Title
Refunding of 2002A and 2002B Bonds, Termination of Interest Rate Swap (NB)
Explanation
In 2002, the City issued the 2002A Bonds as variable rate debt in order to refund a prior bond issue. At the same time, the City issued the 2002B Bonds as variable rate debt in order to finance certain of the Utility's capital projects. In anticipation of the issuance of the 2002A Bonds and in order to "lock-in" the debt service savings resulting from the refunding, the City entered into a floating-to-fixed interest rate swap with Merrill Lynch Capital Services, Inc., effectively fixing the rate of interest on the 2002A Bonds at 4.10%.
In conjunction with our Financial Advisor, Public Financial Management, Utility staff continuously monitors opportunities to optimize our debt structure and to refund outstanding debt. Both the 2002A and 2002B Bonds are variable rate debt, and their interest rates are reset to current market levels every 35 days. With long-term interest rates still at historically low levels, we can refinance (refund) these Bonds with new fixed rate debt and lock in these low interest rates for our ratepayers.
Since the interest rate on the 2002B Bonds has not been synthetically fixed, those Bonds can simply be refunded, in effect replacing variable rate debt with fixed rate debt. In the case of the 2002A Bonds, however, the associated interest rate swap must first be terminated. At the time of termination, the City will either pay or receive a termination payment. The payment or receipt will serve to increase or decrease the size of the refunding bond issue and will, in effect, preserve the debt service savings realized through the issuance of the 2002A Bonds.
Utility staff and our Financial Advisor recommend that the issuance of the new refunding bonds be accomplished through a negotiated sale of those bonds. It is recommended that J.P. Morgan Securities Inc. serve as the sole Underwriter for the refunding bonds. JPMorgan has provided value to the Utility in the form of solid recommendations for financing opportunities and familiarity with the issues being refunded. They have been very active in monitoring this opportunity for the Utility, providing frequent market updates.
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 this City Commission authorization.
Recommendations
The City Commission:
1. Authorize the refunding of the Variable Rate Subordinated Utilities System Revenue Bonds, 2002 Series A (the "2002A Bonds") and the Variable Rate Subordinated Utilities System Revenue Bonds, 2002 Series B (the "2002B Bonds") through the issuance of fixed rate senior lien bonds;2. Authorize the termination of a floating-to-fixed interest rate swap entered into with Merrill Lynch Capital Services, Inc. in connection with the issuance of the 2002A Bonds;3. Approve the selection of J.P. Morgan Securities Inc. as sole Underwriter for the refunding bonds referenced in 1 above; and4.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 and 2 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 Impact
The Utility can continue to take advantage of historically low interest rates and replace existing variable rate debt with fixed rate debt. This will help hold down future debt service costs.
Drafter
Prepared by Jennifer L. Hunt, Chief Financial Officer, Utilities
Reviewed by Raymond O. Manasco, Jr., Utilities Attorney
Submitted by Karen S. Johnson, General Manager