Overview of Proposed Loan from SMCTA to SMCEL-JPA - PowerPoint Presentation

1. Overview of Proposed Loan from SMCTA to SMCEL-JPA For San Mateo County Express Lanes Joint Powers AuthorityPeter Shellenberger, Managing DirectorPresented by:April 10, 2020

2. Total Cost of the Express Lane Project (“Project”) is approximately $581 millionFunding need from future toll revenues is approximately $86.5 millionExpenditure of $86.5 million is estimated to occur April 2020 – September 2022 (30 months) Borrowing against future, forecasted toll revenues would be necessary to provide the $86.5 millionThe San Mateo County Transportation Authority (TA) has proposed issuing bonds against their sales tax revenues and loaning bond proceeds to the SMCEL - JPAOverview

3. The SMCEL-JPA has two options to borrow against future toll revenues:Borrow directly in the bond market or from a commercial bankBorrow from the TA as a lenderIf the SMCEL-JPA sold toll revenue bonds directly, they would be rated in the “BBB” category, or possibly lower, and would be an expensive form of borrowingInvestors are accepting traffic and toll revenue riskTraffic declines in express lanes have been extreme during the COVID-19 crisis The TA can sell highly rated bonds to investors that are supported and repaid by sales tax revenuesAAA/AA sales tax credit provides easy market access and lower cost of borrowing that is passed through to the SMCEL-JPAWhy Borrow from the TA?

4. TA will publicly sell sales tax revenue bonds and loan the proceeds to the SMCEL-JPABond Issuance Size: Approximately $100 millionMode: Variable rate bonds – interest rate will reset weekly/dailyPrincipal maturity on the Bonds: 2050 Proposed Bond Issuance by the TA

5. Variable rate bonds provide principal repayment flexibilityMay be repaid, without penalty, on any interest payment date (monthly)Bond repayment flexibility will translate to TA loan repayment flexibilityAs toll revenues come in, the loan will be repaid. If there is a delay in toll revenues, the TA will accept delayed loan principal repaymentInterest rates on variable rate bonds reset each week or dayPro: short-term rates are usually lower than long-term ratesCon: rate is not “locked-in,” like fixed rate bonds, and is subject to volatilityWhy Variable Rate Bonds?

6. TA issues sales tax bonds and lends the proceeds to the SMCEL-JPALoan Amount: Approximately $100 millionUse of Proceeds: pay Project costs, pay transaction costs, repay any interim loan from the TA to the SMCEL-JPA, pay interest on bonds during constructionLoan interest cost: TA will pass through actual costs (i.e., TA cost of borrowing) on a monthly basis plus a proposed credit premium of 0.60% for accepting traffic and revenue repayment riskLoan principal repayment: flexible principal repayment as toll revenues are realized (see flow-of-funds)Documentation: Project Loan Repayment AgreementProposed Loan Structure

7. Interest rate on the bonds – re-set weekly/dailyLetter of credit (LOC) fee paid to a commercial bank that directly supports the bondsUnderwriter takedown compensates the investment bank for initially selling the bondsRemarketing agent (i.e., underwriter) who sells the bonds to investors at the lowest rate each weekPaying agent fees (i.e., trustee managing the flow of funds between investors, the LOC bank and the TA)Rating agency fees (upfront fee and an annual surveillance fee) Issuance costs required to pay the legal, financial and other consultants to execute the transaction Separate credit premium is specific to this structure and is usually reflected in higher LOC fees or interest ratesLoan Cost Elements

8. The TA has proposed a “credit premium” of 0.60% as part of the annual cost of the Loan to the SMCEL-JPAReflects a “capital-market” structure where investors or commercial bank lenders would demand higher rates for lower rated credits, reflecting the increased risk of delayed or inability to repay the bonds/loan from forecasted toll revenue (i.e., a credit risk premium) Basis for the 0.60%Differential between LOC costs for AAA vs BBB issuer = 1.12%Differential between fixed rate bonds costs for AAA vs BBB issuer = 1.22%TA views the 0.60% credit premium as program-compensation for accepting toll revenue/repayment risk at a discounted rate (i.e., below “market”)Proposed Credit Premium - Rationale

9. Funding for the Project will be needed in the next 4 to 8 weeks. The financial markets, including the municipal bond market, has been adversely impacted during the COVID-19 crisis and has delayed all bond issuance.The TA has proposed providing an interim loan from sales tax revenues to fund immediate project costs, prior to eventual bond issuanceInterim loan proposal:Fund Project costs for 3 to 6 months from TA sales tax revenuesRepay interim loan from bond proceeds upon bond issuanceProposed interest rate on interim loan: SMC investment pool earnings rate + 0.60%Proposed Interim Loan from the TA

10. Loan Repayment and Proposed Flow of Funds

11. Discuss and negotiate Bond Loan and Interim Loan terms between TA and SMCEL-JPABegin documentation – Project Loan Repayment Agreement and any related documentsDocuments will be presented to TA and JPA Boards for consideration and approvalTA Bond issuance and Bond Loan executionReturn to SMCEL-JPA and TA Boards in May and June for updates and or actionNext Steps