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.

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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.

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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

5 Things to Consider When Investing Bond Proceeds

Posted on Mon, May 16, 2016

By Chris DeBow, Managing Director, Public Trust Advisors LLC

You need to invest bond proceeds. Sounds simple right?

At Public Trust Advisors we take a thoughtful approach built over years of experience investing bond proceeds and will happily work with you based on your specific situation.

There is no one size fits all for investing bond proceeds – like any other investment it needs to be guided by both the needs of the underlying public entity and the complexities of the investment marketplace.  

The only thing that is true for all situations is that one wrong move and you could violate the public trust that is bestowed upon you.  Public Trust Advisors implements a comprehensive investment solution for managing bond proceeds that is anchored in the key tenants of public funds investing:  Safety, Liquidity and Yield.

Investing Bond Proceeds

5 things you should consider when investing bond proceeds:

1.) Waiting for a draw schedule from the construction manager may reduce interest income.

a. While having an accurate draw schedule is important, entities may begin investing a portion of their construction funds utilizing the “completion date” method and working backwards to build a ladder with a portion of the funds.

b. Once the construction manager provides the official draw schedule, one can put remaining funds to work along the investment ladder accordingly.

c. Even when you receive a copy of the official draw schedule, rest assured, it will change.  Large construction projects are too complex to predict. Amongst other factors, they are attempting to predict weather, material costs, soil samples and future presidents; hence, they are not always correct. 

2.) Too much liquidity can be inefficient.

a. Many entities tend to keep too much liquidity on hand. 

b. This problem only compounds when securities mature from the investment ladder and are not needed to fund current expenses.

c. It can be beneficial to pay construction expenses twice monthly.  This will allow the entity to better time and plan for checks leaving the building for the construction project.  If you are constantly paying expenses, things can get complicated.

Investing Bond Proceeds

3.) Do not just focus on today; focus on maximizing interest income over the life of the construction program. 

a. Many entities focus on today’s “best rate” and fail to adequately search for the best rates over the life of the construction program.

b. This is especially important when securities mature and the proceeds are not needed.  Often times, folks let the fund sit in cash, earning nearly zero, when the funds could be redeployed further out in maturity structure potentially earning additional yield. 

4.) Should I hire an investment advisor to help invest the proceeds?

a. A registered investment advisor can bring a lot to the table when it comes to managing bond proceeds.  Because the construction program is dynamic and constantly changing, an advisor can be continually scouring the investment marketplace for investment opportunities that may fit into the investment program. 

b. If an entity has a full-time staff professional dedicated exclusively to investing, the entity can certainly invest the bond proceeds without an investment advisor. Sometimes, public entities use both internal professionals and external experts, especially on large sophisticated projects. 

5.) What happens after I invest the bond proceeds?

a. I have often joked that investing is the easiest thing to do when investing bond proceeds.   It can be more important to develop accurate and in depth reports that can be shared with the School Board or governing body.  

If you would like to learn more about creating a customized investment solution for bond proceeds, please click the link below to work directly with Mr. DeBow.

Contact Chris DeBow, Managing Director

 

Tags: investment advisor, investing bond proceeds

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