title
AUTHORIZATION TO PROCEED WITH REFINANCING WATER BONDS
recommended action
RECOMMENDATION
It is recommended that the City Council adopt a motion to:
1. Authorize the City Manager to proceed with activities related to refinancing certain water bonds, subject to subsequent approval by the City Council of the final refinancing documents,
2. Approve findings for exemptions from competitive bidding requirements to appoint an underwriter for the refinancing transaction, and
3. Authorize the City Manager to take appropriate and necessary actions to carry out the purpose and intent of the motion.
body
Summary
Interest rates are at historic lows and the City can take advantage of these rates by refinancing two of the City’s outstanding water bonds:
1. California State Wide Communities Development Authority Water and Wastewater Revenue Bonds, Series 2002A
2. Stockton Public Financing Authority Water Revenue Bonds, Series 2005A
Estimated savings of $4.6 million for the City’s water enterprise fund can be achieved through this refinancing, which will probably take place in early 2017.
A bond team consisting of the Municipal Advisor, Underwriter and Bond/Disclosure Counsel is necessary. The current contract for the City’s Municipal Advisor will be extended, with an addition of $15,000, while the current bond counsel pool and expired underwriter pool will be utilized to establish the bond team (Attachment A). It is recommended that Council adopt findings to allow the appointment of an underwriter that was part of the expired pool, which was competitively bid, to be appointed to the bond team for this transaction. Staff will return to Council with the proposed refinancing documents (Official Statement, savings analysis, bond documents, etc.) to obtain final approval prior to taking the transaction to the financial market.
The cost for the Municipal Advisor can be reimbursed from the costs of issuance of the refinancing. The costs of the Underwriter and Bond/Disclosure Counsel are contingent on the transaction occurring and will be included in the costs of issuance. If the City Council does not approve the issuance of bonds or if the market changes such that the refinancing is no longer financially feasible, there will be no charge to the City for work done contingently. There are no net financial cost impacts on the City’s General Fund or Water enterprise fund.
This report to Council and the public is intended to provide preliminary information regarding the proposed bond refinancing while establishing the appropriate bond team for the transaction.
DISCUSSION
Background
The Administrative Services Division continues to evaluate the current debt portfolio to identify opportunities for savings. This effort, in light of the current low interest rate environment, resulted in this proposal to refinance two of the City’s outstanding water debt issues.
The proposed refinancing includes:
1. California State Wide Communities Development Authority Water and Wastewater Revenue Bonds, Series 2002A
2. Stockton Public Financing Authority Water Revenue Bonds, Series 2005A
Present Situation
Bonds have been identified for potential refinancing due to the significant savings that can be captured at this time due to historically low interest rates. It is recommended that the City move to refinance these bonds to capture these savings.
With the proposed refinancing, the debt service on these bonds is estimated to decrease by almost $5.8 million over the life of the bonds and $315,000 annually on average. The total Net Present Value of these savings are estimated to be $4.6 million; or approximately 15.45% of the bonds being refinanced.
|
Series |
Outstanding Par Amount |
Refunding Par Amount |
Total Savings |
Net Present Value Savings |
Net Present Value Savings % |
|
2002A |
$ 5,755,000 |
$ 5,385,000 |
$ 470,570 |
$ 439,683 |
7.64% |
|
2005A |
$ 24,230,000 |
$ 18,725,000 |
$ 5,377,968 |
$ 4,192,418 |
17.30% |
|
Total |
$ 29,985,000 |
$ 24,110,000 |
$ 5,848,538 |
$ 4,632,101 |
15.45% |
To initiate the proposed refinancing, a bond team consisting of the Municipal Advisor, Underwriter and Bond/Disclosure Counsel is necessary. The current bond counsel and expired underwriter pools will be utilized to establish the bond team. It is recommended that Council adopt findings to allow the appointment of an underwriter that was part of the expired pool, which was competitively bid, to be appointed to the bond team for this transaction. Bond/Disclosure counsel can be appointed from the current pool.
The City will extend the current Municipal Advisor contract with Del Rio Advisors, LLC to June 30, 2017, and add $15,000 to the contract for these additional financial services. Del Rio Advisors, LLC assisted the City throughout the bankruptcy proceedings and on the refinancing of various bond transactions.
The other members of the bond team, the Underwriter, Bond Counsel, and Disclosure Counsel, will work on a contingent basis. The Bond Counsel being recommended, Orrick, Herrington & Sutcliffe (“Orrick”) is a current member of the City’s pool. The Disclosure Counsel being recommended, Schiff-Hardin LLP acquired Lofton and Jennings and is a successor firm to the former firm in the City’s pool. In addition, the recommended Underwriter, Citigroup, has experience with the City in such financial transactions and has previously been part of the City’s underwriter pool.
In accordance with the City’s debt and investment policies, staff will return to Council with the proposed refinancing documents, seeking formal approval to bring the final transaction to the market.
Findings
Stockton Municipal Code section 3.68.070 provides for an exception to the competitive bidding requirement for contracts in cases where the City Council has approved findings that support and justify exceptions to the competitive bidding process. It is recommended that Council adopt findings to allow an underwriter who was part of the expired pool that was competitively bid, to be appointed to the bond team for this transaction. The findings are as follows:
1. Current market conditions offer the potential of significant savings through the refinancing of debt, and warrant the appointment of an underwriter immediately to capture this opportunity.
2. The underwriter pool, which expired in August, 2015, was competitively bid and Citigroup was part of the pool. Citigroup is very experienced with bond transactions for water and wastewater systems and has previously provided such services to the City.
3. Although the City is in the process of revising the current debt policy and will be preparing new Requests for Qualifications to establish new pools for Municipal Advisors and Underwriters, market conditions warrant moving ahead on the proposed refinancing now to take advantage of current interest rates.
FINANCIAL SUMMARY
All costs of these preliminary refinancing activities by the bond team, which are expected to be made part of the final bond refinancing, will be charged to the Water Debt Service fund.
The cost for the Municipal Advisor can be reimbursed through the costs of issuance and the costs of the Underwriter and Bond/Disclosure Counsel will be made part of the refunded bonds provided the transactions are completed. Other non-contingent costs such as rating fees are expected to be incurred with the final refinancing activities and made part of the bond refinancing. For this transaction, the estimated cost of issuance is $250,000.
The $4.6 million Net Present Value savings estimated to be achieved from the refinancing are provided as reference only and are subject to numerous factors such as market conditions, the rating the transaction receives, and if the transaction is insured. Staff will return to Council with the final refinancing documents to obtain formal approval of the refinancing and permission to take the transaction to the market.
There is no impact to the City’s General fund or to any other unrestricted fund as a result of taking the recommended action.
Attachment A - Contract Change Order for Debt Administration Municipal Advisor