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 accor...
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