New Format for GO and Public Debt Reports
In an effort to provide data users with a better more informative experience with Clearinghouse reports, we are moving away from the print center PDF reports we have been providing since the program began and are introducing new formats for our major reports. New public debt and GO reports are being released with interactive charts in a more online friendly format.
We hope this new formatting will increase ease of use, and provide some customizability for individual user’s data needs. In an effort to continuously improve our reporting, we invite you to complete our survey.
We also welcome any feedback you may have about these new report formats or any other Clearinghouse services at BUC@commerce.wa.gov.
The Cost of Issuing a Bond
What funding sources are available?
Bond Users Clearinghouse could not begin a discussion of funding available to local governments without first addressing bonds. Bonds allow governments to issue long term debt, generally with low interest rates which will be tax exempt for investors. Bonds do however have additional upfront costs when compared to other financing options which must be considered.
Certificates of Participation (COPs) are issued by the Treasury. These are essentially bonds with multiple participating issuers. Local governments can participate in a COP to fund smaller projects for which issuing a bond may have excessive upfront costs. These can also be useful for governments which have not obtained credit ratings or with limited tax income. COPs defray the upfront costs of issuing a bond by sharing the costs proportionally across multiple issuers, however COPs are only feasible for relatively small issuances by each participant.
Bank loans are likely the most familiar financing option. Bank loans generally require one institutional investor to supply the entirety of the funding for the loan, because of this the investor has a significant amount of power to determine financing costs and terms. The impact of this power becomes more significant with larger longer term debts.
Considerations with Bonds
The cost to issue a bond (including underwriting, insurance, official statements, and all external advisors) has averaged just below one percent of total par value, based on Bond 101 data. This cost proportion increases for lower par value issuances, averaging 2.3 percent of par value for issuances with a par of one million dollars or less. This places a large cost barrier to the use of bonds for lower cost projects.
Underwriting costs are directly related to the par value of an issuance. Generally this cost is normalized as cost per one thousand dollars. Surprisingly, once normalized underwriting costs do not appear to be significantly impacted by the par value of the issuance. Between 2000 and 2018 the average underwriting spread has been $4.23 per thousand dollars of par value. Though this cost ranges widely with the highest spread reported at $123.51 per thousand dollars.
Counsel fees were reported by more than ninety percent of all bond 101 reports. These costs are related to the par value of an issuance, likely due to the added complexity of larger issuances. As a result these costs range greatly across the reported data. The average counsel fee from 2000 to 2018 was over twenty thousand dollars, with the highest counsel fee reported just shy of one million dollars.
Financial advisor costs, much like counsel fees increase with par value of issuance, and it is not uncommon for smaller par bonds to be issued without the aid of an advisor. But, when utilized the average financial advisor fee was around ten thousand dollars ranging as high as half a million dollars on some large issuances.
Insurance rate is a particularly dicey cost to estimate, as most issuers will not need to utilize bond insurance. However, insurance can be a useful tool to decrease bond interest rates. Bond insurance provides a guarantee of payment from an organization with a high credit rating, with this guarantee the issuing jurisdiction can adopt the insuring organizations credit rating and issue at an interest rate suitable to that higher credit rating. Based on reported insurance costs in bond 101 (roughly 600 data points) insurance averages one half of one percent of the issued par value, but can range as high as five percent. The value of insurance is based upon the difference between realized interest rates with and without the insurance, as well as the ability to attract buyers for debt, which will vary depending on the perceived risk and return of the debt product.
Benefits of Bonds
With all of the added costs incurred by local governments when issuing bonds, why would they ever choose this option? Bonds certainly have higher upfront costs than other financing option but this is generally offset by the strengths bonds possess. Historically bonds have offered lower interest rates than bank loans and private placements, while this has waned a bit with recent historically low interest rates as rates recover this difference will become more apparent. This difference in interest rates allows governments to save money on financing costs over the long run.
Speaking of the long run, bonds can generally be issued for longer terms than could reasonably be obtained through a bank loan. Both bank loans and bonds will see interest rates increase as terms extended, however bank loans which already have higher rates will have a more pronounced increase. While bonds can easily be issued for as long as 40 years with a locked in interest rate and will often allow for the issuer to easily refinance if market rates decrease during the life of the debt, longer term bank loans may mitigate bank risks by allowing the bank to reassess interest at a defined point should market rates increase.
Frequently asked questions about Bond 101 reporting
Yes. State law (RCW 39.44) requires all bond issuers in the state — both state and local — to report bond and other debt issuances to the Department of Commerce within 20 days of closing on the bond. You will enter your information in a convenient online tool, which we call a Bond 101 report.
Most Bond 101s are completed by the bond counsel. At times the financial advisor or underwriter completes the report. More rarely, issuers submit their own reports.
The data that needs to be reported includes issuer name and contact information; user name (if different from issuer); official name and type of issuance; purpose of issuance; issuance par value and interest rate; costs of issuance; bond ratings; issuance team members (bond counsel, underwriter, rating agency, etc.)