Title
Financing Item Related to Future Debt Issuance (NB)
The Utility will need to issue debt in the future to finance a portion of the capital improvement program. Long-term interest rates are currently close to their historic lows. There is an opportunity to enter into an interest rate swap to hedge future bond rates. The Utility staff and our Financial Advisor recommend that any of the interest rate swap transactions be accomplished through a competitive selection process. Capturing the current favorable interest rate environment will allow the Utility to issue future new money debt at low rates, which will help hold down future debt service costs.
Explanation
To support the Utility's capital improvement program, the Utility will need to issue debt in the future to finance a portion of these planned expenditures. Although long-term interest rates are currently close to their historic lows, it is too far in advance for the Utility to sell bonds for these future capital needs. There are however, financing alternatives that enable the Utility to capture current market conditions for a financing that would not occur until one or two years in the future. With the assistance of PFM, we are monitoring various options to capture the benefit of this favorable interest rate environment, even though we do not need the construction funds at this time. These options will allow us to obtain a high degree of certainty for a portion of our future debt service costs, and potentially generate significant savings, by financing future bond needs at current market rates. The most efficient method of locking in the current market is to enter into an interest rate swap to hedge future bond rates. In most markets it can be quite costly to lock-in future rates. This cost comes in the form of a "forward premium". The forward premium is the difference between current market rates and the available rates for a future (or forward) financing that can be locked-in today. ...
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