Title
Taxable Financing - Partial Cost Mitigation (NB)
Explanation
Based on prior City Commission approval, the City will be issuing fixed rate bonds on November 16, 2005. The interest on a portion of these bonds (the 2005 Series B Bonds) will be taxable. The taxable issuance consists of two components: the conversion of the outstanding Taxable Commercial Paper to a fixed rate and the financing of the first two years of construction costs associated with environmental controls for Deerhaven 2.
After much discussion with our bond and tax counsel, environmental engineering firm, environmental counsel and other professionals, it was concluded that the cost of the environmental controls must be financed with taxable debt. The primary reason for this is due to private use restrictions related to the Lease In - Lease Out (LILO) transaction.
One way of mitigating the additional cost that taxable debt has over tax-exempt debt is through a basis swap. A basis swap is a financial transaction under which two parties exchange periodic payments determined by applying different interest rates or interest rate indices to an agreed-upon notional amount. The basis swap options that we currently are evaluating either have the Utility (1) making payments based upon the BMA Index (an index of tax-exempt floating interest rates) and receiving payments based upon a percentage of LIBOR (a taxable floating interest rate) plus a predetermined spread (premium); or (2) making payments based upon the BMA Index times a selected multiple and receiving payments based upon 100% of LIBOR plus a predetermined spread.
In the case of each of the swap options described above, the optimal solution will depend on various factors, including market conditions existing at the time of execution. Thus, since it is not absolutely clear which type of swap is best for us at this time, we recommend that staff and our Financial Advisor continue to discuss the options and make a decision accordingly.
When GRU staff and our Financial Advisor determine which basis swap would be more beneficial to layer on a traditional fixed-rate bond issue, we recommend that the swap be negotiated with Goldman, Sachs, who has provided us with extensive analysis and expertise related to this matter. In that regard, and in order to obtain the most favorable terms from Goldman, Sachs, it is desirable that the basis swap be designated as a "Qualified Hedging Contract" within the meaning of the Utilities Bond Resolution, so that the City's payment obligations under the basis swap may be secured under the Utilities Bond Resolution.
In connection with the approval of this basis swap, it is requested that the City Commission delegate to the General Manager or his designee the authority: (i) to determine, among other things:(a) the notional amount of the basis swap relative to the portion of the 2005 Series B Bonds to be issued to finance the Deerhaven 2 environmental controls; (b) the term of the swap and the amortization schedule for the swap; and(c)the interest rates or interest rate indices that payments both to and from GRU will be based upon; provided, however, that:(1)the maximum notional amount of the basis swap shall not exceed $45 million;(2) the term of the swap shall end not later than October 1, 2021, the final maturity date of the 2005 Series B Bonds, and the notional amount of the swap shall amortize in proportion to the amortization of the portion of the 2005 Series B Bonds allocable to the Deerhaven 2 environmental controls;(3) payments by GRU shall be based upon a percentage of the BMA Index, and payments to GRU shall be based upon a percentage of LIBOR plus a negotiated spread; and (4)the maximum percentage of the BMA Index payable by GRU under the swap shall be no greater than 150 percent;(ii) to enter into such documents with respect to the swap (including, without limitation, a confirmation with respect thereto under the existing ISDA Master Agreement between the City and Goldman Sachs Mitsui Marine Derivative Products, L.P.) as he determines are necessary or appropriate, subject to the approval of the Office of the City Attorney as to form and legality; and(iii) to execute and deliver or cause to be executed and delivered such documents and to do all such acts and things as may be necessary or desirable in order to designate the basis swap as a Qualified Hedging Contract within the meaning of the Utilities Bond Resolution so that, at such time as such designation shall become effective, (X) the obligation of the City to make scheduled payments under the basis swap shall be and constitute a "Parity Hedging Contract Obligation" within the meaning of the Utilities Bond Resolution and (Y) the obligation of the City to make any termination payments under the basis swap shall be and constitute a "Subordinated Hedging Contract Obligation" within the meaning of the Utilities Bond Resolution.
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 this transaction. Therefore, we recommend that these officials be authorized to take such other actions as may be necessary or desirable to proceed with the transaction in accordance with this City Commission authorization and delegation.
Recommendations
The City Commission: 1) Authorize the entry into a basis swap with Goldman, Sachs if the financing team determines that it is most beneficial to the Utility, in order to lower synthetically the taxable interest rate to be paid on the taxable debt for the Deerhaven 2 Retrofit that will be issued on November 16, 2005, and delegate to the General Manager the authority to determine certain matters, and to execute certain documents, in connection therewith, subject to approval of the Office of the City Attorney as to form and legality; 2)Approve the designation of the basis swap as a "Qualified Hedging Contract" within the meaning of the City's Amended and Restated Utilities System Revenue Bond Resolution (Utilities Bond Resolution), and approve the securing of such swap under the Utilities Bond Resolution; and 3) Authorize the Clerk of the Commission, the General Manager and other Authorized Officers to take such other actions as may be necessary or desirable to proceed with this transaction in accordance with this City Commission authorization.
Fiscal Note
Entering into a basis swap is expected to reduce the overall interest cost of the taxable 2005 Series B Bonds, which would result in savings that would accrue to our ratepayers.
Drafter
Prepared by: Jennifer Hunt, Utilities Chief Financial Officer
Submitted by: Michael L. Kurtz, General Manager