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July 16, 2018
An Issuer’s Guide to Rating Agency Presentations
Ratings-Related Issuer Education Conference
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• What is a Credit Rating?
• Rating Process and Scale
• General Obligation Credit Factors
• Water & Sewer Utility Credit Factors
• GO Rating Criteria and Analysis
• Rating Agency Scorecards
• Credit Issues and Strengths
• Hot Topics in US Public Finance
• Resources
Agenda
1
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– Denotes relative credit quality
– Assessment of issuers’ ability and willingness to repay debt in
full and on time
– Measure of expected loss
o Default probability times loss severity
– Independent opinion
– Forward-looking projection
– Used by investors as one component of investment decisions
What is a Credit Rating?
2
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– An audit
– A recommendation to buy, sell or hold a security
– Static or permanent
– An opinion of a community’s policy choices or quality of life
A Credit Rating is NOT:
3
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Credit Spreads
44
Source: Thomson Reuters
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Credit Spreads
5
Source: Thomson Reuters
5
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Credit Spreads
6
Source: Thomson Reuters
6
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Rating Process
7
Call, meeting or
visit
Rating
Released
Preliminary
Discussion
Analysis
Complete
Analysis
Rating
Committee
New Audit
Received
Surveillance or
New Bond Sale
Documents
Received
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Rating Relative credit risk
Aaa/AAA Obligations rated Aaa/AAA are judged to be of the highest quality, with minimal credit risk
Aa/AA Obligations rated Aa/AA are judged to be of high quality and are subject to very low credit risk
A Obligations rated A are considered upper-medium grade and are subject to low credit risk
Baa/BBB Obligations rated Baa/BBB are subject to moderate credit risk. They are considered medium
grade and as such may possess certain speculative characteristics
Ba/BB Obligations rated Ba/BB are judged to have speculative elements and are subject to substantial
credit risk
B Obligations rated B are considered speculative and are subject to high credit risk
Caa/CCC Obligations rated Caa/CCC are judged to be of poor standing and are subject to very high credit
risk
Ca/CC Obligations rated Ca/CC are highly speculative and are likely in, or very near, default with some
prospect of recovery of principal and interest
C Obligations rated C are the lowest rated class and are typically in default, with little prospect for
recovery of principal or interest
Note: Moody’s appends numerical modifiers 1, 2, and 3 and S&P and Fitch append + and - to each generic rating classification from
Aa/AA through Caa/CCC. The modifier 1 or + indicates that the obligation ranks in the higher end of its generic rating category and
the modifier 3 or - indicates a ranking in the lower end of that generic rating category
Long-Term Obligation Ratings Scale (Moody’s/S&P and Fitch)
8
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Credit Profile Analytics
9
Rating Agency Analysts, as well as Institutional Investor Analysts, review
different elements for General Obligation and Revenue Credits
In addition to the package provided to them, analysts gather data from
public sources including annual financial statements, continuing disclosure
filings, PUC Rate Filings and certain data base products such as Municipal
Financial Ratio Analysis
General Obligation Bonds
(GO)
Revenue Bonds
Governance/Management
Financial Position
Debt Position / Pension and
OPEB
Economy
Essentiality of Project
Debt Service Coverage
Bond Indenture and
Covenants
Flow of Funds
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Four Primary General Obligation Credit Factors
10
RATING
Debt
Position
Management
Finances
Economy
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General Obligation Factors/Criteria (Moody’s and S&P)
11
Pension and Other Post-Employment
Benefit (OPEB) Liabilities Have Growing
Significance
Moody’s
S&P Global
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Water and Sewer Utility Factors/Criteria (Moody’s and S&P)
12
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– Governmental Tax Base - size, location, infrastructure, diversity,
components of base
– Regional and local growth and economic trends
– Largest taxpayers and concentration
– Employment base
– Socio-economic indicators - income levels, population trends,
housing values, unemployment, poverty, seasonal and tourism
Analysis Begins With Economy and Tax Base
13
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– Operating performance
– Balance sheet/reserve level performance
– Structural Balance
– Quality of Revenue Streams
o Diversity and Economic Sensitivity
– Financial flexibility
– Adequate liquidity
– Budgetary assumptions and budget vs. actual statement
Trend in Financial Performance is Often the Deciding Factor
14
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• Debt Levels
• Direct, overlapping & overall debt
• Self-supporting debt
• Debt limits & authorization
• Debt structure
• Maturity and amortization
• Exposure to variable rate debt and swap risk
• Capital plans & future borrowing
• Impact on future debt position
• Issuance restrictions and limits
• Pensions & other long-term liabilities
• Pension and OPEB funding status and size of liabilities
• Burden on annual budget
Debt Analysis Includes Existing and Future Obligations
15
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– Policies and guidelines
– Ability to achieve budgetary targets
– Ability to make mid-year corrections
– Ability to recognize and respond to problems and constraints
– Ability to provide appropriate disclosure and timely financial
statements
– Is management structure consistent with scope of operations?
– Structure of government and cooperation among elected and
appointed boards and committees
– State oversight and limitations (local governments)
Management is the Hardest Factor to Quantify
16
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– Preliminary Official Statement (POS/OS) or continuing disclosure
document
– Independent Audits—at least three years
– Independent Actuarial Studies—Pension and OPEB
– Site visit or conference call
– State and Local disclosure websites
– Proposed/approved budget for current year
– Multi-year projections
– Capital Improvement Plan
– Consulting Engineer Study (utilities and other enterprises)
– Economic data—US Census, Moody’s economy.com, etc.
– Legal Documents—Indenture, Resolution, Swap, SBPA, Letter of Credit
– Analysis relative to Medians and Comparable Credits
Information Used by Rating Agencies
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Purpose and Use of the Scorecard:
– Enhances the transparency of rating process
– Captures the key considerations that correspond to particular rating categories
– Not an exhaustive list of factors considered in every local government rating
– Each subfactor is a quantitative metric
– May notch up or down from the scorecard-indicated rating based on the additionalbelow-the-line factors
– The scorecard acts as a starting point for a more thorough and individualisticanalysis
– Final rating is determined by a Rating Committee
GO Scorecard – A Relatively New Tool
18
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Sample GO Scorecard Overview – Factors, Subfactors and Weights (Moody’s)
19
Moody's Criteria
Sub-Factor
Weights
Factor 1: Economy (30%)
Tax Base Size (MM) 10%
Full Value Per Capita 10%
Wealth (median family income) 10%
Total Factor 1 30%
Factor 2: Finance (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%
Total Factor 2 30%
Factor 3: Management (20%)
Institutional Framework 10%
Operating History 10%
Total Factor 3 20%
Factor 4: Debt/Pensions (20%)
Debt to Full Value 5%
Debt to Revenues 5%
Moody's Adjusted Pension Liability (3-Year Average) to Full Value 5%
Moody's Adjusted Pension Liability (3-Year Average) to Revenues 5%
Total Factor 4 20%
Moody's Local General Obligation Debt Rating Factors
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Sample GO Scorecard Overview – Factors and Weights (S&P)
20
Institutional Framework 10%
Economy 30%
Management 20%
Budgetary Flexibility 10%
Budgetary Performance 10%
Liquidity 10%
Debt and Contingent Liabilities 10%
S&P Local General Obligation Rating Factors
Category Weight
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Scorecard Factor 1: Economy/Tax Base – 30% (Moody’s Example)
21
Very Strong Strong Moderate Weak Poor Very Poor
Aaa Aa A Baa Ba B & Below Weight
ECONOMY/TAX BASE (30%)
Tax Base Size: Full Value > $12B $12B ≥ n > $1.4B $1.4B ≥ n > $240M $240M ≥ n > $120M $120M ≥ n > $60M ≤ $60M 10%
Full Value Per Capita > $150,000$150,000 ≥ n >
$65,000$65,000 ≥ n >
$35,000$35,000 ≥ n >
$20,000$20,000 ≥ n >
$10,000≤ $10,000 10%
Socioeconomic Indices: MFI> 150% of US
median150% to 90% of US
median90% to 75% of US
median75% to 50% of US
median50% to 40% of US
median≤ 40% of US
median10%
– The tax base is the source of most local government revenues
– The tax base scorecard weight is reduced to 30%, which is still a significant weight
o Lowered from 40% to reflect Moody’s observation that some local governmentshave been either unwilling or unable to convert economic strength intorevenues – could be due to tax caps, anti-tax sentiment, timing lags or othersimilar obstacles
– Full value: The market value of taxable property accessible to the municipality
– Full value per capita: scales tax base strength to the number of residents
– Median Family Income (MFI): Important measure of the strength and resiliency of a taxbase
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Scorecard Factor 2: Finances – 30% (Moody’s Example)
22
– Fund Balance (10%) – the net financial resources available in the short term
– Cash Balance (10%) – the paramount liquid resource available; excludes accruals
– 5-Yr. $ Change in Fund Balance and Cash Balance as % of Revs (each 5%)
o Incorporated to capture trend information; avoids overweighting point-in-timedata
o The focus here is on whether financial reserves and liquidity are increasing instep with budgetary growth
Very Strong Strong Moderate Weak Poor Very Poor
Aaa Aa A Baa Ba B & Below Weight
FINANCES (30%)
Fund Balance as % of Revenues> 30.0%
> 25.0% for School Districts
30.0% ≥ n > 15.0%25.0% ≥ n > 10.0%
for SD
15.0% ≥ n > 5.0%10.0% ≥ n > 2.5%
for SD
5.0% ≥ n > 0.0%2.5% ≥ n > 0.0%
for SD
0.0% ≥ n > -2.5%0.0% ≥ n > -2.5%
for SD
≤ -2.5%≤ -2.5% for SD
10%
5-Year Dollar Change in Fund Balance as % of Revenues
> 25.0% 25.0% ≥ n > 10.0% 10.0% ≥ n > 0.0% 0.0% ≥ n > -10.0%-10.0% ≥ n > -
18.0%≤ -18.0%
5%
Cash Balance as % of Revenues > 25.0%
> 10.0% for School Districts
25.0% ≥ n > 10.0%10.0% ≥ n > 5.0%
for SD
10.0% ≥ n > 5.0%5.0% ≥ n > 2.5%
for SD
5.0% ≥ n > 0.0%2.5% ≥ n > 0.0%
for SD
0.0% ≥ n > -2.5%0.0% ≥ n > -2.5%
for SD
≤ -2.5%≤ -2.5% for SD
10%
5-Year Dollar Change in Cash Balance as % of Revenues
> 25.0% 25.0% ≥ n > 10.0% 10.0% ≥ n > 0.0% 0.0% ≥ n > -10.0%-10.0% ≥ n > -
18.0%≤ -18.0%
5%
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Scorecard Factor 3: Management – 20% (Moody’s Example)
23
– Overall factor weight maintained at 20%
– Institutional Framework
o New factor for US Local Governments
o Focuses on issuers’ legal ability to match revenues with expenditures based on their legalapparatus
o Standard inputs determined for each state/sector combination; revisited annually forpossible updates
– Operating History
o Measures the degree that an issuer has demonstrated the practical ability and willingnessto match revenues with expenditures
o Input: Five-year average of the ratio of operating revenues to operating expenditures
Very Strong Strong Moderate Weak Poor Very Poor
Aaa Aa A Baa Ba B & Below Weight
MANAGEMENT (20%)
Institutional Framework
Very strong legal ability to match resources with
spending
Strong legal ability to match
resources with spending
Moderate legal ability to match resources with
spending
Limited legal ability to match resources with
spending
Poor legal ability to match
resources with spending
Very poor or no legal ability to
match resources with spending
10%
Operating History: 5-Year Average of Operating Revenues / Operating Expenditures
> 1.05x 1.05x ≥ n > 1.02x 1.02x ≥ n > 0.98x 0.98x ≥ n > 0.95x 0.95x ≥ n > 0.92x ≤ 0.92x 10%
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Scorecard Factor 4: Debt/Pensions – 20% (Moody’s Example)
24
– Overall factor weight increased to 20% from 10% (to capture pension risks more fully)
– Specific metrics proposed:
o Debt: Measures the magnitude of debt obligations relative to resources (using the tax baseas a proxy) and operations (using operating revenues as a proxy)
o Pensions: Utilize Moody’s adjusted net pension liability metrics
• Three-year average is used to smooth the volatility inherent in the metric
• Debt breakpoints more restrictive than pensions reflecting the fixed nature of debtobligations; pension measures are estimates, may be volatile across years and can berenegotiated and reduced
Very Strong Strong Moderate Weak Poor Very Poor
Aaa Aa A Baa Ba B & Below Weight
DEBT/PENSIONS (20%)
Net Direct Debt / Full Value < 0.75% 0.75% ≤ n < 1.75% 1.75% ≤ n < 4% 4% ≤ n < 10% 10% ≤ n < 15% > 15% 5%
Net Direct Debt / Operating Revenues
< 0.33x 0.33x ≤ n < 0.67x 0.67x ≤ n < 3x 3x ≤ n < 5x 5x ≤ n < 7x > 7x 5%
3-Year Average of Moody's Adjusted Net Pension Liability / Full Value
< 0.9% 0.9% ≤ n < 2.1% 2.1% ≤ n < 4.8% 4.8% ≤ n < 12% 12% ≤ n < 18% > 18% 5%
3-Year Average of Moody's Adjusted Net Pension Liability / Operating Revenues
< 0.4x 0.4x ≤ n < 0.8x 0.8x ≤ n < 3.6x 3.6x ≤ n < 6x 6x ≤ n < 8.4x > 8.4x 5%
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GO Scorecard – Notching Factors (Moody’s Example)
25
Adjustments/Notching FactorsDescription DirectionEconomy/Tax BaseInstitutional presence upRegional economic center upEconomic concentration downOutsized unemployment or poverty levels downOther analyst adjustment to Economy/Tax Base factor (specify) up/downFinancesOutsized contingent liability risk downUnusually volatile revenue structure down
Other analyst adjustment to Finances factor (specify) up/downManagementState oversight or support up/down
Unusually strong or weak budgetary management and planning up/downOther analyst adjustment to Management factor (specify) up/downDebt/PensionsUnusually strong or weak security features up/down
Unusual risk posed by debt/pension structure downHistory of missed debt service payments down
Other analyst adjustment to Debt/Pensions factor (specify) up/downOther
Credit event/trend not yet reflected in existing data sets up/down
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NATIONAL CITIES - GLOBAL SCALE RATING MEDIANS
Total Entities Rated Aaa Aa A Baa Ba
Total Entities per Rating 197 1923 964 68 13
Total GF Revenues ($000) $47,305 $19,644 $7,309 $6,225 $17,328
GF Balance as % of Revenues 33.9 29.9 27.0 10.7 -1.1
Unassigned GFB as % of Rev 18.1 19.9 18.9 6.7 -5.9
Direct Net Debt as % of Full Value 0.7 0.9 1.3 1.9 4.3
Debt Burden (Overall Net Debt as % FV) 2 2.5 3.2 4.4 6.5
Total Full Value ($000) $7,091,842 $2,242,895 $625,708 $268,198 $1,121,662
Full Value Per Capita ($) $188,892 106,939 $65,995 $45,619 $57,569
Population 2000 Census 34,727 18,474 8,390 8,693 15,946
PCI as % of U.S. (2000 Census) 184 114 88 77 79
Median Statistics—US Cities
26
Source: Moody’s Investors Service
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Pensions are growing problem, not a short-term issue for most
27
Combined Liabilit ies as Share of GDP – Top 10 States
Source: Moody’s Investors Service
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Debt/ GDP Pensions/ GDP
27
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Government Pension Liabilities at an All-Time High
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2015 Moody’s Default Study--Key Findings 1970-2015
• The number of defaults increased since the recession
• 4 defaults in 2015
• 0 defaults in 2014
• 7 defaults in 2013—including Detroit
• Average 4.5 defaults per year since 2008
• Total of 99 defaults from 1970-2015
• Average 2.15 defaults per year since 1970
• Default composition has shifted slightly
• Previous defaults were largely concentrated in the healthcare and housing
sectors (70% of all defaults)
• 14 general government defaults in the 1970-2015 period
• 9 general government defaults in the 2009-2015 period
• Ultimate recovery rates for municipal bonds are higher than those for senior
unsecured corporate bonds
• On average, municipal bonds recovered 65% versus 53% for corporate bonds
29
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Default Counts by Sector: 1970-2015
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Budget difficulties have increased with increasing evidence of structural
imbalance in more State and local budgets
In 2017 an unprecedented number of States did not pass their budgets on
time
Some States experienced shut downs and interruption or elimination of
State Aid to Local Communities
– Local Credits were impacted in several States
States and Local Communities have experienced growing Pension and
OPEB Liabilities
Economic conditions in many Northeast States lag the Nation
Recent State and Local Government Credit Issues
31
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Governments exist in perpetuity
Federal monetary policies benefit state and local economies
State economies and those of large cities are broad-based and diverse
State and local governments have strong mandates and incentives to pay
bond debt
Debt service, even when combined with unfunded pension and OPEB
liabilities, is a small share of expense budgets
State and local governments have a variety of powerful fiscal
management tools at their disposal
State and Local Governments Have Inherent Strengths
32
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• Federal Tax Policy
• Distressed Cities and Bankruptcy
• Long-Term Liabilities for Pension and OPEB (Other Post-Employment
Benefits)
• Enterprise Risk
• Issuer disclosure to investors and muni bond market
• Infrastructure Finance
• Green Bonds
• Resident and Mini- Bonds
Other Hot Topics in Public Finance
33
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Bond Buyer http://www.bondbuyer.com/
Bond Dealers of America http://www.bdamerica.org/
Center for Retirement Research at Boston College http://crr.bc.edu/
Governmental Accounting Standards Board www.gasb.org
Municipal Securities Rulemaking Board Electronic Municipal Market Access (EMMA)
http://www.emma.msrb.org/Home
Municipal Market Advisors http://www.mma-research.com/
Rating Agencies
– http://www.moodys.com/
– http://ratings.standardandpoors.com/us-public-finance
– http://www.fitchratings.com/
– http://www.krollbondratings.com/
Municipal Bond Resources
34
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Disclosure
35
This communication is intended for issuers for educational and informational purposes only and does not constitute legal or
investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product or service.
Financial transactions may be dependent upon many factors such as, but not limited to, interest rate trends, tax rates, supply,
change in laws, rules and regulations, as well as changes in credit quality and rating agency considerations. The effect of such
changes in such assumptions may be material and could affect the projected results. Any outcome or result HilltopSecurities, or
any of its employees, may have achieved on behalf of our clients in previous matters does not necessarily indicate similar results
can be obtained in the future for current or potential clients. HilltopSecurities makes no claim the use of this communication will
assure a successful outcome. This communication is intended for institutional use only. For additional information, comments or
questions, please contact Hilltop Securities Inc.
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Municipal Advisor Disclosure Statement
36
This disclosure statement (“Conflict Disclosures”) is provided by Hilltop Securities Inc. (“the Firm”) to you (the “Client”) in connection with our
current municipal advisory agreement, (“the Agreement”). These Conflict Disclosures provide information regarding conflicts of interest and
legal or disciplinary events of the Firm that are required to be disclosed to the Client pursuant to MSRB Rule G-42(b) and (c)(ii).
PART A – Disclosures of Conflicts of Interest
MSRB Rule G-42 requires that municipal advisors provide to their clients disclosures relating to any actual or potential material conflicts of
interest, including certain categories of potential conflicts of interest identified in Rule G-42, if applicable.
Material Conflicts of Interest – The Firm makes the disclosures set forth below with respect to material conflicts of interest in connection with
the Scope of Services under the Agreement with the Firm, together with explanations of how the Firm addresses or intends to manage or
mitigate each conflict.
General Mitigations – As general mitigations of the Firm’s conflicts, with respect to all of the conflicts disclosed below, the Firm mitigates such
conflicts through its adherence to its fiduciary duty to Client, which includes a duty of loyalty to Client in performing all municipal advisory
activities for Client. This duty of loyalty obligates the Firm to deal honestly and with the utmost good faith with Client and to act in Client’s best
interests without regard to the Firm’s financial or other interests. In addition, because the Firm is a broker-dealer with significant capital due to
the nature of its overall business, the success and profitability of the Firm is not dependent on maximizing short-term revenue generated from
individualized recommendations to its clients but instead is dependent on long-term profitably built on a foundation of integrity, quality of service
and strict adherence to its fiduciary duty. Furthermore, the Firm’s municipal advisory supervisory structure, leveraging our long-standing and
comprehensive broker-dealer supervisory processes and practices, provides strong safeguards against individual representatives of the Firm
potentially departing from their regulatory duties due to personal interests. The disclosures below describe, as applicable, any additional
mitigations that may be relevant with respect to any specific conflict disclosed below.
I. Affiliate Conflict. The Firm, directly and through affiliated companies, provides or may provide services/advice/products to or on behalf of
clients that are related to the Firm’s advisory activities within the Scope of Services outlined in the Agreement. First Southwest Asset
Management (FSAM), a SEC-registered affiliate of the Firm, provides post issuance services including arbitrage rebate and treasury
management. The Firm’s arbitrage team verifies rebate and yield restrictions on the investments of bond proceeds on behalf of clients in order
to meet IRS restrictions. The treasury management division performs portfolio management/advisor services on behalf of public sector clients.
The Firm, through affiliate First Southwest Advisory, provides a multi-employer trust tailor-made for public entities which allows them to prefund
Other Post-Employment Benefit liabilities. The Firm has a structured products desk that provides advice to help clients mitigate risk though
investment management, debt management and commodity price risk management products. These products consist of but are not limited to
swaps (interest rate, currency, commodity), options, repos, escrow structuring and other securities. Continuing Disclosure services provided by
the Firm work with issuers to assist them in meeting disclosure requirements set forth in SEC rule 15c2-12. Services include but are not limited
to ongoing maintenance of issuer compliance, automatic tracking of issuer’s annual filings and public notification of material events. The Firm
administers two government investment pools for Texas governments; the Short-Term Asset Reserve Fund (TexSTAR) and
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Municipal Advisor Disclosure Statement
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the Local Government Investment Cooperative (LOGIC). These programs offer Texas government entities investment options for their cash
management programs based on the entities specific needs. The Firm and the aforementioned affiliate’s business with a client could create an
incentive for the Firm to recommend to a client a course of action designed to increase the level of a client’s business activities with the affiliates
or to recommend against a course of action that would reduce or eliminate a client’s business activities with the affiliates. Furthermore, this
potential conflict is mitigated by the fact that the Firm and affiliates are subject to their own comprehensive regulatory regime as a member of
multiple self-regulatory organizations in which compliance is verified by not only internal tests but annual external examinations.
II. Other Municipal Advisor or Underwriting Relationships. The Firm serves a wide variety of other clients that may from time to time
have interests that could have a direct or indirect impact on the interests of Client. For example, the Firm serves as municipal advisor to
other municipal advisory clients and, in such cases, owes a regulatory duty to such other clients just as it does to Client. These other
clients may, from time to time and depending on the specific circumstances, have competing interests, such as accessing the new issue
market with the most advantageous timing and with limited competition at the time of the offering. In acting in the interests of its various
clients, the Firm could potentially face a conflict of interest arising from these competing client interests. In other cases, as a broker-dealer
that engages in underwritings of new issuances of municipal securities by other municipal entities, the interests of the Firm to achieve a
successful and profitable underwriting for its municipal entity underwriting clients could potentially constitute a conflict of interest if, as in
the example above, the municipal entities that the Firm serves as underwriter or municipal advisor have competing interests in seeking to
access the new issue market with the most advantageous timing and with limited competition at the time of the offering. None of these
other engagements or relationships would impair the Firm’s ability to fulfill its regulatory duties to Client.
III. Secondary Market Transactions in Client’s Securities. The Firm, in connection with its sales and trading activities, may take a principal
position in securities, including securities of Client, and therefore the Firm could have interests in conflict with those of Client with respect
to the value of Client’s securities while held in inventory and the levels of mark-up or mark-down that may be available in connection with
purchases and sales thereof. In particular, the Firm or its affiliates may submit orders for and acquire Client’s securities issued in an Issue
under the Agreement from members of the underwriting syndicate, either for its own account or for the accounts of its customers. This
activity may result in a conflict of interest with Client in that it could create the incentive for the Firm to make recommendations to Client
that could result in more advantageous pricing of Client’s bond in the marketplace. Any such conflict is mitigated by means of such
activities being engaged in on customary terms through units of the Firm that operate independently from the Firm’s municipal advisory
business, thereby reducing the likelihood that such investment activities would have an impact on the services provided by the Firm to
Client under this Agreement.
IV. Broker-Dealer and Investment Advisory Business. The Firm is dually registered as a broker-dealer and an investment advisor that
engages in a broad range of securities-related activities to service its clients, in addition to serving as a municipal advisor or underwriter.
Such securities-related activities, which may include but are not limited to the buying and selling of new issue and outstanding securities
and investment advice in connection with such securities, including securities of Client, may be undertaken on behalf of, or as counterparty
to, Client, personnel of Client, and current or potential investors in the securities of Client. These other clients may, from time to time and
depending on the specific circumstances, have interests in conflict with those of Client, such as when their buying or selling of Client’s
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Municipal Advisor Disclosure Statement
38
securities may have an adverse effect on the market for Client’s securities, and the interests of such other clients could create the incentive for
the Firm to make recommendations to Client that could result in more advantageous pricing for the other clients. Furthermore, any potential
conflict arising from the firm effecting or otherwise assisting such other clients in connection with such transactions is mitigated by means of
such activities being engaged in on customary terms through units of the Firm that operate independently from the Firm’s municipal advisory
business, thereby reducing the likelihood that the interests of such other clients would have an impact on the services provided by the Firm to
Client.
V. Compensation-Based Conflicts. Fees that are based on the size of the issue are contingent upon the delivery of the Issue. While this
form of compensation is customary in the municipal securities market, this may present a conflict because it could create an incentive for the
Firm to recommend unnecessary financings or financings that are disadvantageous to Client, or to advise Client to increase the size of the
issue. This conflict of interest is mitigated by the general mitigations described above.
Fees based on a fixed amount are usually based upon an analysis by Client and the Firm of, among other things, the expected duration and
complexity of the transaction and the Scope of Services to be performed by the Firm. This form of compensation presents a potential conflict of
interest because, if the transaction requires more work than originally contemplated, the Firm may suffer a loss. Thus, the Firm may
recommend less time-consuming alternatives, or fail to do a thorough analysis of alternatives. This conflict of interest is mitigated by the general
mitigations described above.
Hourly fees are calculated with, the aggregate amount equaling the number of hours worked by Firm personnel times an agreed-upon hourly
billing rate. This form of compensation presents a potential conflict of interest if Client and the Firm do not agree on a reasonable maximum
amount at the outset of the engagement, because the Firm does not have a financial incentive to recommend alternatives that would result in
fewer hours worked. This conflict of interest is mitigated by the general mitigations described above.
PART B – Disclosures of Information Regarding Legal Events and Disciplinary History
MSRB Rule G-42 requires that municipal advisors provide to their clients certain disclosures of legal or disciplinary events material to its client’s
evaluation of the municipal advisor or the integrity of the municipal advisor’s management or advisory personnel.
Accordingly, the Firm sets out below required disclosures and related information in connection with such disclosures.
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Municipal Advisor Disclosure Statement
39
I. Material Legal or Disciplinary Event. The Firm discloses the following legal or disciplinary events that may be material to Client’s
evaluation of the Firm or the integrity of the Firm’s management or advisory personnel:
• For related disciplinary actions please refer to the Firm’s BrokerCheck webpage.
• The Firm self-reported violations of SEC Rule 15c2-12: Continuing Disclosure. The Firm settled with the SEC on February 2, 2016.
The firm agreed to retain independent consultant and adopt the consultant’s finding. Firm paid a fine of $360,000.
• The Firm settled with the SEC in matters related to violations of MSRB Rules G-23(c), G-17 and SEC rule 15B(c) (1). The Firm
disgorged fees of $120,000 received as financial advisor on the deal, paid prejudgment interest of $22,400.00 and a penalty of $50,000.00.
• The Firm entered into a Settlement Agreement with Rhode Island Commerce Corporation. Under the Settlement Agreement, the firm
agreed to pay $16.0 million to settle any and all claims in connection with The Rhode Island Economic Development Corporation Job Creation
Guaranty Program Taxable Revenue Bond (38 Studios, LLC Project) Series 2010, including the litigation thereto. The case, filed in 2012, arose
out of a failed loan by Rhode Island Economic Development Corporation. The firm’s predecessor company, First Southwest Company, LLC,
was one of 14 defendants. FirstSouthwest’s engagement was limited to advising on the structure, terms, and rating of the underlying bonds.
Hilltop settled with no admission of liability or wrongdoing.
II. How to Access Form MA and Form MA-I Filings The Firm’s most recent Form MA and each most recent Form MA-I filed with the
SEC are available on the SEC’s EDGAR system at Forms MA and MA-I. The SEC permits certain items of information required on Form MA or
MA-I to be provided by reference to such required information already filed by the Firms in its capacity as a broker-dealer on Form BD or Form
U4 or as an investment adviser on Form ADV, as applicable. Information provided by the Firm on Form BD or Form U4 is publicly accessible
through reports generated by BrokerCheck at http://brokercheck.finra.org/, and the Firm’s most recent Form ADV is publicly accessible at the
Investment Adviser Public Disclosure website at http://www.adviserinfo.sec.gov/. For purposes of accessing such BrokerCheck reports or Form
ADV, click previous hyperlinks.
PART C – Future Supplemental Disclosures
As required by MSRB Rule G-42, this Municipal Advisor Disclosure Statement may be supplemented or amended, from time to time as needed,
to reflect changed circumstances resulting in new conflicts of interest or changes in the conflicts of interest described above, or to provide
updated information with regard to any legal or disciplinary events of the Firm. The Firm will provide Client with any such supplement or
amendment as it becomes available throughout the term of the Agreement.