credit enhancement) from
MBIA to increase the bond ratings to “AAA” from all three rating agencies.
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The City issued the Series 2007 Bonds with the underlying ratings being upgraded to
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A L M
insurance from MBIA for the Series 2007 Bonds increasing the bond rating to “AAA”.
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A2, A, A by Moody’s, Fitch and S&P respectively. The City also purchased bond
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In 2008 Moody’s and Fitch recalibrated / upgraded the City’s ratings to Aa3 and AA-
O A S T
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,
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respectively.
L O R I D A
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Member FINRA & SIPC
© 2013 First Southwest Company
Credit Considerations – Importance of Bond Ratings
In 2008 the Credit Crisis and Bond Insurance Meltdown

Since 2007 there were six (6) “AAA” rated municipal bond insurance companies – today
none are rated “AAA” by any of the rating agencies.

Only two bond insurers are actively issuing new policies.
–
Assured Guaranty Municipal Corp. “A2” Moody’s and “AA” S&P (January 18, 2013 downgraded
by Moody to A2 from Aa3)
–
Build America Mutual Assurance Company “AA” S&P only – Start up bond insurer that is presently
not licensed in Florida.
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The collapse of the bond insurers means:
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MBIA downgrade required the City to fund with cash its DSR Accounts requiring the City to
transfer from reserves and project funds $9.4 million.
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I T Y
The Series 2003 and 2007 Bond Insurer : MBIA now known as National Public Finance is
now rated “Baa2” and “BBB” from Moody’s and S&P respectively. The Fitch rating has
been pulled.
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
O A S T
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Issuer’s underlying ratings are extremely important.
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Institutional Investors now do their own credit analysis prior to purchasing any bonds.
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At the City’s current ratings bond insurance is currently not cost effective.
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Member FINRA & SIPC
© 2013 First Southwest Company
L O R I D A
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Municipal Bond Insurers Rating Summary
As of January 18, 2013
Significant Recent Actions: On January 17, 2013, Moody's downgraded
Assured Guaranty Municipal and Assured Guaranty's ratings to "A2" and
"A3," respectively, from "Aa3;" rating was removed from "Review for a
Possible Downgrade" and a "Stable" oulook was assigned. On July 23,
2012, S&P assigned an "AA" rating and "Stable" outlook to Build America
Mutual.
Stable
Negative Outlook
Positive Outlook
Watch Negative / Review for Possible
Downgrade / R (Regulatory Intervention)
Developing Watch / Review With Direction
Uncertain
Watch Positive / On Review for Possible
Upgrade
Insurer
Moody's
Standard & Poor's
Fitch
Berkshire Hathaway (Columbia and
Aa1 / Stable Outlook
AA+ / Negative Outlook
National Insurance Co. "NICO")
(as of 7/22/10)
(as of 8/08/11)
Build America Mutual
No Rating
A3 / Stable Outlook
No Rating
AA / Stable Outlook
No Rating
(as of 7/23/12)
AA- / Stable Outlook
Ratings Withdrawn
(as of 11/30/11)
(as of 2/24/10)
Assured Guaranty Municipal
AA- / Stable Outlook
Ratings Withdrawn
(formerly FSA)
(as of 1/17/13)
(as of 11/30/11)
(as of 2/24/10)
National Public Finance
Baa2 / Negative Outlook
BBB / Developing
Ratings Withdrawn
(formerly MBIA Illinois)
(as of 12/19/11)
(as of 06/21/12)
(as of 6/26/08)
Ba1 / Negative Outlook
B+ / Negative Outlook
Ratings Withdrawn
(as of 4/17/12)
(as of 8/2/12)
(as of 5/02/08)
Caa2 / Developing
B / Negative Outlook
Ratings Withdrawn
(as of 11/19/12)
(as of 6/21/12)
(as of 6/26/08)
I T Y
Ratings Withdrawn
Ratings Withdrawn
Ratings Withdrawn
Radian
MBIA
Syncora
(as of 4/7/11)
(as of 11/30/10)
(as of 6/26/08)
FGIC
Ratings Withdrawn
Ratings Withdrawn
Ratings Withdrawn
(Certain Policies Covered by National)
(as of 3/24/09)
(as of 4/22/09)
(as of 11/24/08)
Ratings Withdrawn
Ratings Withdrawn
Ratings Withdrawn
(as of 11/11/09)
(as of 02/16/10)
(as of 10/21/08)
Ambac
O A S T
CIFG
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(as of 9/05/08)
Ratings Withdrawn
A L M
(as of 7/28/10)
Ratings Withdrawn
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(as of 11/8/12)
Ratings Withdrawn
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(as of 1/17/13)
A2 / Stable Outlook
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Assured Guaranty
Legend
,
No Rating
Ratings Withdrawn
No Rating
Disclosure : This is a summary of the current outstanding ratings and outlooks of monoline bond insurers as reported by Moody's Investors Service (Moody's), Standard and Poor's Corporation (S&P), and Fitch Ratings (Fitch) as of
the approximate date and time set forth on this summary. FirstSouthwest does not guarantee the accuracy or completeness of the data set forth herein. For the most accurate and current information, contact Moody's, S&P, and
Fitch. Certain of the insurers' parent companies are currently operating under Chapter 11 of the US Bankruptcy code or other plans of reorganization under applicable insurance regulators. In addition there maybe relationships
among insurers that could also affect credit quality.
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Member FINRA & SIPC
© 2013 First Southwest Company
L O R I D A
(as of 12/15/08)
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ACA
Credit Considerations – Importance of Bond Ratings
On March 30, 2011 Fitch downgraded the City’s Utility Bonds to A+ from AARationale
– “Rating reflects system's very low debt service coverage margins in
fiscal 2010 and expectations for below-average financial metrics and
liquidity for the near to intermediate term….”
– “The system remains highly leveraged”
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What Could Make the Ratings Go Down?
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– “Further declines in system liquidity may lead to lower overall financial
flexibility and could cause additional downward rating pressure”
O A S T
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Member FINRA & SIPC
© 2013 First Southwest Company
Credit Considerations – Importance of Bond Ratings
On August 26, 2011 Moody’s downgraded the City’s Utility Bonds to A1 from Aa3
Rationale
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“The downgrade to A1 from Aa3 reflects the system's diminished debt service
coverage levels and liquidity position.”
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“Challenges include: diminished debt service coverage, new growth is limited,
system is highly leveraged”
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“The rating also incorporates the system's stable customer base with average
wealth levels, a high debt ratio, adequate system capacity, and standard legal
covenants.”
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Failure to implement timely rate increases
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Further deterioration of reserves
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Significantly increase debt burden
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O A S T
Sustained decline in debt service coverage
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What Could Make the Ratings Go Down
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Member FINRA & SIPC
© 2013 First Southwest Company
Credit Considerations – Importance of Bond Ratings
Why maintaining your rating is so important:

The higher the rating the lower the interest rate / yield and lower the interest
cost.

The rating comes out just prior to the issuance of bonds. A downgrade just prior to
pricing has a more profound impact on the City’s rates.

Strong ratings translate into lower rates not only on the Series 2013 Bonds but future
Bonds (Series 2014/15 Bonds) as well.

Highly rated Utility Issues are now issued without a funded Debt Service Reserve
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Account (DSR)
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– Series 2003 DSR Requirement: $6.2 million Cash Funded
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DSR fund to the Series 2013 Project Fund. The plan also includes not funding a
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new DSR for the Series 2013 bonds.
O A S T
Part of the financing plan includes a transfer of $6.2 million from the Series 2003
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– Series 2007 DSR Requirement: $3.1 million Cash Funded
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Not funding a DSR will save approximately $10 million in total debt service
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L O R I D A
over the life of the financing and $400,000 annually
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Member FINRA & SIPC
© 2013 First Southwest Company
Credit Considerations – Importance of Bond Ratings
Utility Ratings are subjective and based on some of the following criteria

Economics and Demographic of the Area: income indicators and growth potential,
residential and commercial and industrial, foreclosures, etc.

Legal and Financial Covenants – rate covenant, additional bonds test, funded debt
service reserve (DSR), renewal and replacement covenants, etc.
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The City’s Financial Position: Liquidity position, cash reserves and cash policies,
current and future debt service coverage
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Condition of the System: CIP requirements, future capital needs, renewal and
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replacement
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Management considerations: stability of the elected officials and their willing to raise
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,
Utility Staff.
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rates if necessary to maintain the system, the experience of the City’s staff and
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L O R I D A
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Member FINRA & SIPC
© 2013 First Southwest Company
Credit Considerations – Importance of Bond Ratings
Financial Impact of ratings downgrades:

If either Moody’s or Fitch lowers their bond ratings to A2 from A1 (Moody’s) or A
from A+ (Fitch)
– The City should still be able to transfer $6.2 million from the Series 2003 DSR
and not fund a new DSR on the Series 2013 Bonds
– Interest rates/ Yields will increase by approximately 5 basis points
o translates into approximately $ 45,000 increase in annual debt service
o $950,000 over the life of the financing.
rating
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Interest rates / yields will increase by approximately 15 basis points
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F
Translates into approximately $ 530,000 increase in annual debt service
$11.3 million over the life of the financing*
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o
o
O A S T
the bond size by over $6.3 million to fund the $21 million project fund.
A L M
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The City will need to fund the DSR on the new Series 2013 Bonds and increase
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–
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If both Moody’s and Fitch or if S&P alone (S&P has the lowest rating A) lowers their
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L O R I D A
* Excludes the DSR and investment earnings
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© 2013 First Southwest Company
Credit Considerations – Importance of Bond Ratings
MFRA
Moody's Investors Service
Selected Financials and other
Datapoints
Boynton
Beach, FL
Cap Coral,
FL
Citrus
County, FL
Davie, FL
Deltona, FL
Lake City,
FL
Palm Coast,
FL
Port St.
Lucie, FL
St.
Augustine,
FL
Stuart, FL
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
General Entity Information
Current Senior Most Rating*
A1
A1
A1
A1
A1
A1
A1
A1
A1
A1
LT SR REV
LT SR REV
LT SR REV
LT SR REV
LT SR REV
LT SR REV
LT SR REV
LT SR REV
LT SR REV
LT SR REV
Total Annual Senior Lien Debt
Service Coverage (x)
3.19
2.81
2.88
2.56
1.76
4.15
1.51
1.30
1.89
2.61
Total Annual Debt Service Coverage
(x)
3.19
2.36
2.63
2.56
1.76
2.66
1.25
1.30
1.89
2.61
Revenue Backed Rating Description
Financial Data : Key Financial Ratios
* The Rating displayed in MFRA is the most recent derived underlying rating issued by Moody's Investors Service, Inc.
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Member FINRA & SIPC
© 2013 First Southwest Company
Conclusions

S&P has not reviewed the credit since 2009.

In order to lessen the impact to water and sewer rate payers our financing plan reduces the
amount of debt to be issued by using the existing debt service reserve and not funding a new
one.

By not funding a DSR we are reducing the overall security to the rating agencies and bond
holders therefore the need to make sure other credit factors remain strong.

A downgrade by any two rating agencies or by S&P alone will require the City to fund a new
debt service reserve.

This will increase interest rates / yields by approximately 15 basis points increasing debt
service by $530,000 annually and $11.3 million* over the life

At current ratings purchasing bond insurance is currently not cost effective

If downgraded, purchasing municipal bond insurance may reduce the interest rates, but a DSR
will need to be funded requiring selling $6.3 million more bonds.
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Both Moody’s and Fitch have stated they are concerned about Utility's debt service coverage,
it’s liquidity / reserves position and it’s debt load.
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
I T Y
In 2011 both Moody’s and Fitch downgraded the Utility Bonds.
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Member FINRA & SIPC
© 2013 First Southwest Company
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F
* Excludes the DSR and investment earnings
Conclusions

Even if the City enacts the proposed rates there is no guarantee the City’s ratings
will not be downgraded.

Increasing the rates as proposed by PRMG increases the chance the City’s bond
ratings will not be downgraded.

If the City is downgraded it will still be able to sell it’s bonds and fund it’s capital
improvement plan. It will simply cost more - Issue more debt at higher interest rates
and more debt more often.
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If actual future financial performance is better than the projected, the City has the
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option when reviewing their rates to make future adjustments.
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Member FINRA & SIPC
© 2013 First Southwest Company