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REFUNDING OF SUCCESSOR AGENCY TO THE FORMER REDEVELOPMENT AGENCY OF THE CITY OF STOCKTON, CITY OF STOCKTON ENFORCEABLE OBLIGATIONS THROUGH THE ISSUANCE OF ONE OR MORE SERIES (NOT TO EXCEED $130,000,000 AGGREGATE PAR AMOUNT) OF SUCCESSOR AGENCY 2016 TAX ALLOCATION REFUNDING BONDS
recommended action
RECOMMENDATION
Adopt a resolution of the Stockton Successor Agency Oversight Board approving the Successor Agency to the former Redevelopment Agency of the City of Stockton’s (“Successor Agency”) authorizing the taking of all necessary actions and approving all documents in connection with the refunding of enforceable obligations currently payable from tax increment revenue of the Successor Agency, as set forth below, authorizing the issuance and sale of Successor Agency’s 2016 Tax Allocation Refunding Bonds (the 2016 “Bonds”) in one or more series not to exceed $130,000,000 (current issuance estimate of $113,085,000), including the approval of the form of an indenture of trust, escrow agreement, bond purchase contract, certain refunding agreements, the modification of adopted budgets to accommodate the refunding, and authorizing certain other actions in connection therewith.
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SUMMARY
The primary goal of the refinancing is to generate significant savings. The issuance of new bonds will not move forward unless savings of at least 3.0 percent, which is a generally accepted threshold for proceeding with a refunding transaction, can be achieved. The final savings amount will depend upon the rating that the new bonds receive and market conditions at the time of sale. In addition to this transaction’s significant financial benefits, the City can also completely eliminate the General Fund obligations relating to both the 2003 COPs and the 2004 Arena Bonds and can terminate the agreements entered into with Ambac and NPFG in its Chapter 9 bankruptcy.
The City of Stockton (“the City”), the former Redevelopment Agency of the City of Stockton (the “Former Agency”), and the Stockton Public Financing Authority, as applicable, issued the following bonds to eliminate blight and to promote development of low income housing stock in the City. Approval of the above resolution authorizes refunding certain enforceable obligations of the Successor Agency relating to the following series of securities, resulting in the prepayment or redemption of such securities:
• Certificates of Participation (Redevelopment Housing Projects) 2003A (the “2003A COPs”) & Certificates of Participation (Redevelopment Housing Projects) Taxable Series 2003B (the “2003B COPs” and, collectively, the 2003 COPs): As described in an Official Statement dated June 17, 2003, the 2003 COPs were executed and delivered in the original principal amounts of $1,160,000 (2003A) and $12,140,000 (2003B). The net proceeds of the 2003 COPs were used to finance the construction of capital improvements to provide affordable housing in the City. The 2003A COPs and the 2003B COPs are currently outstanding in the aggregate principal amount of $985,000 and $10,515,000, respectively. The 2003 COPs as initially structured are payable from certain lease payments to be made by the City’s General Fund under a lease agreement. The Successor Agency is obligated under a reimbursement agreement to reimburse the City, from certain housing set-aside tax increment revenues, for such lease payments. The 2003 COPs were the subject of negotiations during the City’s bankruptcy case, and the City entered into certain agreements with Ambac in connection with the effectiveness of the City’s Plan of Adjustment. The City expects to terminate these agreements in connection with the prepayment of the 2003 COPs.
• 2004 Arena Bonds and Amended and Restated Pledge Agreement:
As described in an Official Statement dated March 18, 2004, the Former Agency issued its Revenue Bonds, Series 2004 (Stockton Events Center - Arena Project) in the original aggregate principal amount of $47,000,000 (the “2004 Arena Bonds”) to finance a portion of the arena at the Stockton Events Center. The 2004 Arena Bonds are payable from certain lease payments to be made from the City’s General fund under a lease agreement, and, pursuant to a pledge agreement, the Successor Agency, as successor in interest to the Former Agency, was obligated to make certain payments, the receipt of which acted as an offset to the City’s lease payment obligations. The 2004 Arena Bonds are currently outstanding in the aggregate principal amount of $43,360,000. During the City’s bankruptcy case, the City negotiated certain agreements with NPFG, the municipal bond insurer that insures the payment of debt service on the 2004 Arena Bonds. Under these agreements NPFG and the trustee for the 2004 Arena Bonds agreed to forbear from enforcing certain remedies against the City under the bond documents and adjusted the lease repayment and pledge payment schedules. The City expects to terminate these agreements in connection with the proposed refunding of the 2004 Arena Bonds.
• 2006A (Tax-Exempt) Tax Allocation Bonds & 2006C (Taxable) Tax Allocation Bonds: As described in an Official Statement dated June 21, 2006, the Stockton Public Financing Authority issued its Revenue Bonds (Redevelopment Projects), 2006 Series A in an original aggregate par amount of $75,755,000 (the “2006A Bonds”), its Taxable Revenue Bonds (Redevelopment Projects), 2006 Series B in an original aggregate par amount of $8,445,000 (the “2006B Bonds”), and its Taxable Revenue Bonds, (Housing Projects) 2006 Series C in an original aggregate par amount of $25,985,000 (the “2006C Bonds”). Proceeds of the 2006A Bonds and the 2006B Bonds were used to finance certain redevelopment projects within or of benefit to the Merged Midtown, North Stockton and South Stockton Merged Redevelopment Projects. Proceeds of the 2006C Bonds were used to fund a loan to finance certain low and moderate-income housing projects throughout the City of Stockton. The 2006A Bonds and 2006C Bonds are outstanding in the aggregate principal amount of $49,160,000 and $22,285,000, respectively. The 2006B Bonds matured on September 1, 2013, and were paid in full.
• Collectively, the Successor Agency’s obligations relating to the 2003 COPs, the 2004 Arena Bonds and the 2006A Bonds and 2006C Bonds are, in this report, referred to as the “Prior Obligations.”
• The Successor Agency assumed responsibility for all debt management with respect to the former Redevelopment Agency in 2012. Under State law (including the Fiscal Year 2012-13 State of California budget bill (Assembly Bill 1484) and California Health and Safety Code Section 34177.5(a)), the Successor Agency may refund outstanding bonds and other indebtedness of the Former Agency with approval from the Oversight Board and the California Department of Finance (“DoF”), subject to certain conditions, including that the total interest cost to maturity plus the principal amount of the refunding bonds does not exceed that of the bonds or other indebtedness to be refunded. In other words, there must be debt service savings created by the refinancing. The City and Successor Agency have commissioned a Refunding Plan and Savings Analysis be prepared by the Municipal Advisor, which is included as an attachment to this report. The Successor Agency expects to seek Oversight Board approval on June 29 and, subsequent approval from the DoF.
DISCUSSION
Background
The City of Stockton (“the City”), the former Redevelopment Agency of the City of Stockton, and the Stockton Public Financing Authority previously issued the following bonds which are now recommended to be refinanced.
• 2003A (Tax-Exempt) Certificates of Participation & 2003B (Taxable) Certificates of Participation
• 2004 Arena Bonds and Amended and Restated Pledge Agreement
• 2006A (Tax-Exempt) Tax Allocation Bonds & 2006C (Taxable) Tax Allocation
Present Situation
The proposed Tax Allocation Refunding Bonds, Series 2016A & 2016B (collectively, the “2016 Bonds”) will be structured as a tax-exempt and a federally taxable series, respectively. The 2016A Tax-Exempt Tax Allocation Bonds (the “2016A Bonds”), with an estimated par of $79.1 million, will refund enforceable obligations of the Successor Agency relating to the 2003A COPs, the 2004 Arena Bonds. The 2016B Taxable Tax Allocation Bonds (the “2016B Bonds”), with an estimated par of $32.1 million, will refund enforceable obligations of the Successor Agency relating to the 2003B COPs and the 2006C Bonds. The aggregate par amount of the 2016 Bonds is estimated to be approximately $111.2 million. The current estimate of the final maturity of the 2016A Bonds is September 1, 2037, which is the same final maturity as the 2006A Bonds (the 2003A COPs mature in 2033 and the 2004 Bonds mature in 2036). The 2016B Taxable Bonds are currently estimated to have an earlier final maturity, September 1, 2025, than that of the series they are refunding (the 2003B COPs and the 2006C Bonds).
The final interest rates and structure will be determined when the 2016 Bonds are priced and sold. The current target for the pricing date is September 20, subject to market conditions. Assuming pricing on that date, the bond closing could be expected to occur on or around October 4 and the Prior Obligations could be expected to be redeemed in November 2016. Although the 2016 Bonds have not yet been rated, the 2003A COPs, 2003B COPs, the 2006A Bonds and the 2006C Bonds currently carry underlying ratings from Standard & Poor’s (“S&P”) of “B-”, “B-”, “BB” and “BBB-”, respectively. The 2004 Bonds are not currently rated by S&P. It is anticipated that the 2016 Bonds will maintain at least the same credit rating as the 2006C Bonds.
The City and the Successor Agency have directed the Municipal Advisor, Del Rio Advisors, LLC, to prepare an analysis of the potential savings that will accrue to the Successor Agency and to the applicable taxing entities as a result of the refinancing (the “Refunding Plan and Savings Analysis”) (Attachment A). That analysis demonstrates there are significant potential savings available to the Successor Agency and to the applicable taxing entities in compliance with the savings parameters as set forth by approval of the proposed resolution and the issuance of the 2016 Bonds, all as evidenced by the Refunding Plan and Savings Analysis on file with the Successor Agency.
The primary goal of the refinancing is to generate significant savings to the various participating taxing entities. The issuance of the 2016 Bonds will not move forward unless savings of at least 3.0 percent, which is a generally accepted threshold for proceeding with a refunding transaction, can be achieved. In addition to this transaction’s significant financial benefits, the City can also completely eliminate the General Fund obligations relating to both the 2003 COPs and the 2004 Arena Bonds and can terminate the agreements entered into with Ambac and NPFG in its Chapter 9 bankruptcy.
Should this resolution be approved, the approved resolution and all of the attached documents will be forwarded to the DoF for its review and approval. DoF has five (5) days to respond that it will review the request and an additional sixty (60) days to either approve or deny the refinancing. During the period of DoF review, the financing team will finalize the Fiscal Consultant’s Report, the Preliminary Official Statement and any other documents required for the issuance and bring these back to the Successor Agency for review.
Documents to be Executed
Approval of the Resolution will authorize the execution of the following documents (Attachment B):
• Indenture of Trust - This document contains the terms of the 2016 Bonds, including payment and redemption provisions, definition and pledge of revenues to pay the 2016 Bonds, Rights and Duties of the Trustee, remedies upon a default in the payment of the 2016 Bonds, and final discharge of the 2016 Bonds and other related matters.
• Escrow Agreement - This document provides for the investment and application of the proceeds of the 2016 Bonds to prepay or redeem the Prior Obligations.
• Refunding Agreements - These documents authorize the termination of the agreements entered into with Ambac and NPFG in connection with the City’s chapter 9 bankruptcy case.
• Bond Purchase Contract - This document provides for the sale of the Bonds by the Successor Agency to the underwriter, and includes representation and warranties, and preconditions for the closing of the transaction including the delivery of various documents and legal opinions.
FINANCIAL SUMMARY
Based on market conditions as of May 5, 2016, the refinancing is estimated to result in net present value savings of approximately $16.2 million, or 13.2 percent (see table below). However, the final savings amount will depend upon the rating that the 2016 Bonds receive and market conditions at the time of sale. The estimated annual savings will become available after the payment of enforceable obligations as approved on the Recognized Obligation Payment Schedule and will be distributed among various taxing entities such as the State of California, San Joaquin County, and the City. A complete listing of the anticipated bond numbers is presented in Attachment C.
Summary of Savings Results for 2016 Bonds*
|
2016 Bonds |
|
|
Net Present Value Savings |
$16.2 million |
|
Net Present Value Savings (% of Par Value Refunded) |
13.17% |
|
Avg. Annual Savings |
$1.2 million |
|
Total Debt Service Savings |
$25.5 million |
*Projected savings are based on current interest rates assuming the 2016 Bonds have a “BBB” underlying rating and overall level debt service on the bonds issued for the refinancing. These rates are subject to change based on market conditions at the time of sale.
The 2016 Bonds would not be an obligation of the City, but rather the Successor Agency. Debt service on the 2016 Bonds will be supported by tax increment revenues collected by the County and deposited into the Successor Agency’s Redevelopment Property Tax Trust Fund.
Due to preparing projections and other pertinent information in the Fiscal Consultant’s Report, the fees and expenses of Fraser & Associates, acting as Fiscal Consultant, cannot be contingent on the sale of the 2016 Bonds. The fee for Fiscal Consultant is currently estimated at $30,000 and can be recovered through the costs of issuance upon successful closing and, should the refinancing not close, these costs can be recovered via allowable administrative expenses.
Fees for a bond rating are required for a review of the Successor Agency credit by Standard & Poor’s, and possibly by Fitch Ratings. Current fee estimates are $65,000 for Standard & Poor’s, and $60,000 for Fitch Ratings. A higher rating will yield a lower interest rate. Additionally, it may be economically beneficial to obtain bond insurance for the refunding bonds, which would be expected to result in a higher (insured) rating being issued for the 2016 Bonds. The rating fee will not be incurred until later in the process when the team is reasonably confident that the transaction will obtain final approvals. The fees for a bond rating can be recovered through the costs of issuance upon successful closing and, should the refinancing not close, these costs can be recovered via allowable administrative expenses.
The fees of Del Rio Advisors, LLC acting as Municipal Advisor to the City and Successor Agency are payable under an hourly contract and are currently estimated at $35,000. The fees of the Municipal Advisor can be recovered through the costs of issuance upon successful closing and, should the refinancing not close, can be recovered via allowable administrative expenses.
The remainder of the financing team will work on a contingent basis with fees payable only from a successful sale and closing of the 2016 Bonds.
Attachment A - Savings Analysis (PowerPoint presentation for DOF)
Attachment B - Indenture of Trust, Bond Purchase Contract, and Refunding Escrow Agreement
Attachment C - Complete Set of Bond Numbers