Discussion Material- 28th Annual Economic Forecast Salisbu bury y - - PowerPoint PPT Presentation

Member NYSE|FINRA|SIPC

December 17, 2015

Discussion Material- 28th Annual Economic Forecast

Salisbu bury y Ar Area Chambe mber r of Commer mmerce ce

1. 1. What t Goes s into a Bond Rating? – Illustrated through example of Wicomico County – Importance of a Credit Rating; – Introduce the three National Rating Agencies; – Discuss respective methodologies and Four Key Factors: – Economy – Finances – Management – Debt/Pensions 2. 2. Provi vide e a snapsho hot of the historical ical and curren ent market t envir ironm

• nment

Topics for Discussion

1 Salisbury Area Chamber of Commerce December 17, 2015

Credit Rating Overview and Approach

2 Salisbury Area Chamber of Commerce December 17, 2015

Historical Credit Spreads

3 Salisbury Area Chamber of Commerce December 17, 2015

 An issuer’s creditworthiness has a direct impact on the cost of borrowing, which in turn effects debt capacity and affordability. – The credit spread is the premium an issuer pays to the purchaser of their bonds (i.e. higher interest rate) as compensation for increased credit risk. – Since the financial downturn in September 2008, credit quality of issuers has taken on a renewed importance to investors. – The average spread for an A rated borrower has increased from 0.33% from Nov 2004 – Dec 2008 to 0.73% since Dec 2008.  Thus achieving the best possible rating result continues to be of major importance for local governments entering the credit markets.

Credit Spreads (%) vs the 30-yr AAA MMD Nov 2004 - Dec 2008 Rating Min Max Average AA 0.04 0.19 0.10 A 0.15 1.26 0.33 BBB 0.30 2.52 0.60 Dec 2008 - Oct 2015 Rating Min Max Average AA 0.09 0.56 0.22 A 0.27 1.11 0.73 BBB 0.69 2.58 1.44 Note: credit spreads compared to the 'AAA' equivalent

2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 Percent (%)

30 30-Year ear MMD

AAA AA A BBB

Credit Rating Overview

4 Salisbury Area Chamber of Commerce December 17, 2015

 The following slides will discuss the Credit Ratings framework in general and for each of the three major rating agencies in the context of Wicomico County’s (the “County”) general

• bligation bond ratings.

 The County’s general obligation bonds are currently rated Aa2 / AA+ / AA by Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings, respectively.  As highlighted in the table to the right, these ratings place the County one or two “notches” from the highest possible credit rating for each agency.  The County’s ratings were recently affirmed by all three agencies in conjunction with the issuance of the County’s $19,715,000 Consolidated Public Improvement and Refunding Bonds, Series 2015 in November.

Source: Moody’s Investors Service, Standard & Poor’s, Fitch Ratings

Moody's S&P Fitch Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB- Non Investment Grade

December 17, 2015 Salisbury Area Chamber of Commerce 5

Rating Agency Commentary – Moody’s (10/16/2015)

Wicomico County, Maryland

Source: Moody’s Investors Service

 Strengths – Sound financial reserve position; – Strong Management and formal fiscal policies; – Sizable, albeit rural, tax base; – Position as economic center for the Delmarva Peninsula.  Challenges – Slightly above average, but manageable, debt burden.  What Could Change the Long Term Rating (Up) – Continued growth and diversification in the tax base.  What Could Change the Long Term Rating (Down) – Deterioration of reserves; – Declines in tax base in excess of current projections; – Significant increase in debt burden.

Moody’s

Rating Agency Methodology Updates: Moody’s

 On January 15, 2014, Moody’s updated its US Local Governments General Obligation Debt methodology and assumptions.  Under the new methodology, an initial indicative rating is calculated from a weighted average of four key factors:  Up to a one-notch adjustment can be made from the indicative rating based on other qualitative factors.

December 17, 2015 Salisbury Area Chamber of Commerce 6

US Local Governments General Obligation Debt Methodology

• 1. Economy / Tax Base

30% 30% Tax Base Size (Full Value) 10% Full Value Per Capita 10% Wealth (Median Family Income) 10%

• 2. Finances

30% 30% Fund Balance (% of Revenues) 10% Fund Balance Trend (5-Year Change) 5% Cash Balance (% of Revenues) 10% Cash Balance Trend (5-Year Change) 5%

• 3. Management

20% 20% Institutional Framework 10% Operating History 10%

• 4. Debt / Pensions

20% 20% Debt to Full Value 5% Debt to Revenue 5% Moody's Adjusted Net Pension Liability (3-Year Average) to Full Value 5% Moody's Adjusted Net Pension Liability (3-Year Average) to Revenue 5%

Moody’s Rating Scorecard

HI HI LO LO Rating 0.5 1.5 Aaa 1.50 1.83 Aa1 1.83 2.17 Aa2 2.17 2.50 Aa3 2.50 2.83 A1 2.83 3.17 A2 3.17 3.50 A3 3.50 3.83 Baa1 3.83 4.17 Baa2 4.17 4.50 Baa3 4.50 4.83 Ba1 4.83 5.17 Ba2 5.17 5.50 Ba3 5.50 5.83 B1 5.83 6.17 B2 6.17 6.50 B3 & Below Indicative Rating 1.97 Current Adjusted Rating (10/16/2015) Moody's Rating Scorecard: Indicative Ratings

December 17, 2015 Salisbury Area Chamber of Commerce 7

Moody’s Scorecard

Source: Obtained by Davenport from Moody’s personnel

December 17, 2015 Salisbury Area Chamber of Commerce 8

Rating Agency Commentary – S&P (10/16/2015)

Wicomico County, Maryland

Source: Standard & Poor’s

 The 'AA+' rating reflects S&P’s opinion of the County’s: – Adequate economic profile; – Strong budgetary performance; – Very strong budgetary flexibility; – Very strong liquidity; – Very strong management; – Strong debt and contingent liability profile; and, – Very strong Institutional Framework.  Outlook – The stable outlook reflects our opinion of Wicomico County's large, diverse, and growing economy. The outlook also reflects

• ur opinion that management will likely continue to manage its

budget conservatively in response to economic conditions and maintain its strong finances. We believe the county's strong financial management practices and policies should help support what we consider its strong financial performance. In

• ur opinion, overall debt will likely remain close to current levels

due to the county's above-average amortization, providing additional rating stability. Therefore, we do not expect to change the rating within the outlook's two-year period.

S&P

Rating Agency Methodology Updates: S&P

 On September 12, 2013, Standard & Poor’s updated its US Local Governments General Obligation Ratings methodology and assumptions.  Under the new methodology, an initial indicative rating is calculated from a weighted average of seven key factors:  Up to a one-notch adjustment can be made from the indicative rating based on other qualitative factors.

December 17, 2015 Salisbury Area Chamber of Commerce 9

US Local Governments General Obligation Ratings Methodology

• 1. Institutional Framework

10% 10% Legal and practical environment in which the local gov't operates

• 2. Economy

30% 30% Total Market Value Per Capita Projected per capita effective buying income as a % of US projected effective buying income

• 3. Management

20% 20% Impact of management conditions on the likelihood of repayment

• 4. Budgetary Flexibility

10% 10% Available Fund Balance as a % of Expenditures

• 5. Budgetary Performance

10% 10% Total Government Funds Net Result (%) General Fund Net Revenue

• 6. Liquidity

10% 10% Total Gov't Available Cash as a % of Total Gov't Funds Debt Service Total Gov't Cash as a % of Total Gov't Funds Expenditures

• 7. Debt and Contingent Liabilities

10% 10% Net Direct Debt as a % of Total Governmental Funds Revenue Total Governmental Funds Debt Service as a % of Total Governmental Funds Expenditures

S&P’s Rating Scorecard

 Within the 7 Factors to the left, S&P will rate the measured criteria as follows: – Very Strong 1 – Strong 2 – Adequate 3 – Weak 4 – Very Weak 5  Based on the scores and weighting within these 7 Factors, S&P will produce a Factor Score Weighted Average which will align to an Indicative Rating according to the matrix below:

HI HI LO LO Rating 1 1.64 AAA 1.65 1.94 AA+ 1.95 2.34 AA 2.35 2.84 AA- 3.85 3.24 A+ 3.25 3.64 A 3.65 3.94 A- 3.95 4.24 BBB+ 4.25 4.54 BBB+ 4.55 4.74 BBB- 4.75 4.94 BB 4.95 5.00 B Standard & Poor's Rating Scorecard: Indicative Ratings

December 17, 2015 Salisbury Area Chamber of Commerce 10

Rating Agency Methodology Updates: S&P

Source: Standard & Poor’s report dated 10/16/2015.

 S&P affirmed the County's 'AA+' rating in its October 16, 2015 Report and assigned a Stable Outlook.

Factor Weight Score Weighted Score Economy 30% 3.00 0.90 Management 20% 1.00 0.20 Budgetary flexibility 10% 1.00 0.10 Budgetary performance 10% 2.00 0.20 Liquidity 10% 1.00 0.10 Debt and contingent liabilities 10% 2.00 0.20 Institutional framework 10% 1.00 0.10 Weighted Average 1.80 HI HI LO LO Rating 1 1.64 AAA 1.65 1.94 AA+ 1.95 2.34 AA 2.35 2.84 AA- 3.85 3.24 A+ 3.25 3.64 A 3.65 3.94 A- 3.95 4.24 BBB+ 4.25 4.54 BBB+ 4.55 4.74 BBB- 4.75 4.94 BB 4.95 5.00 B Indicative Rating 1.80 Current Adjusted Rating 10/16/2015 Standard & Poor's Rating Scorecard: Indicative Ratings

December 17, 2015 Salisbury Area Chamber of Commerce 11

Rating Agency Commentary – Fitch (10/13/2015)

Wicomico County, Maryland

Key Rating Drivers

 Strong Financial Profile – Conservative budgeting practices; – Recent revenue enhancements; – Historically positive operating results, ample reserve levels and strong liquidity.  Socioeconomic Metrics Somewhat Weak – Key metrics have shown improvement the past year but remain below state and national averages; – Agriculture, higher education, and healthcare provide a solid foundation for the economy.  Favorable Debt Position – Overall debt levels are low; – Rapid amortization of principal; – Prudent management analyze capital needs alongside capital affordability.  Well Managed Long-Term Benefits Liabilities – County’s pension system remain well funded; – Teacher’s pension costs funded through the state are affordable.

Municipal Market Overview

12 Salisbury Area Chamber of Commerce December 17, 2015

Municipal Market Overview

 The 20-Bond Index matures in 20 years and is rated ‘Aa2’/‘AA’ by Moody's and S&P.  Historical 20-year Yields since 1980: – Curren ent: 3.57% – Average: 6.20% – Minimum: 3.27% – Maximum: 13.44%

December 17, 2015 13 Salisbury Area Chamber of Commerce

Source: Bond Buyer

2% 4% 6% 8% 10% 12% 14% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Tax-Exe xempt Interest Rat ates, 1980 - Present

20-Bond Index Average Since 1980 Current 3.1% 3.3% 3.5% 3.7% 3.9% 4.1% 4.3% 4.5% 4.7% 4.9% 5.1% 01/13 03/13 05/13 07/13 09/13 11/13 01/14 03/14 05/14 07/14 09/14 11/14 01/15 03/15 05/15 07/15 09/15 11/15

January 2013- Present

20-Bond Index Average Since 1980 Current

‘AAA’ MMD Observations

Municipal Market Overview

 The Municipal Market Data Daily Rate Publication (MMD) is the benchmark for municipal yields.  Municipal borrowers who issue public securities receive the benefit of the yield curve.  Yields remain quite similar to where they were one year ago, however on the short end they have risen.

December 17, 2015 14 Salisbury Area Chamber of Commerce

Source: MMD

0.5 1 1.5 2 2.5 3 3.5 4 4.5 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 12/14/2015 12/15/2014 12/13/2013 12/14/2012

Year 12/14/2015 12/15/2014 12/13/2013 12/14/2012 1 0.5 0.14 0.17 0.2 5 1.26 1.22 1.18 0.73 10 1.95 1.99 2.71 1.66 15 2.34 2.34 3.36 2 20 2.59 2.59 3.8 2.3 25 2.77 2.79 4.05 2.65 30 2.84 2.89 4.14 2.71 Percent %

Historical 10-year Treasury Bond Yield Observations

Municipal Market Overview

 The 10-year Treasury Bond Yield is a commonly used indicator for a number of interest rates in both the taxable and tax-exempt marketplace.  The 10-year Treasury Bond yield may provide a better indication of the private placement (bank) market than

• ther commonly used benchmarks (e.g. ‘AAA’ MMD or 20-

bond Index).  Historical 10-year Treasury Bond Yields since 1991: – Current: 2.24% – Average: 4.70% – Minimum: 1.43% – Maximum: 8.31%

December 17, 2015 15 Salisbury Area Chamber of Commerce

Source: Bond Buyer

1 2 3 4 5 6 7 8 20-Bond Index Average Current

2 4 6 8 10 12 14 16 2015 2016 2017

Appropriate Timing of Policy Firming

2 4 6 8 10 12 14 16 2015 2016

Appropriate Timing of Policy Firming

December 17, 2015 Salisbury Area Chamber of Commerce 16

FOMC Assessments

Source: Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2015

Quarter End (9/30/15) Quarter End (6/30/15)

Richmond Office

One James Center 901 East Cary Street 11th Floor Richmond, VA 23219

Towson Office

Maryland Executive Park The Chester Building 8600 LaSalle Road Suite 324 Towson, MD 21286

December 17, 2015 Salisbury Area Chamber of Commerce 17

Joe Mason

Senior Vice President 571-223-5893 jmason@investdavenport.com

Sam Ketterman

Senior Vice President 410-296-9426 sketterman@investdavenport.com

Municipal Advisor Disclosure

The enclosed information relates to an existing or potential municipal advisor engagement. The U.S. Securities and Exchange Commission (the “SEC”) has clarified that a broker, dealer or municipal securities dealer engaging in municipal advisory activities outside the scope of underwriting a particular issuance of municipal securities should be subject to municipal advisor registration. Davenport & Company LLC (“Davenport”) has registered as a municipal advisor with the SEC. As a registered municipal advisor Davenport may provide advice to a municipal entity or obligated person. An obligated person is an entity other than a municipal entity, such as a not for profit corporation, that has commenced an application or negotiation with an entity to issue municipal securities on its behalf and for which it will provide support. If and when an issuer engages Davenport to provide financial advisory or consultant services with respect to the issuance of municipal securities, Davenport is obligated to evidence such a financial advisory relationship with a written agreement. When acting as a registered municipal advisor Davenport is a fiduciary required by federal law to act in the best interest of a municipal entity without regard to its own financial or other interests. Davenport is not a fiduciary when it acts as a registered investment advisor, when advising an obligated person, or when acting as an underwriter, though it is required to deal fairly with such persons. This material was prepared by public finance, or other non-research personnel of Davenport. This material was not produced by a research analyst, although it may refer to a Davenport research analyst or research report. Unless otherwise indicated, these views (if any) are the author’s and may differ from those of the Davenport fixed income or research department or others in the firm. Davenport may perform or seek to perform financial advisory services for the issuers of the securities and instruments mentioned herein. This material has been prepared for information purposes only and is not a solicitation of any offer to buy or sell any security/instrument or to participate in any trading strategy. Any such offer would be made only after a prospective participant had completed its own independent investigation of the securities, instruments or transactions and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are

• referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty

with respect to the completeness of this material. Davenport has no obligation to continue to publish information on the securities/instruments mentioned herein. Recipients are required to comply with any legal or contractual restrictions on their purchase, holding, sale, exercise of rights or performance of obligations under any securities/instruments transaction. The securities/instruments discussed in this material may not be suitable for all investors or issuers. Recipients should seek independent financial advice prior to making any investment decision based on this material. This material does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. Prior to entering into any proposed transaction, recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction. You should consider this material as only a single factor in making an investment decision. The value of and income from investments and the cost of borrowing may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes,

• perational or financial conditions or companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide

to future performance and estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact

• n any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes or to simplify the

presentation and/or calculation of any projections or estimates, and Davenport does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material may not be sold or redistributed without the prior written consent of

• Davenport. Version 1.13.14 MM | JM

18 Salisbury Area Chamber of Commerce December 17, 2015