Title
Financing for Construction (B)
This item is related to financing for costs of acquisition and construction.
Explanation
We have a current need to fund for Costs of Acquisition and Construction for up to the next two years. Our recommendation, in consultation with Public Financial Management (PFM), our Financial Advisor, is to issue up to $105 million of taxable debt and up to $100 million of tax-exempt debt to fund a portion of these construction costs through fixed-rate bonds.
For the financing described above, the optimal structure will depend on market conditions existing at the time of execution. Thus, since it is not absolutely clear which type of financing structure is best for us, we recommend that staff and our Financial Advisor continue to monitor the market to select the best alternative at the time of pricing.
GRU staff and our Financial Advisor recommend that any of the transactions referred to above that entail the issuance of bonds be accomplished through a negotiated sale of those bonds. It is recommended that Goldman Sachs serve as Senior Manager. Goldman Sachs has continued to bring significant value to the Utility in the form of solid recommendations for financing opportunities, familiarity with our bond resolution, innovative work concerning future debt structures, and expertise in rating agency criteria and considerations. In addition, upon the advice of our Financial Advisor, we can appoint additional Co-Managers as appropriate, if their addition will enhance the distribution of the bonds.
Since interest rates were near historical lows late last year, with the assistance PFM, we monitored various options available to capture the benefit of the then favorable environment, even though we did not need the construction funds at that time. We reviewed various options that allowed us to obtain some cost certainty, and potentially generate significant savings by financing future bond needs at then current market rates. The swap options that we evaluated had the Utility either (1) paying a fixed swap rate and receiving BMA (a tax-exempt floating rate now referred to as SIFMA); or (2) paying a fixed swap rate and receiving a percentage of LIBOR (a taxable floating rate). Given the market conditions at the time, we entered into two BMA interest rate swaps in order to hedge our future borrowing costs.
The swap agreements were structured in a way that allows the Utility to terminate the swaps and issue fixed-rate bonds in a separate transaction. If interest rates increase by the termination date, the swap counterparty will owe the Utility a termination payment. If interest rates decrease, the reverse will be true. With either scenario, the effective borrowing cost of the 2008 bonds was established when the swaps were executed. The synthetic fixed rate swaps permitted us to achieve a favorable fixed rate of interest of 4.222% for $90 million of our tax-exempt issuance. Upon the advice of the Utility’s Financial Advisor, Utility staff entered into two interest rate swap transactions on October 23, 2006. The swaps were competitively bid, with JPMorgan Chase, N.A. and Bear Stearns Financial Products Inc., as the winning bidders. We are requesting authorization to terminate the swaps, effectively locking the low fixed rate, and issuing fixed rate bonds.
The Clerk of the Commission, the General Manager or other Authorized Officers of the City (as defined in the Utilities Bond Resolution) may be required to take certain other actions and hire certain other professionals to proceed with these transactions. Therefore, we recommend that these officials be authorized to take such other actions as may be necessary or desirable to proceed with the transactions in accordance with City Commission authorization and delegation.
Recommendations
The City Commission: 1) Authorize the financing of up to $205 million of new money for payment of Costs of Acquisition and Construction (capital projects) through the issuance of fixed-rate bonds; 2) Authorize the termination of the JPMorgan Chase, N.A., $31,500,000 swap whose effective date is February 1, 2008; 3) Authorize the termination of the Bear Stearns Financial Products Inc., $58,500,000 swap whose effective date is February 1, 2008; 4)Approve the selection of Goldman Sachs as Senior Manager for the bonds referenced in 1 above and authorize the appointment of additional Co-Managers if, upon the advice of Public Financial Management (PFM), our Financial Advisor, doing so would enhance the distribution of the bonds; 5) Authorize the Clerk of the Commission, the General Manager and other Authorized Officers to execute such documents as may be necessary to proceed with the transactions authorized in 1-4 above, subject to approval of the Office of the City Attorney as to form and legality, and to take such other actions as may be necessary or advisable to proceed with these transactions in accordance with this City Commission authorization.
Fiscal Note
Issuing new money debt at historically low rates will help manage future debt service costs.
Drafter
Prepared by Jennifer L. Hunt, Utilities Chief Financial Officer
Reviewed by Raymond O. Manasco, Jr., Utilities Attorney
Submitted by Karen S. Johnson, General Manager