• LOOP CAPITAL HilltopSecurities
To: Mike Meyer, NHA Advisors
From: Rob Larkins, Loop Capital Markets
Craig Bettencourt, Hilltop Securities
Re: City of Richmond 2022 POBs, Rationale for Increased Underwriters' Compensation Date: June 29, 2022
In our individual responses to the City of Richmond's (the "City") Request for Qualifications for Pension Obligation Bond Underwriting Firms, due April 1, 2022, Loop Capital Markets ("Loop") and Hilltop Securities ("HTS") independently submitted fee proposals that assumed a 2034 final maturity, and both firms' proposals were premised on a sole Underwriter/Placement Agent arrangement. Loop proposed $2.50/bond as underwriter for a public sale, and HTS proposed a flat fee of $165,000 as placement agent for a direct bank placement and $2.32/bond as underwriter for a public sale.
In subsequent negotiations with NHA Advisors ("NHA"), and with the approval of Anil Camelo at the City, both firms agreed to a fee of $3/bond, split 50/50, with underwriting/placement expenses to be paid out of Costs of Issuance.
Since that time, HTS has determined that a private placement is not competitive, and the finance team has pivoted to a public offering.
After exhaustive (and ongoing) analysis, the finance team is now leaning toward recommending an extension of the final maturity to 2050-2052 in order to provide substantial General Fund budget relief to the City. Accordingly, both Loop and HTS are asking that the City revisit our fee proposal to reflect the longer maturity of the 2022 Bonds, as well as the massive commitment of resources by both firms since our engagement commenced in April - and cognizant of the expected continued commitment of time and resources to bring the financing to a successful culmination in August/September. We are only 3 months in, and our assessment is that we are only about 25% of the way to the finish line. There remains to come a great deal of quantitative analysis, document review (the first draft of the Preliminary Official Statement is yet to come, development of the rating presentation and investor presentation, and Council education materials.
Both firms are committed to honoring the original arrangement of $3/bond "takedown" (sales commission to place the Bonds) for maturities through 2034. However, it is customary in the municipal bond market that longer maturities carry higher takedowns to compensate sales professionals' added work in marketing longer-dated securities to potential investors. Accordingly, Loop and HTS are proposing the following takedowns:
• Maturities through 2034: $3/bond
• Maturities 2035-2040: $3.75/bond
• Maturities 2041 and longer: $5/bond
These fees, split 50/50 per the original agreement, would be payable from the normal "Underwriters' Discount" which is deducted from the Net Proceeds we would wire to the Bond Trustee at Closing, while "Underwriters' Expenses" (Underwriters' Counsel and other customary fees) would be funded from Costs of Issuance. We have provided, in an Exhibit, examples of takedowns for comparably (or higher) rated transactions of comparable tenor (maturity) priced since January 1, 2022, including the most recent Pension Bond issued in California (Barstow) and most recent outside of California (Longview, Texas). The rise in takedowns for taxable deals can be directly attributed to the volatility in the taxable fixed income market which we have seen over the past few months.
At the time when both firms were mandated as co-equal underwriters, Loop and HTS agreed to the above-referenced $3/bond fee (with expenses paid from Costs of Issuance) with the explicit understanding that NHA and the City would keep an open mind to a "Management Fee," which is compensation paid to underwriters for their banking work. In the case of our assignment for the City, to date, this includes, but is not limited to:
Unraveling the 2005 POBs and associated RBC Swaps. This has involved going to the source documents (the 2005 Indenture and Swap Confirmations) to determine what is actually owed by the City (pursuant to the Credit Adjustment under the 2005 Indenture), as well as working with NHA and the City's Swap Advisor, KPM Financial, to nail down the expected termination cost of the RBC Swaps. We have also had to reconstruct what would be due/payable by the City pursuant to the existing debt service pre-funding arrangement under the 2005 Indenture, as well as the currently "live" B-1 Swap.
Extensive, repeated efforts to ascertain current holders of the privately placed B-1 and B-2 Bonds for possible negotiation of an early call, including multiple interactions with the Trustee and DTC and numerous outreaches to Citibank, who is listed on DTC's A LOOP CAPITAL HilltopSecurities
reports as the "holder" of the B-2s. Our research suggests that Citi is a custodian, rather than the beneficial owner. Nonetheless, despite several efforts to engage them, Citi has been completely unresponsive. • Evaluating Defeasance of the 1999 POBs to eliminate their prior claim on Pension Tax Override (PTO) revenues and avoid a second, separate debt service pre-funding requirement, determining the cost of a defeasance, sorting out where the City's PTO revenues have been deposited, and drilling down to what cash contribution will be required of the City at closing to accomplish a defeasance of the 1999s.
• Working with the County of Contra Costa to unravel the existing timing/distribution of PTO revenues. This involved numerous email exchanges with the Auditor-Controller's Office to get remittance records with the goal of determining actual PTO revenues, including "rebates" to the City from the RPTTF.
• Working with US Bank to determine funds available under the 1999 and 2005 Indentures and further determining what funds we expect the City will have available after paying the 8/1/22 scheduled sinking fund payment and 8/1/22 coupon on the B-1s, as well as the remaining 8/1/22 net Swap obligation.
• Working with Bond Counsel to determine what funds on hand under the 2005 Indenture can legally be applied to the 1999 Bonds vs the defeasance of the 2005 B-1s and the appropriate legal requirements for defeasing the 1999s, 2005 B-1s and 2005 B-2s. • Extensive quantitative analysis to arrive at the optimal "Holistic Solution" to put the City on a path to successful administration of the 2022 Bonds with an easy-to-administer semi-annual debt repayment structure and a sustainable debt repayment profile. • Creating numerous models to bifurcate 2022 POB debt service between PTO-eligible debt service (associated with refunding the B-1s and B-2s) and debt service associated with terminating the RBC Swaps, which cannot be funded from PTO revenues. • Working with Bartel Associates to determine what share of the City's pension expenses are eligible for the City's voter-approved PTO, and then factoring in that data into our Holistic Solution model. • Working with Bond Counsel to develop the First Supplemental Indenture, with an eye on the underlying PTO distribution mechanics to make sure the 2022 Bonds "fit" with the underlying facts and the City's debt administration resources. This has included creating an Appendix to the First Supplemental Indenture that will provide the City and the Trustee a clear "road map" as to how much of each semi-annual debt service payment will be payable from PTO revenues vs the General Fund. We have also spent a lot of time determining the appropriate lien on PTO revenues and a fact-base release of said lien each Bond Year. • Extensive actuarial analysis, including development/review of the Bartel Report, with the goal of driling down to the City's future pension costs (not just the Allocable Percentage of the 2022 POBs, but also including UAL and Normal Cost expenses for both the Miscellaneous Plan and Safety Plan) to determine what future costs can be paid from PTO revenues to minimize the City's future Net General Fund Cost.
• Working with NHA to create educational materials to educate the Council about the City's pension situation and viable options.
We note that each version of these materials has required both firms to invest significant time and resources. • Exploration of a direct bank placement, contacting 26 banks and other institutional investors. Led by HTS, this included multiple contacts with the leading banks active in this direct lending space, with a particular focus on those banks that have previously shown an appetite for California POBs. This involved significant time/resources to explain the City's credit and the specifics of the City's voter-approved Pension Tax Override. HTS also invested considerable time/resources discussing with target banks the concept of a separate series of Bonds that would be secured by a pledge of PTO revenues that would provide a certain level of debt service coverage. Though it now appears that a public offering will be more cost-effective, HTS' efforts to secure a cost- effective bank placement consumed considerable time and effort by HTS' bankers, as well as their credit specialist.
What started out as periodic Teams Meetings has now morphed into bi-weekly (at a minimum) calls, and we have yet to start the POS preparation process, from which HTS will be deriving the rating deck and investor presentation. Based on both firms' vast professional experience, we believe, despite our massive investment of time and resources to date, that we are only 25-30% of the way to the finish line. We also note that preceding and following many/most of these Teams Meetings both firms have prepared extensive analysis.
Accordingly, we believe that a Management Fee of $200,000 to each firm is fair and warranted. Keep in mind that while each of the other firms involved with this engagement - Bond Counsel, Disclosure Counsel, Underwriters' Counsel, and NHA - are tasked with their individual responsibilities, both Loop and HTS need to review and input on everything: the legal documents, the POS, NHA's quantitative work and presentations to the City, in addition to our own, independent quantitative analysis, actuarial review/analysis, and the rating and investor decks.
"LOOP CAPITAL HilltopSecurities
Each of the assigned senior professionals at Loop and HTS have been doing municipal finance for at least three decades, and none of us has ever encountered such a resource-heavy assignment. We are up to the task, and we are enthusiastically committed to tapping whatever resources at our firms are required to deliver a first-class, long-term viable solution for the City.
We look forward to an expeditious resolution of this matter so that the NTE parameters in the Resolution can be revised in time to meet the City's agenda filing deadline for its July 26 Council meeting. $45,600,000 S115,705,000 $950,000,000
City of Longview, Texas NYC Housing Development Corporation New York City, NY GO Pension Bonds (Taxable) Multi-Family Housing Revenue Bonds General Obligation Bonds Ratings (M/S&P/F): NR/AA/AA Ratings (M/S&P/F): Aa2/AA+/NR Ratings (M/S&P/F): Aa2/AA/AA- Priced: 6/15/2022 Priced: 6/7/2022 Priced: 5/19/2022
Closing: 7/14/2022 Closed: 6/21/2022 Closed: 5/26/2022
Par Coupon Takedown Par Coupon Takedown Par Coupon Takedown Maturity Maturity (%) ($/bond) Maturity ($000) (%) ($/bond) ($000) (%) (S/bond) (S000)
2023 $375 3.206% $1.250 2023 2023
2024 715 3.406 2.500 2024 2024 $19,585 5.000% $1.250
2025 770 3.663 2.500 2025 2025 20,570 5.000 2.500
2026 830 3.844 2.500 2026 $920 / $950 2.600% / 2.750% $3.750 2026 2027 895 3.994 3.750 2027 965/980 2.850 / 2.950 3.750 2027 2028 965 4.111 3.750 2028 995 / 1,015 3.100 / 3.150 3.750 2028 2029 1,040 4.211 3.750 2029 1,030 / 1,055 3.250 / 3.300 3.750 2029 2030 1,120 4.292 3.750 2030 1,075 / 1,095 3.350 / 3.400 5.000 2030 4,825 5.000 3.750 2031 1,205 4.392 3.750 2031 1,115 / 1,140 3.550 / 3.600 5.000 2031 31,330 5.000 3.750 2032 1,295 4.542 3.750 2032 2,350 / 2,475 3.700 / 3.750 5.000 2032 32,895 5.000 4.500 2033 1,395 4.642 4.500 2033 2,475 / 2,535 3.750 5.000 2033 34,540 5.000 4.500 2034 1,500 4.742 4.500 2034 2034 36,265 5.000 4.500
2035 1,615 4.842 4.500 2035 2035 38,080 5.000 4.500
2036 1,735 4.942 4.500 2036 2036 39,985 4.000 4.500
2037 1,870 4.992 4.500 2037 8,385 3.875 6.250 2037 41,585 4.000 4.500 2038 2,010 4.042 4.500 2038 2038 43,665 5.250 4.500
2039 2039 2039 45,955 5.250 4.500
2040 2040 28,370 / 20,000 4.250 / 5.250 4.500 / 4.500
2041 2041 2041 50,625 5.250 4.500
2042 9,655 5.233 4.500 2042 28,000 4.000 6.250 2042 53,280 5.250 4.500 2043 2043 2043 56,080 5.250 4.500
2044 2044 2044 59,020 5.500 4.500
2045 2045 2045 62,270 5.500 4.500
2046 2046 2046 65,695 5.500 4.500
2047 16,610 5.333 4,500 2047 13,250 4.125 6.250 2047
2048 2048 2048
2049 2049 2049 165,380 4.500 4.500
2050 2050 2050
2051 2051 2051
2052 2052 37,285 4.250 6.250 2052
2053 2053 2053
2054 2054 2054
2055 2055 2055
2056 2056 2056
2057 2057 9,090 4.300 6.250 2057
2058 2058 2058
2059 2059 2059
2060 2060 2060
Total Par $45,600 Avg Takedown $4.265 Total Par $115,705 Avg Takedown $5.952 Total Par $950,000 Avg Takedown $4.361