Public Trust Advisors Blog

Investing Bond Proceeds: Part Three

Posted on Wed, Dec 28, 2016

Part Three: Other Considerations for Investing Bond Proceeds

Creating a successful bond proceeds reinvestment program starts with structuring a strategy that adheres to your governing documents and risk tolerances while simultaneously accounting for the ever-changing nature of your project and the market. 

Arbitrage Rebate: IRS regulations set forth in Section 148(a) of the Internal Revenue Code were enacted to keep public entities from issuing bonds for reasons other than their originally intent.  Arbitrage rebate regulations force any bond issuer to pay 100% tax on investment earnings of gross proceeds in excess of the bond’s arbitrage yield.  Here are a few items to consider:BP3.jpg

  • In general, paying arbitrage rebate is a good thing because it means that you have earned the maximum interest income allowed during your project.
  • Using a reputable arbitrage rebate compliance firm will help you determine your potential liabilities.

Municipal Advisor Rule: The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Exchange Act of 1934 to add a new requirement that “Municipal Advisors” register with the SEC.  The rule places a fiduciary obligation on those providing certain financial and investment advice to municipal entities.  Please also condsider the following:

  • You should not take advice regarding the investment of your proceeds from someone who is not a municipal advisor registered with the SEC.
  • There are some exemptions in regards to registering as a municipal advisor.
  • Exemptions include regisBP3a.jpgtered investment advisors; they already have a fiduciary responsibility.
  • Additionally, your underwriter should not be giving you advice regarding the investment of proceeds as it is outside their scope of work.
  • Finally, if broker dealers are not registered as municipal advisors, they cannot present investment advice but may provide information on securities they have available for purchase or sale.

Remember, prudent investment of your bond proceeds will help you work towards maximizing interest income over the life of your project.  The more you earn, the lower the overall financing cost of your project.

If you would like to speak with a PUBLIC TRUST ADVISORS™ public funds investment professional regarding bond proceeds management, please email info@publictrustadvisors.com and a local representative will be in touch. 

*The information presented should not be used in making any investment decisions. The presentation is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact, and these assumptions may or may not be correct based on foreseen and unforeseen events. All calculations and results presented are for discussion purposes only and should not be used for making calculations and/or decisions. Any financial and/or investment decision may incur losses.

Tags: yield, Local Government Investment Pools, investing bond proceeds, fixed income management services, local government investment pool administration, LGIP, LGIP Operational efficiency, Investing Public Funds

Investing Bond Proceeds Series: Part Two

Posted on Wed, Dec 14, 2016

Part Two: Strategies for Investing Bond Proceeds in Today’s Environment.

The goal of investing bond proceeds is to maximize interest income over the life of the project; maintaining the safety and liquidity is always necessary when investing public funds. Due to the complex and ever-changing nature of bond project spending schedules, investment of bond proceeds can require a little more thought than the traditional investment account. 

Here are some strategies to consider when planning a strategy for the investment of your proceeds.

1. Invest Your Funds in a Local Government Investment Pool (LGIP) - If your project is short term in nature, LGIPs can provide both competitive yields and ample liquidity to satisfy your required draws.


2. Match Investments with Liabilities - Ideally, if you can match each investment with a corresponding draw from your draw schedule, you can attempt to optimize the amount of interest income for each specific draw.

Bond Blog 2.png
3. Combined Approach - Combining a multi-tiered approach utilizing both the LGIP and liability matched investment programs may provide the most strategic approach. A combined approach will allow you to utilize a LGIP for draws in the near future as well as unexpected liabilities and fixed income securities to match draws with a longer time horizon.

Bond Blog 2.1.png

The size, duration, and complexity of your bond project combined with the current investment environment play important roles in choosing a strategy for investment of the proceeds. The better you understand your project, the better you will be positioned to maximize interest income earned while investing the proceeds. Stay tuned for the final piece of the PUBLIC TRUST ADVISORS™ Bond Proceeds Series: Part Three: Other Considerations for Investing Bond Proceeds

If you would like to speak with a PUBLIC TRUST ADVISORS™ public funds investment professional regarding bond proceeds management, please email info@publictrustadvisors.com and a local representative will be in touch. 

*The information presented should not be used in making any investment decisions. The presentation is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact, and these assumptions may or may not be correct based on foreseen and unforeseen events. All calculations and results presented are for discussion purposes only and should not be used for making calculations and/or decisions. Any financial and/or investment decision may incur losses.

 

Tags: investing bond proceeds, local government investment pool administration, LGIP operational efficency, yield, Investing Public Funds, fixed income management services, Local Government Investment Pools

Investing Public Funds: Basel III and What the Financial Crisis...

Posted on Tue, Oct 21, 2014

By Todd Alton, Vice President of Credit Research, Public Trust Advisors

Investing Public Funds: Basel III and What the Financial Crisis Taught Us About Above Market Yield.

Dodd-Frank set into motion a comprehensive set of financial regulatory changes. For the banking sector the new rules surround what is referred to as Basel III. Basel III is intended to be “a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision (and adopted by the United States Federal Reserve Bank), to strengthen the regulation, supervision and risk management of the banking sector.” (Source: www.bis.org).

 

Public Funds Investing

The end goals of Basel III are three-fold:

  • “to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source;”

  • “to improve risk management and governance;”

  • “to strengthen banks' transparency and disclosures.” (Source: www.bis.org)

The first phase of Basel III became effective for the largest internationally active U.S. banks on January 1, 2014. The second phase of the Basel III Comprehensive Capital Framework is scheduled to go into effect beginning January 1, 2015. This phase will affect the “standard approach” or “non-advanced approach” banking organizations. Below are some key highlights of the rule, coupled with its possible effects on bank balance sheets.

Key Highlights:

  • The Basel III risk-based capital rules will apply to all banks and savings associations (and holding companies with greater than $500 million in total assets).

  • The rule will require banks to hold higher levels of regulatory capital.

  • The new risk-weighting regime will require institutions to maintain significantly higher capital reserves when they hold assets considered to have higher risk exposures.

In certain circumstances, some items that were previously included in a bank’s capital ratios will now either be reduced or eliminated from the calculation, thus reducing depositors’ overall capital protection.

Public Funds Investing

Potential effects on banks that “pay up” for deposits (i.e. fund themselves with hot/volatile money):

  • Margin compression: more capital held equates to less productively deployed capital and thus lower earnings which when added to the higher costs of the deposits equals compression.

  • Acquiring assets with yields sufficient enough to “pay for” the increased capital charge will result in the bank necessarily taking on more potential challenges -- those of either greater interest rates or credit risks.

What types of banks might still be willing to pay the highest deposit rate in their trade areas?

  1. Banks that have to replace wholesale funding

  2. Banks that are trying to grow rapidly

Prudent Questions to Consider:

If a bank is currently replacing wholesale funding by paying up for deposits there is a reason, so what is forcing their reduction in reliance on that type of funding source AND what were they doing on the asset side of the balance sheet that drove them to need that concentration in funding to begin with?

  1. If the bank is attempting to grow rapidly, what is the strategic goal . . . the old “cross sell” story that often fails to develop . . . or the “build the balance sheet to sell the bank” paradigm . . . or maybe it is merely some concentrated industry growth in the bank’s trade area that they want to fund in an attempt to retain a client relationship . . . the next relevant question in any of these cases is, given my fiduciary duty, are these strategies likely to result in my deposit relationship being safe and long-lived?

  2. If the need for increased funding (deposits) is driven by the new, special mouse trap strategy, one really needs to decide if this is a strategic growth story that is prudent to fund with the deposit dollars under prudential care, and then if the additional yield is sufficient reward for the investment risk and brand exposure taken?

So after all the necessary analysis, from the perspective of a public funds investor one must be able to effectively answer these final questions:

What are the pros and cons of depositing the public’s funds in a bank that is paying top of, or above, market deposit rates . . . AND is the risk/reward profile in balance, a prudent allocation of funds, and an appropriate discharge of my fiduciary duties? And ultimately, are the extra few basis points really worth the risk, even with collateral?

One final note, during FDIC Material Loss Reviews of failed institutions, paying above market deposit rates and investing those funds in a pool of assets with high or similar risk concentrations, were the PRIMARY drivers of bank failures during the recent banking crisis. 



 


Tags: fixed-income asset management, fixed income management services, Investing Public Funds

Investing Public Funds - Building the Public's Trust

Posted on Wed, Sep 10, 2014

By Thomas D. Jordan, Chief Executive Officer, Public Trust Advisors

Building the Public’s Trust:

In our opinion the word trust has gradually eroded and has diminished meaning among the public funds sector. The word "trust" can be overused by asset managers when discussing public funds investing and it is often under-delivered by the firms who claim it to be one of their “values.”

From our perspective, there is no value more essential to every aspect of our business than the trust we build with our clients. 

Trust is the prism through which public entities must evaluate fixed income asset managers to invest and manage public funds.

Fixed Income Asset Management

When evaluating a firm for the management of a local government investment pool or a separately managed account, it will quickly become apparent that there are a number of technically qualified fixed income asset managers and management services in the marketplace. Price, in the form of a firm’s management fee, is often the driver in the selection process, as is performance, track record, and the proposed scope of services. All of these “objective” elements can be procured from any number of asset management firms.

It is TRUST that sets us apart from the others. From relationships to customer service and from investment options to recommendations, trust is at the heart of all we do for you. 

You have our word, and on that we deliver.

Rates Change, Values Should Not

We believe that for many public entities, the relationship with their fixed income asset managers has been altered by the current protracted low-interest rate environment. Fee pressure can change the behavior of the firms engaged in public funds investing. Firm business models, predicated on the ability to charge the now unthinkable fixed income “50 basis point” management fees, can create dysfunctional relationships between clients and the investment management service provider. Client-first values can suffer, and quite possibly, have struggled during the recent economic down-turn. As time goes on, rates do and will change, however a firm’s values should not. At Public Trust we have built our business on that very premise.

Don’t Manage Trust, Build It:

fixed income asset management

For the team at Public Trust Advisors, building trust, through long term relationships with our clients, is key in all that we do, and it permeates our deeds and words. Public Trust was founded to address a void we perceived in the fixed-income asset management services sector focused on investing public funds. Public Trust was started to create a renewed sense of commitment to do what we deem is right for public sector marketplace including state and local government’s clients and the assets that we manage on their behalf. We believe our actions and the fundamental foundation of our company points to a higher purpose that resides in our mission statement:

The Public Trust Mission Statement: 

“To provide valued and trusted services to our marketplace in the manner we would serve ourselves and to create enduring bonds of trust between us and the clients we serve.”

We think fixed income asset managers have a duty to build a high-level of trust with their public sector clients. Here are ten easy steps to building trust between the investment service provider and public sector marketplace.

10 Steps to Building Trust with the Public Sector Investor

 

1)      Transparency:  Open dialogue. Alignment with your client goals and objectives.

2)      Sincerity: Say what you mean, mean what you say.

3)      Adding Value:  Have your client’s interest at heart.

4)      Respect:  Treat your client as you would yourself.

5)      Feedback: Welcome it, learn from it.

6)      Consistency: Committed in words and deeds to your clients.

7)      Responsibility: Mistakes happen, own them, learn from them.

8)      Expectations: Be clear and honest as to what you can deliver.

9)      Execution: Work to meet or exceed expectations.

10)    Word is Bond: Promises made are promises met.

 

Trust, Demand It: 

If you are a buyer of fixed income management services for the public sector, we believe that you are due a high-level of trust. Your fiduciary role in maintaining public funds is significant.  Beyond that, only with trust can an optimal working relationship exist that creates complete alignment between the public funds client and the fixed income management services provider. It is the mutual trust between the client and the fixed income manager that provides the quality investment management services that the client should not only expect, but deserves. 

Trust is not an option; it’s a long-term commitment to building value.

Tags: public funds investing, building trust, fixed income management services, fixed-income asset manager, Investing Public Funds, public trust

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