Title
Financing for Construction (B)
Explanation
In November 2007, the City Commission, (1) authorized the financing of up to $205 million of new money for payment of Costs of Acquisition and Construction (capital projects) through the issuance of fixed-rate bonds; and (2) approved the selection of Goldman Sachs as Senior Manager for the bonds and authorized the appointment of additional Co-Managers if doing so would enhance the distribution of the bonds. The $205 million authorized consisted of $100 million in tax-exempt Bonds and $105 million in taxable Bonds to fund construction expenditures.
GRU staff and our Financial Advisor now recommend that we also obtain authorization to issue the tax-exempt Bonds on a variable-rate basis.
In October 2006, GRU executed two separate interest rate swaps to hedge its borrowing cost on a portion of the $100 million of tax-exempt Bonds expected to be issued this year. At the time the swaps were entered into, it was expected that the swaps would not be terminated upon the issuance of the tax-exempt Bonds, and that those Bonds would be issued as variable rate Bonds. The swaps were executed at a rate that provides an all-in fixed rate of less than 4.50% on the hedged portion of the financing. Under the swaps, GRU will pay a fixed rate of 4.222% on the swaps, and receive a floating rate linked to the SIFMA short-term index. The actual cost of GRU floating-rate debt historically has been almost identical to the SIFMA index. Therefore, the net effect of issuing variable-rate debt and leaving the swaps in place would be a net fixed-rate obligation. GRU would receive a swap payment that is virtually identical to its variable-rate interest cost, and the 4.222% fixed swap payment would create "synthetic" fixed rate debt.
However, the swaps were structured to allow GRU the option to terminate the swaps and issue fixed-rate debt. Any gain or loss on the swap termination was expected to offset the effect of changes...
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