FAQ

New bond issues are sold in the primary market.  In a new issue, all of the terms are set, including the initial price and interest rates, and the bonds are sold to investors, with the issuer receiving the proceeds. Primary market issues are affected through one of two methods:

• Competitive sale:  A competitive sale of bonds operates like an auction.  Broker-dealers acting as underwriters or syndicates of underwriters bid against each other by submitting to the issuer on a given day at a given time a sealed bid to buy the issuer’s bonds and then reoffer them to investors.  The underwriter or syndicate of underwriters that submit the lowest interest cost for the bonds are awarded the competitive bid. 
• Negotiated sale:  In a negotiated sale, the terms and price of the bonds are negotiated by the issuer through an agreement with an underwriter or syndicate of underwriters selected in advance of the sale.

A secondary market transaction does not involve the issuer, but is a transaction between two investors – a buyer and a seller.  Secondary market transactions involve a brokerage firm which acts either as an intermediary between the buyer and seller, or as a buyer or seller itself.  Market conditions, such as prevailing interest rates, supply and demand, and credit quality, among other variables, determine the price, which may differ from the par value or original price on the bond.

• Step 1 – Have or establish a brokerage account

  • You must have an account with one of the brokerage firms participating in the bond or note sale.  Bonds and notes cannot be purchased directly from the City.  If you do not have an account at one of the participating firms, you may open one and purchase bonds or notes during the early order period.  (If you have a brokerage account, go to Step 2.)
  • Investors are encouraged to begin the new account process well in advance of the sale.  Depending on the brokerage, internal new account procedures may take some time to process.
  • Each firm has its own requirements for opening an account.  The City does not endorse any particular brokerage firm.  Additionally, the City does not guarantee that any one of these firms will open an account for an investor.

• Step 2 - Learn about the bonds or notes

  • Bonds or notes can only be offered through an Official Statement (OS).  A Preliminary Official Statement (POS) is the pre-sale offering document for the bonds that is prepared for a particular transaction or bond sale.  The POS discloses security features, credit ratings, economic, financial, and legal information as well information on the types of projects being financed and other information you may find important to help you make an informed investment decision.  A POS contains relevant information except for the information determined on the pricing date of the bond sale (interest rates, maturity amounts, etc.).
  • An OS contains pricing data in addition to all of the information contained in the POS.  The OS is typically not finalized until after the results of the bond sale or “pricing.”  As a result, the OS discloses the results of the bond sale such as interest rates, and maturity structures.  Before purchasing the bonds, you should conduct your own due diligence by reading the POS or OS for that bond issue.

• Step 3 - Place your order to buy bonds

  • Contact the broker with whom you have an account, either online or by phone, to get more information about how to buy bonds or notes during the early order period.

A retail order period is a special, designated order period in a negotiated sale during which only retail and professional retail investors may place orders for bonds.  The retail order period allows retail investors to place orders before institutional investors.  Occasionally, both retail and institutional investors place orders at the same time with retail investors receiving priority.

“Retail investors” are typically defined to include individuals as well as bank trust departments, investment advisors and money managers acting on behalf of individuals. Orders from residents are typically given priority over residents from other locations. Individuals may place orders directly with a broker, or they may have a bank trust department, investment advisor, or money manager place the order on their behalf.

• Interest Rate - The interest rate is a percentage of the principal (the amount borrowed), payable for the use of the borrowed money.  Interest on bonds with fixed interest rates typically is compounded and paid semiannually.  Interest on bonds with variable interest rates is payable at a rate that changes periodically based on specified criteria and is typically paid monthly.
• Price - The price is the amount investors are willing to pay based on certain variables, including current market yields, supply and demand, credit quality, maturity, and tax status.  Keep in mind that prices and yields move in opposite directions.  When market yields increase, the value of a bond decreases, and vice versa.
• Yield - The yield generally refers to the return an investor earns on the bond, taking into account the price the investor paid for the bond, which may differ from the face value or par amount of the bond.  The yield is calculated in two ways: based on the market price and interest rate; or by taking into account a number of other factors, including maturity date, optional redemption date(s), and the time between interest payments.  Investors should consult their brokers or other financial advisors to learn more about yield and the different ways to measure it.
• Maturity - Maturity is the date when the principal on the bond is scheduled to be repaid to the investor.  The City generally sells bonds that have maturities between 1 and 30 years.  In general, the further out the maturity date, the higher the  yield on the bond.
• Redemption Provisions - Some bonds contain provisions that allow the City to redeem, or “call,” all or a portion of the bonds, at specific prices, prior to their maturity dates.  Bonds frequently are called when interest rates are lower than when the City originally sold the bonds.  Bonds with certain redemption provisions usually offer investors higher yields to compensate for the risk that the bonds might be called early.  When the City calls a bond, it pays the holder the principal amount and any interest earned since the last interest payment.  However, the holder does not typically receive the interest that would have been earned if the bond had been allowed to reach its maturity date.  Holders of bonds that have been called for redemption are notified of upcoming payment. 
• Creditworthiness - Most municipal bonds are rated by one or more of the three major rating agencies:  Fitch Ratings, Moody’s Investors Service, and S & P Global Ratings.  A credit rating is an independent assessment of the creditworthiness of the bonds. An explanation of the significance and status of credit ratings may be obtained from the rating agencies furnishing such rating.

• Credit Risk - Risk that the issuer is unable to pay scheduled principal and interest on a timely basis.  To evaluate the credit quality of an issuer, examine its credit ratings and review the Preliminary Official Statement of the offering, which contains detailed financial information of the issuer.
• Interest Rate Risk - When interest rates decrease, bond and note prices increase, and when interest rates increase, bond and note prices decrease.  Interest rate risk is the risk that changes in interest rates may reduce (or increase) the market price of a security.  For investors who own a bond or note until its maturity, interest rate risk is not a concern.

Detail regarding the rating scales for Moody's and S&P can be found at the following websites:

1. S&P - https://www.standardandpoors.com/en_EU/web/guest/article/-/view/sourceId/504352
2. Moody's - https://www.moodys.com/sites/products/ProductAttachments/AP075378_1_1408_KI.pdf

The Comprehensive Annual Financial Report (CAFR) calculates debt service coverage (DSC) on a generally accepted accounting basis (GAAP). However, the City of Hamilton, Ohio transfers funds from established rate stabilization funds to the operating fund to calculate DSC and fixed obligation charge coverage (FOCC), as permitted by the City's bond indentures. Furthermore, the City's auditors and bond council have previously approved this indenture calculation basis (i.e., non-GAAP) to calculate these financial metrics.

Transfers between funds are required to be budgeted and approved by City Council. The funds are moved from Rate Stabilization to Operating for DSC support, and then finally back to Rate Stabilization. The City's bond indentures define revenue as including transfers from rate stabilization, which are not reflected as revenue on a GAAP basis.

Rate Stabilizations funds are established for the Electric, Gas, Water and Wastewater systems per the indentures for these systems. This fund serves to provide debt service coverage support in the event current year revenues are lower than anticipated. The rate stabilization reserve fund always maintains a minimum balance (e.g., $4MM for the Electric System) that is required per indenture. Per codified ordinance, if this fund is reduced below the indenture required minimum, customer rates are increased by a percentage that will recover the revenue necessary to replenish the fund.

Per codified ordinance, the Power Cost Adjustment (PCA) and Gas Cost Recovery (GCR) rider calculation shall be based on forward looking projections of power supply related costs and customer sales (i.e., kWh or Ccf) for the period. The calculation shall be performed at six-month intervals or more frequently if required, to accomplish recovery of power supply related costs in a timely manner. The calculation includes a provision to reconcile over or under collection of costs from previous periods based on actual costs versus projected costs for the period. These riders are administratively set and adjustment does not require council approval.