Loading...
Agenda 04/27/2010 Item #10B Agenda Item No.1 OB April 27, 2010 Page 1 of 7 EXECUTIVE SUMMARY Recommendation to refinance $59,893,000 in outstanding Commercial Paper loans through the issuance of traditional tax exempt fixed rate bonds. OBJECTIVE: To achieve certainty with respect to the County's debt structure and to allow for more accurate budgeting practices by eliminating variable interest rate exposure and the lump sum commercial paper loan payment due in December 2012 (fiscal year 2013). The re-financing will also allow the County to take advantage of historically low fixed interest rates. BACKGROUND: The Florida Local Government Finance Commission (FLGFC) pooled commercial paper loan program is designed to provide short to medium term infrastructure and capital construction loans with limited administrative lead time, low issuance costs and flexible repayment terms at the available rate of interest. Collier County entered the commercial paper market in fiscal year 1991 with an initial road construction loan through the FLGFC for $13,750,000. Since this initial loan, the County has borrowed over $275,000,000 from the program. The average historical total interest cost since program inception is 3.36%. Currently the County has twelve (12) outstanding loans under the program which were incurred for recent infrastructure, public safety equipment and governmental building projects. These loans represent almost 8% of the County's total debt portfolio outstanding at September 30,2009. In practice, the County has issued commercial paper loans as an interim financing vehicle and refinanced the loans with longer term debt in an effort to match the useful life of the asset financed consistent with the Collier County Debt Management Policy. This program has served the County well over the years and will not be renewed past December 2012 (fiscal year 2013) with the current letter of credit provider. Effects from the financial crisis which began in the Fall of 2008 effectively shut the current program down. The existing letter of credit provider has indicated that they will not allow new loans under the program. There is a possibility of the establishment of a new loan program with a different letter of credit provider but there is quite a bit of uncertainty with respect to any such program 'at this time. , Faced with the potential for repayment of all or a portion of the current $59.9 million dollar balance during fiscal year 2013, members of the County's Finance Committee along with our curreht financial advisor of record and bond counsel began discussing various refinancing scenarios knowing that the outstanding commercial paper loans must be re- paid or refinanced on or prior to December 2012. CONSIDERATIONS: Under the commercial paper loan program, the County has secured the loans by covenanting in the loan documents to budget and appropriate sufficient legally available non ad-valorem revenues each fiscal year in order to satisfy debt service on the loans. This essentially means that all legally available non ad-valorem revenues are available to repay the interest and eventual principal obligation. Collier County has routinely paid Agenda Item No. 10B April 27, 2010 Page 2 of 7 down the principal of the loans annually in addition to required monthly interest payments. Should the County elect to keep its commercial paper loans outstanding until their scheduled maturities, the General Fund will be required to continue to appropriate approximately $6,500,000 annually to pay down the principal balance, as approximately $47,000,000 will be due in December 2012. Principal and interest on outstanding commercial paper loans prior to fiscal year 2006 was paid primarily from impact fee collections. More recently, due to the general economic decline and corresponding reduction in impact fee revenue, non ad-valorem dollars have been appropriated in the General Fund for the payment of commercial paper principal and interest. For fiscal year 2010, $9,500,000 is appropriated for the payment of commercial paper principal and interest and an estimated $9,200,000 is proposed to be appropriated in fiscal year 2011. Faced with the exposure of paying off a large commercial paper principal balance up to $59.9 million dollars, members of the Finance Committee and the County's advisors discussed several options which are framed below. tions Descri tion Proceed with the practice of paying down commercial paper principal debt with a plan to pay off the principal balance due at term in December 2012. 1. 2. Refinance existing commercial paper loans with new commercial paper loans with yet to be established new loan program prior to December 2012. Advanta es *Current monthly interest presently at or below 1 %. * Amount of periodic principal pay down continues at County discretion. *Current monthly interest presently at or below 1 % although rates under any new program likely to be higher. * Amount of periodic principal pay down continues at County discretion. Disadvanta es *Continue to divert approximately $9.0 million in legally available non ad-valorem revenue to pay debt with increasing reliance upon property taxes to fund general services. *Potential volatility and likely increase in variable interest rates. *Determining source of funds and budgeting to payoff $47M to $60M commercial paper principal due in December 2012. *Debt not aligned with useful life of the asset fmanced. * Low Risk, Hi h Uncertaint *Continue to divert approximately $9.0 million in legally available non ad-valorem revenue to pay debt with increasing reliance upon property taxes to fund services. *Potential volatility of and likely increase in variable interest rates. *Debt not aligned with useful life of the asset fmanced. *New program may not be established and if established there is current uncertainty with respect to cost and credit requirements. * Hi h Risk. Hi h Uncertaint o tions 3. Descri tion Refinance the outstanding commercial paper loans through the issuance of longer term fixed rate bonds. Agenda Item No. 108 April 27, 2010 Page 3 of 7 Advanta es *Debt aligned with useful life of the asset financed. * Achieve interest rate and budget certainty. *Fixed interest rates are currently very low. *General Fund liquidity. *Low Risk, High Certaint Disadvanta es * Amortization of debt over longer period with a fixed cost slightly higher than the current variable interest rate. A memorandum from The County's financial advisor of record - the PFM Group - offering a recommendation on the proposed refinancing is attached as exhibit one. FINANCE COMMITTEE RECOMMENDATION: Taking into account the current interest rate environment, a desire to achieve budgetary certainty and benefits associated with eliminating what might be a $47 million commercial paper principal payment in December 2012, the Finance Committee unanimously (3-0) recommended to refinance $59,893,000 in outstanding commercial paper loans through the issuance of tax exempt fixed rate bonds. FISCAL IMPACT: This is a refinancing of existing commercial paper debt totaling $59,893,000. The issuance of fixed rate bonds carries an approximate all in true interest cost of 4.59% over the 25 year life of the intended bond issue. GROWTH MANAGEMENT IMP ACT: None LEGAL CONSIDERATIONS: The County Attorney is working with outside bond coulJ-sel to ensure the legal sufficiency of this proposed action. -JAK RECOMMENDATION: To direct the County Manager or his designee along with the County Attorney and the County's respective financial and legal advisors to proceed with the preparation of all necessary documents required to refinance $59,893,000 in commercial paper loans through the issuance of tax exempt fixed rate bonds and to authorize all necessary budget amendments. Prepared by: Mark Isackson, Corporate Financial Planning and Management Services - County Manager's Office Item Number: Item Summary: Meeting Date: COLLIER COUNTY BOARD OF COUNTY COMMISSIONERS Agenda Item NO.1 OB April 27, 2010 Page 4 of 7 108 Recommendation to refinance $59,893,000 in outstanding Commercial Paper loans through the issuance of traditional tax exempt fixed rate bonds. (Mark Isackson, Corporate Financial and Management Services, County Manager's Office) 4/27/20109:00:00 AM Approved By Leo E. Ochs, Jr. County Managers Office County Manager County Managers Office Date 4/21/201012:24 PM Agenda Item No. 10B 2121 Ponce de Leon Blvd. ~jlB~'IJ~:eO 1 0 Suite 510 305~rl~5fO'f 7 Coral Gables, FL wwW.p.fiir.i:om 33134 The PFM Group Public Financial Management, Inc, PFM Assot Management LLC PFM Advisors April 20, 2010 Memorandum To: Collier County, Florida From: Public Financial Management, Inc. Re: F AC Commercial Paper Refinancing Recommendation As of this memorandum, Collier County (the "County") has approximately $60 million of commercial paper notes outstanding under the Florida Association of Counties' Commercial Paper Program (the "CP Program"). As the County is aware, the CP Program may be winding down for two primary reasons: (1) limited credit/liquidity support in the market due to the global financial crisis and (2) the likelihood the incumbent letter of credit (LaC) bank will not renew the LaC, at least at the existing rate. The existing LaC is priced at a "below" current market rate of 30 bps per annum and is set to expire in February 2013. Upon expiration of the existing LaC in FY 2013, any principal outstanding will be due in full and the CP Program may be discontinued (however note that the County's final allowable maturity is December 2012). In addition to the expiring LaC, the County has the opportunity to amortize the debt over a term that closer resembles the useful life of the projects. The CP program originally financed various infrastructure and equipment projects with a blended useful life that can be reasonably expected to exceed 30 years. As such, a long-term refinancing is in line with the original intent of the program. Based on the current practice of budgeting prepayments of approximately $6.5 million per year, the County estimates that $47 million will be outstanding by FY 2013. Therefore, to avoid the potential financial strain of a significant bullet payment in 2013, the County requested that Public Financial Management, Inc. (PFM) develop various strategies to refinance the CP notes in full this year or in tranches as part of a staggered approach. Accordingly, PFM developed several options to redeem and refinance the existing CP notes for the County's consideration. As a secondary consideration, the County also has the opportunity to utilize "freed" cash flow realized by a longer-term refinancing, or amortization, of the CP Program related debt. The County can utilize the available near-term cash flow for other budgetary items at its discretion. As part of our continuing evaluation and analysis, PFM provided the County with the pros and cons of various potential refinancing structures. This analysis included alternatives that ranged across different levels of long-term certainty - from fixed to variable rate alternatives. Ultimately, the County's Finance Committee discussed and voted to recommend a fully fixed- rate transaction, which provides the County with a refinancing structure with the greatest amount of long-term certainty. Should the County desire to implement the refinancing strategy, PFM would also recommend that the fixed-rate alternative is utilized. Our recommendation is based on the analysis conducted over the last several months and the County's ability to lock-in rates that are expected to be below historical averages. The County would issue traditional tax-exempt fixed rate bonds structured on a level debt service basis. The final maturity of the issuance is expected to be in 2024, which is well within the anticipated useful life of the projects. Based on prevailing market rates, which are ~ ~PFM' Agenda Item NO.1 OB April 27, 2010 Collier County, Florida Page 6 of 7 Apri120,2010 Page 2 preliminary and subject to change, we would expect that the All-In True Interest Cost (TIC) of the transaction would be below the 5% budgeted rate currently applied. If the County seeks a long-term solution to refinance the existing commercial paper program, and at the same time, seeks to better match the useful life of the assets financed with the amortization of the debt, the most suitable course of action is to issue fixed-rate refinancing bonds. The County would have the additional benefit of near-term cash flow relief and the ability to fund other budgetary items at its discretion. It is PFM recommendation after a thorough analysis of the options available to the County that the CP Program is refinanced with long-term fixed-rate bonds. This structure provides the County with the ability to potentially lock-in interest rates while they are still below their historical averages while at the same time providing the greatest amount of long-term budgetary certainty. Below we explain the various factors that affect the pricing of the bonds and also describes the considerations for either a competitive or negotiated transaction. In the municipal bond market, some issuers have strong preferences for each approach and oftentimes issuers achieve very successful results from both competitive and negotiated sales. Ultimately, the decision in favor of either method may be influenced by a combination of broader policy and financial objectives, issuer specific characteristics and market conditions. There are a number of considerations in establishing a method of sale for any bond issue. Factors supporting one sale methodology versus another are summarized in the table below. The issues shown in the table should be viewed as indicators of the most effective approach given a set of circumstances. Many issuers will find characteristics for a specific set of circumstances that fall in both columns. The refinancing bonds would be secured by the same revenue pledge that secured the Commercial Paper program, thereby not creating a new burden to the County. The municipal market is familiar with an issuer such as Collier County, and is generally knowledgeable of the credit securing the bonds. However, today's challenging economic environment, specific negative focus on the state of Florida in general, and uncertain capital markets dictate that the County should consider both methods of sale in order to provide the greatest flexibility at this time. The following points highlight the basis of our recommendation. · Issuer/Frequency of issuance - Collier County is a well known county in Florida and is a semi-frequent participant in the municipal market. Because of its status as a broad-based government and its relatively large investor base, the County can be fairly certain that its non-ad valorem bond credit will be accep~ed by municipal investors. · Credit Quality - The finance team will soon approach credit enhancers and rating agencies to discuss the credit, documentation, and flow of funds. In light of the market events over the past couple of years investors are placing an even greater premium on credit ratings than before. As a result highly rated credits ('M' category and above) have relatively easier access to the capital markets. Based on the County's financial profile and existing underlying credit ratings, we expect these bonds to be rated in the high-A to M category. This type of credit should therefore be well received by the municipal market. · Market Conditions - The municipal market has seemingly recovered from the prior volatility fueled by broad market uncertainty, tight credit markets, and global concerns of a prolonged recession that began in 2008. Notwithstanding, investor demand for municipal bonds has been largely determined by the amount of supply in both the primary and secondary market. The financing mechanisms made available through ARRA, particularly the ability to access the significantly larger investor base in the taxable market, has dramatically reduced the ~ '=:=PFM' Collier County, Ronda April 20, 2010 Page 3 Agenda Item NO.1 OB April 27, 2010 Page 7 of 7 amount of supply funneled through the tax-exempt market, thus reducing traditional tax- exempt supply and increasing demand. Market participants do not expect that demand to wane significantly over the next several months. . Debt Structure & Timing - The debt structure of the Capital Asset Bonds will likely be a conventional 25-yr fixed-rate financing with level debt service payments. The bonds will be issued on a tax-exempt basis, and because they are refinancing bonds, the financial instruments available through the American Recovery and Reinvestment Act of 2009 ("ARRA") are not applicable. At present time, the municipal market conditions are such that the County can continue its historical practice and issue the refinancing bonds via a competitive sale. This recommendation is based on the considerations described above and market conditions in general.