shellen did burger so he can explain to you about the bnd financing. director nolan: good morning. >> good morning. i'm going to pick up on page 7 of the presentation. it looks like we've lost if -- it from the screen. we will serve as team lead. we will work closely with ross financial and backstrom mccarley to make sure that we first hear your direction and implement a program that allows you to access the market and deliver projects that are important to you in a timely and cost effective fashion. on page 7 -- let me step back here for a moment. really, the purpose of today is to be fairly high level. this is very introductory. it is to introduce you to the process, what we're going to be doing over the next six to eight months with the objectives here before you.

the end goal here is to establish the m.t.a. as a new and credit worthy municipal bond issuer. and that means first determining what makes sense for you, how much you could manage in terms of an amount of debt while still allowing you to operate your primary service, do what your primary mission is. now, there are certain steps we have to go through. we will come back to you with a debt policy. we will have an interactive process. talking about what should be included in the debt policy what the debt policy will determine. typically determines what projects move forward. certain quantitative parameters to limit the amount of debt that would you undertake to make sure that you're not taking on too much debt so in will be a debt policy. we'll go into more detail in these presentations. we'll also have to reach out for the credit agencies. there are three credit agencies. they provide for the benefit of investors credit ratings. and we'll talk a little bit more in detail about that later in this presentation.

we're working aecom, developing a plan of finance for the central subway. we will be working with that long-term plan of finance to identify annual revenues available for debt service. within that concept, how much annual revenue over a long term, 20, 30-year period, do we anticipate having available for debt service. then we can determine how much debt or how much boroughing that would support, your bonding capacity. again, he'll go over more as we go through the presentation. the ultimate goal is to access the market in 2011 and issue bonds for some specified amount that we all deem responsible and support of high credit ratings. on page 9, i'm going to start very high level and introduce some concepts that we're going to be speaking about today. the first is a bond. what is a bond? a bond is a loan and a promise

to repay the loan. it's very similar to a home mortgage. with a home mortgage you will work with a specific bank. bank of america, for instance. you will enter into specific terms of agreements, often for 30 years. within those terms you'll determine how often you'll repay, under what structure, etc. very similar concept here. except rather than working with a specific institutioning, you're going to access the financial markets. and who are the financial markets in this case? it is investors that purchase tax exempt municipal bonds. this year there will be over $400 billion of tax exempt municipal bonds sold. the folks who typically buy those are insurance companies, bond funds managed by large financial institutions like goldman sachs, etc., as well as individual investors, usually high net worth investors who gain a benefit from the tax exemption. there are several key components to a bond.

the first is a par or a principal amount. par and principal amount is the amount of the loan, the base of the amount of the loan. so you go out and borrow -- this example of age 9, $50 million the par amount or principal amount is $50 million. that's how much you have to repay. in addition to repaying the par/principal amount, there will be an interest rate very similar to our home mort. in today's environment it's about 5%. so over time you will be repaying the face element, $50 million plus interest in annual installments at a rate of, say, today's environment, 5%. i'll show you an example in a couple of pages on that and finally, the term or maturity date of the loan. that is simply when is the final payment due when are these bonds repaid. feel free to stop me if questions come up. so on page 10, again a very fundamental concept. why bond finance at all? and the two options open and available to agencies are, you

can either pay on a pay as you go basis with available cash and grant funds as they become available, or you can accelerate some of those expected cash flows and borrow against them and issue a bond. typically agencies borrow simply because the cash available at any point in time is not sufficient to pay for the projects that they want to build today. so it's a mechanism to accelerate projects. now, as you do begin to shift away from a cash funded or pay as you go punded program towards a bond funded program, it has benefits in terms of flexibility for budget management so if you're not using all of your cash to pay for projects today but you're spreading out the repayment over 30 years, you're freeing up that cash for other purposes. and in this case it's operations. so there will be certain operating budget benefits as we think in introducing bonding concepts to your long-term program. the second bullet gets asked, sort of an equity

consideration. typically projects that you fill prince if you build a large infrastructure project with a beneficial life of 30 years, meaning that constituencies, residents, will benefit from that project over that 30-year life of that project. and the argument goes that it makes sense to spread the repayment or the cost of that project over the similar beneficial life of that project. and so not only does it help advance from a cash perspective, it helps intergenerational equity in allowing those who benefit over 30 years to pay over 30 years. and lastly and very importantly , sem, the agency, will be a tax-exempt issuer so under federal tax law, i.r.s. tax law, there are benefits that allow you to issue bonds on a tax exempt basis, meaning investors do not have to pay the income tax on those bonds.

with that you can borrow the a lower rate. on page 11, going to try to tie a few ever these together and biff give you a picture to look at. we have a sample of $75 million borrowing. in this case, the par amount is $75 million. the first bullet you'll note in today's market, the agency can go out and issue it at a rate of approximately 5%. this is for a 30-year borrowing. so today we would ender into a loan agreement or issue bonds for 30 years. we would agree or you would agree to repay investors that $75 million plus an annual interest rate. historically, that's very low. it's never been lower over the

last 50 years. you've seen that in home mortgages. home mortgages are incredibly low. tax exempt bond rates are equally low. we would structure it very similar to a conventional home mortgage. you'll notice on the blue and red bars on page 11, the blue bars are the time in which and the amounts of principle of the $725 million you would repay over time. and -- 75 million you would repay over time. the early years you're paying back mainly interest. and principle is a fairly small amount of that repayment. as time goes on, you're finishing up. there's less principal outstanding, therefore less interest due. it's mainly principle towards the back end. a couple takeaways here. one, we structure this level payment. so you know once we issue fixed rate bonds, you know what you're paying for the next 30 years. in this example, for a $75 million transaction or a $75 million bond issued, you would be paying $25 million a year --

$5 million a year for the next 30 years. we go back to that earlier concept of cash funded versus bond funded, here is the takeaway. you could either from a budget perspective build a $75 million project and repay sort of scheduled $5 million of repayments over 30 years. or, for instance, pay $25 million for the next three years. one has significant budget implications in the short term. and the other is a bit more manageable. we're going to have to find a mix of which projects are ready to go, which make sense to accelerate, and which fit into this sort of broader budget context for you. we're not there, but that's a process that we're going to continue to discuss. that's the end of my section. if there are no questions, i'll turn it over to peter ross to carry it through. director nolan: thank you. appreciate it. good morning mr. ross. >> good morning. peter ross with ross financial. happy to be here today. i apologize in advance for my

voice. i'm recovering from a cold and hopefully past the incubation period. i'm going to be discussing the process of the establishing the m.t.a. as a credit worthy issuer. and in today's times, this is more important than ever. you want to establish yourself to investors that you're fully capable of paying your debt on time and in the amount that you say you would. you read all sorts of hysterical articles these days in the "new york times," "wall street journal". you know, warren buff eliminate, as an example, was saying municipal debt will be the next bubble akin to the mortgage crisis that we just experienced. that's really not going to be the case. the one way of proving it is to demonstrate that you are a credit-worthy issuer. so the first step is to velt a debt policy -- develop a debt policy. a debt policy is really a very basic form of best practices.

it is something that just about every major issuer adopts. what it does is it tells the bond market and the rating agencies that you really have thought about the process of issuing debt. you establish guidelines as to when you want to borrow, for what kind of projects do you want to borrow. things as basic as saying you won't issue long-term debt for short-lived assets. things of that nature. you'd be surprised how often that happens. and that basically reafirms that you've given thought to the process of issuing debt. there are a whole lot of instruments that will be available to you long-term, extradecisional, fixed rate financing will probably be the one you will most likely use. then there is also opportunity to issue short-term debt, bond anticipation notes. if you have federal grants as far as your processes, there are opportunities to leverage off that. your debt policy will provide those guidelines to determine when and under what circumstances it's best to

issue those kinds of obligations. so once you have the debt policy in place, the next step is really to approach the rating agencies. they are the ones that are going to determine just how credit worthy you are. you see on the left there is a diagram of the ratings scale provided by each of the major credit agencies, moody's, standard & poor's and fitch. the best rating is a.a.a. they have gradeations of a.a., a., and b a.a. which is a low investment grade. basically the rating agencies will -- the higher the rating, the more likelihood that you will pay your bonds on time in the proper amount. so the measure -- they measure risk. they measure risk to the investor that they're going to receive the benefit of the bargain that you told them they would. through your bond documents.

the better the rating, the lower your costs. so one of your objectives is to get the best rating possible. so how are you going to do this? you have to develop a rating strategy. and a rating strategy will pull together all of the elements of your credit. that includes what are your revenue sources what is the level of management involvement in your transactions. management is a very important credit cry tearian these days -- cry tearians these days. and you also want to promote the fact that you've got good coverage. your revenues will be more than what your debt service is as well as provide a cushion to operate your system. and one of the most important things you have going for you is the sent of your system -- essentiality of your program.

most support san francisco as being a transit first city so a lot of your policies are geared towards getting people out of their cars into transit. that's a very, very important credit factor in getting the highest ratings we can. and then as a final component to the whole process of establishing yourself as a credit worthy issuer, this is the bond capacity analysis. and this is going to be a very interim process. we are just undertaking it right now. so we can't tell you what your bonding capacity is because that's going to depend on a whole lot of factors. but basically what we'll be doing is determining what your net bondable revenues are, what's going to be available to be pledged to your debt service . and then how much can you borrow as a function of what your structure is. if you issue 30-year fixed rate bonds, that will give you more capacity then a few short-term bonds trfment rate will be

another factor, as peter was mentioning in terms of what your capacity is. and then what we want to do is look at what your capacity is for various projects. some projects may have a separate revenue stream that you may want to access for that. so it really is going to depend on the nature of the improvement that you are looking to finance. but ultimately you will -- how much you finance and your capacity, you will also be a very important factor in determining what your credit rating will be and what your borrowing cost will be. so right now i'm going to turn it over to vincent. director nolan: one minute. bondable revenues. will we be looked at as the agency as a whole if we're doing a particular sflodge let's say we wanted to do something with -- i don't know what, buying a vehicle. would parking garage revenues and that kind of thing all count? >> well it would depend. so, for example, in parking you may want to have a transaction based solely on parking revenues from the various garages.

there may be other kinds of assets you will be bonded against by system-wide revenues. that's all part of the debt policy that you want to be establishing. central subway, there may be federal grants associated with that. that's going to be the objective. that will be the security, primary security, for that transaction. so it really depends on the asset. the other thing you want to make sure of is that you have enough revenues to operate the system. that's going to be the most important. bonding is one thing. but the question is, how much can you afford to maintain the balance of funding capital as well as operating your programs. director nolan: would it be too simplistic to say -- an example that was used earlier say -- an that was used earlier i think, the $5 million obligation per year that would just be part of the operating revenue going forward? >> that would be debt service line item. that would come off the top. right.

director nolan: thanks. >> vincent? >> hi. vincent mccarley, c.e.o. director nolan: glad you're here. >> thanks for the opportunity. i want to talk about the bond process what will be involved is a number of professional that would be working with you. one of the key items to keep in mind is that the m.t.a. is the most important player of all. they're in a nukelyious of the transaction. and each of the professionals will be working on your behalf in terms of carrying the transaction forward. if you look at this diagram here, if you look to basically 7:00 there, you'll see the financial advisory which is the role that this team will be playing. also involved will be the underwriter, the entity, which

will be selling the bonds to the marketed place, in the investors. other key characters that will be involved will be bond counsel. they will be basically providing opinions that the bonds meet the various tax requirements. also that the various authorities have been in place, and that you actually have legal authority to enter into the specific transaction. another key entity will be disclosure counsel. what's been in the press a lot recently has been transparency in the market. they want to make sure that the information that you convey to potential investors is clear, accurate, and gives an investor a full understanding of the financial picture so they can make an informed decision about whether or not they want to own your bonds or not. as mentioned, there will be the rating agency. and there will be a trustee which basically serves to collect the debt service on the

bond and then pay those out to investors. the bond sale process overview, selecting the team, determining what the project's cost will be, and a timeline for issuing the bonds and also what the time line for the project itself will be. maybe there might be an acquisition period. there may be a construction period. all of that will go into the analysis. the legal framework. there are several different legal structures that a bond issue can take. one can be a lease structure. one can be a revenue structure whereby the chairman asks, can you have a pledge where it's a specific revenue that's pledged the service bonds versus an overall general type of pledge? marketing. after getting the ratings, we

may also look at potential credit enhancement if it's economically viable. it may include a letter of credit or some other form of enhancement to the transaction. there will be outreach to investors in terms of the process for selling the bonds. and basically the greater the outreach and distribution of the bonds the lower interest cost that you'll pay. it's basically supply in demand sort of scenario. administration, even after the bonds are issued there's going to be an ongoing process of administration by your staff, by the trustee, and also what's called continuing disclosure. annually you'll need to make a report to the financial markets indicating updates on the financial status of whatever the revenue pledge is that secures the bond. those are legally required items that you must undertake.

you will get a lot of documents. very thick documents to review as part of the bond issuance process. some of these documents we consider standard because we deal with them every day. for you they'll be likely very new. and you should review them. you should ask questions. you should understand them before approving them. there will be items such as a trust endenture or trust agreement, authorizing resolutions which, again, gives your authority. sometimes there will be delegation of authority to staff for particular items. there will be an official statement. you can think of it similar to in the corporate world of a perspective. the official statement will basically describe the transaction, what the pledge is, and an overall picture of what the m.t.a. exists. there will be a bond purchase agreement which is basically the contract between you and the investment banking firm that would be selling the bond. if it's a competitive sale,

there will be a notice of sale which will dictate the parameters for which this would be received. and as a mentioned, there will be a continuing disclosure requirement. for a hypothetical bond financing schedule we've outlined here -- we would, first of all, want to determine the project and available revenues there to support that project. that includes not only paying the debt service but also the ongoing operations which are very key. there will be a lot of working group meetings with staff, with legal counsel in terms of developing what the financing structure is, what the form of those documents will be, credit packages, as peter indicated, drafts of those documents, and a sit-down with the rating agencies. it may involve one or more of the board members, your staff

in that process. what we've outlined here is roughly a 12-week process for issuing bonds. as mentioned, we're looking at 2011 as possibly the first financing. this, again, gives you an outline of what that process will look like. one of the option that we are considering is the used of sfmric as a financing vehicle. it has been used in the past as financing for some of the rail improvements for the m.t.a. this is basically an outline of basically a lease structure that might be utilized if we opt to utilize sfmric as one of the financing vehicles. the approval process of that would be a request from the m.t.a. board to the sfmric

board indicating what those processes would be. it would come back for approval and ultimately to the board of supervisors and finally to the mayor's approval for issuance. if there are any questions? >> san francisco municipal railway improvement corporation. >> it needs to be created? >> it exists. >> and it's been utilized before. >> rudy is the chairman of the sfmric corporation. director heinicke: that's beyond muni, right? >> no. it's municipal railway. director nolan: director beach? commissioner beach: a couple of questions >> know the sfmta would be a new bond issuer.

do we have any current obligations? >> all of the sfmric has been repaid. the parking authority has outstanding bonds at this point in time. obligations other than the public benefit corporations also related to parking garages. director beach: does that have an impact on our ability to issue bonds since there is outstanding debt? >> yes it does. that would also be a part of the comprehensive finance plan that we would be creating to look at that debt following conjunction with any new proposed issuance. director beach: and can you explain for me what the difference is between a bond and a revenue anticipation note which i know has also been uses to finance transit projects. >> hum hum. it's usually a short-term vehicle whereby you are looking for specific revenues to come in to actually pay those bonds off basically as short-term

financing. where as your longer term or permanent financing would be likely what you would be looking at for the financing for the m.t.a. director beach: and to define short term, under three years? >> usually under three years. and sometimes even much less. director beach: great. thank you. director nolan: members? director heinicke? director heinicke: one question. as you explore the difference between sort of a general obligation bond that we build into our overall debt structure and something that's tide to the revenue stream, bobbeded against the revenue stream, i can see why the general debt structure might be more attractive superficially. do we get better bonding terms, better interest rates, that sort of thing if we tie it to a revenue stream? >> a very good question. it's actually one of the items that your team is going to be wrassling with over the next month. basically to analyze the various revenue streams of the m.t.a. whether it's more

beneficial to pledge a single or combination of revenue streams to secure a bond issue versus the general fund. so i don't want to prematurely answer that question. it is one of the things we will be bringing back to you. director heinicke: and the other question, following up on that. can we bond against the revenue stream created by the project for which we're bonding? >> yes. director nolan: thank you. mr. mccarley? >> and peter will wrap up. director nolan: mr. shellenberger? >> hello again. thank you very much for sitting through fairly technical issue such as finance. page 26 here will try to put a

timeline to implementing what we've just walked through. so if you could turn to the final page, page 26, the first couple of bullets, what we're going to do,en that will be a bit of a recap, staff one is determine what you can afford. the name for that is bonding capacity. how much can awed for on an annual basis? and then within that, based on your annual affordability for the next 20 to 30 years, how much does that allow to you accelerate in terms of projects today? so that third bullet is you need to rationalize your affordability with the projects that you want to accelerate. within your concept of affordability, it's a question of how do you want to spend that money? on which projects? how do you want to define your bonding program, limit yourselves so when you go to the market, you say we've thought about this, we're conservative, we're worthy of a high a, maybe aa rating. due to our affordability levels so that's your sort of debt

affordability to your debt policy. there will be policy outreach. we will be coming back to you, obviously to get direction and feedback. you want to reach out to your constituencies as well. when you have a concept of what you want to do within your internal framework, then you can draft your legal documents that reflect that. your legal documents will have flexibility. they'll in part, be for the benefit of the bond holders and as yourselves. with a sort of plan of finance in hand and a legal structure, we will take that to the credit rating agencies that will happen in march so we're right now looking at debt affordability. we'll come back to you in probably two to three months' time. at that point you can start thinking about if it makes sense. if it does, we start drafting legal documents. here we're saying february. and reaching out to the rating agencies in march. with that we start accessing the markets and marketing your bonds in a strong credit. and we likely access and sell bonds in june or july in 2011.