Title
Financing for Construction, refunding of 96As, and refunding of commercial paper (NB)
Explanation
In 1996, the City issued its Utilities System Revenue Bonds, Series 1996A to refund previously outstanding Utilities System Revenue Bonds and to finance certain of the Utility's capital projects. As a result, the portion of the 96A Bonds that financed capital projects is advance refundable (i.e., we could issue refunding debt today), but the portion that refunded previously outstanding Bonds is not advance refundable (i.e., we are not able to issue refunding debt until 90 days prior to the first call date for the 96A Bonds, which is October 1, 2006). Since interest rates are lower now than in 1996 when the 96A Bonds were issued, we can refinance (refund) these Bonds with new debt and save substantial monies for our ratepayers over time. Thus, for the advance refundable portion of these Bonds, as soon as we are ready to proceed with the financing, we could issue either fixed-rate bonds or variable-rate bonds that are converted synthetically to a fixed rate through the use of a "floating-to-fixed" interest rate swap.
Since interest rates are at near historical lows, with the assistance of our Financial Advisor, Morgan Stanley, we are monitoring various options to refund this debt. If we knew that interest rates were going to stay the same or lower, we would wait until July 2006 to issue fixed-rate bonds to refund the debt. However, future interest rates are unknown, so we could take advantage of significant known savings now, through the use of a "synthetic forward refunding" structure whereby we would enter into a "forward-starting" interest rate swap that "locks-in" today's low rates but does not become effective until a future date on which we would issue variable-rate bonds. While there is a small premium for locking in rates now with a forward-starting interest rate swap, the known benefits may more than offset the potential costs of rates incre...
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