REPORT TO COUNCIL
SUBJECT
Title
Actions Relating to the Issuance of the City’s Electric Revenue Refunding Bonds, Series 2018 A
Report
BACKGROUND
From time to time, the City has issued Revenue Bonds in order to raise funds that support long-life, high-cost capital projects for the Electric Utility. Projects have included new generation such as the City-owned Donald Von Raesfeld Power Plant and new high voltage transmission lines. Because such projects have long in-service use, potentially 25 years or more, it is appropriate that the cost to construct be paid by current and future ratepayers who benefit from the project over the lifetime of project. Bonds have also been issued to allow the refunding/refinancing of previous bond issuances when justified for cost savings, interest rate reductions, and other risk reductions.
In May 2009, the City issued Series 2008 B Bonds pursuant to the Original Subordinated Electric Revenue Bond Indenture as amended and supplemented by the Fifth Supplemental Indenture where The Bank of New York Mellon Trust Company, N.A. is the successor Trustee. The Series 2008 B Bonds were originally issued as variable rate bonds in the aggregate principal amount of $86,600,000, for the purpose of refunding a portion of the City’s then outstanding Subordinated Electric Revenue Refunding Bonds, Series 1998 A. As of September 30, 2018, $54,580,000 principal amount of the Series 2008 B Bonds remains outstanding.
In September 2006, in anticipation of the issuance of the Series 2008 B Bonds, the City entered into an interest rate swap agreement with Bear Stearns Capital Markets Inc. Related to the financial crisis in late 2000, Bear Stearns Companies was sold to JPMorgan Chase Bank, N.A. (JPMorgan). Therefore, in 2009, the swap agreement was novated or “transferred” to JPMorgan in an initial notional amount of $83,440,000. The Interest Rate Swap Agreement was entered into by the City for the purpose of receiving amounts expected to be approximately equal - by using a London Interbank Offer Rate (LIBOR) proxy - to the floating rate interest payments the City was obligated to make on the variable rate Series 2008 B Bonds in exchange for the City making fixed rate payments. As of September 30, 2018, the notional amount under the interest rate swap agreement was $52,055,000, the mark-to-market (termination payment equivalent) of the interest rate swap was negative to the City in the amount of $3,802,000, and the City had $212,000 in collateral posted in favor of the JPMorgan. The highest amount of collateral the City has been required to post to the bank on any date has been approximately $11,000,000.
Under the terms of the JPMorgan Swap Agreement, JPMorgan is required to release collateral to the City as market conditions become favorable to the City and may be required to post collateral for the benefit of the City to the extent that JPMorgan’s total exposure for termination payments to the City exceeds the threshold amount specified in the JPMorgan Swap Agreement. As such the amount of collateral varies from time to time due primarily to interest rate movements and can change significantly over a short period of time. Over time, the collateral management has become an administrative burden to the Electric and Finance departments.
Multiple criminal settlements in 2012 revealed significant fraud in the LIBOR rate setting process during the years prior and new requirements were put into place. However, on July 27, 2017 the Financial Conduct Authority, the U.K.'s top financial regulator, tasked with overseeing LIBOR, announced the benchmark will be phased out by 2021. Thus a fundamental element in the JPMorgan Swap Agreement is subject to being phased out and the parties to the agreement would need to agree to a new benchmark.
Finally, the City has used a Letter of Credit (LOC) Agreement to insure its obligations under the Swap Agreement. Over time it has become more difficult and costly to procure the LOC in support of the City’s obligations as banks are disinterested in that particular business product. The current LOC expires at the end of January 2019 and the current providing institution has declined to renew it under similar terms.
DISCUSSION
The attached Resolution authorizes the approval of various documents and actions related to the issuance of fixed rate Electric Revenue Refunding Bonds, Series 2018 A (Series 2018 A Bonds) to refund outstanding Variable Rate Demand Electric Revenue Bonds, Series 2008 B (Series 2008 B Bonds), and the termination of the related interest rate swap transaction. Bond principal amount not to exceed $65,000,000 will be used to refund the aggregate outstanding principal of $54,580,000 of Series 2008 B Bonds, fund a termination payment payable in connection with the termination of the interest rate swap agreement (JPMorgan Swap Agreement), and pay costs of issuance associated with the Series 2018 A Bonds.
Current low interest rates in the municipal bond market present an opportunity to primarily reduce risks related to variable interest rates and the swap agreement realize moderate debt service savings and by refunding the Series 2008 B Bonds and terminating the swap agreement. The issuance of the 2018 A Bonds would convert the existing variable rate bond series into a fixed rate bond series at a time when interest rates remain historically low but are expected to rise. Actual interest rate paid on the new bonds would be determined by the value institutional and other buyers’ place on the City’s ability to pay during in an open market bid process, (i.e. via competitive yield/price bids). The 2018 A Bonds would be paid over a nine year period through July 2027. Buyers are influenced by the Electric Utility’s outstanding credit rating and history of managing debt. As part of the refunding, Silicon Valley Power (SVP) has requested new credit reviews from two of the major rating agencies. Once the 2018A Bonds are sold, staff will inform the Council regarding the actual cost of the termination of the JPMorgan Swap Agreement, the bond principal amount, interest rate, expected interest payments, and debt issuance cost.
The issuance of Series 2018 A Bonds to refund outstanding Variable Rate Demand Electric Revenue Bonds, Series 2008 B Bonds, and the termination of the related JPMorgan Swap Agreement will assist the City in reducing risks associated with the rising variable interest rates, collateral management, LOC renewal, and LIBOR benchmark phase-out.
Approval of the resolution and related documents creates obligations similar to what the City has previously obligated itself in prior bond issuances. It will obligate the City to meet extensive annual reporting requirements to the Municipal Securities Rulemaking Board by dates certain and the reporting of any significant events that may occur along with other administrative tasks, to pay certain cost related to the issuance, and to pay for the termination of the swap agreement. It becomes the responsibility of each of the City Council members to exercise diligence to assure the City’s disclosures meet the standards by not authorizing disclosure if he or she knows the attached Preliminary Official Statement to be false and if he or she has knowledge of material facts that are not disclosed to bring it to the attention of staff so it may be addressed in the appropriate disclosure document. Approval of the resolution and related documents ultimately obligates the City to make timely principal and interest payments on the bond themselves and requires Council to set rates in amount sufficient to meet all payment obligations. The documents to be authorized for approval and execution by this Resolution include:
Third Supplemental Electric Revenue Bond Indenture
Supplements the existing Amended and Restated Electric Revenue Bond Indenture and will provide the terms of the Series 2018 A Bonds upon the sale thereof, including principal and interest payment dates and interest rates. Under the Amended and Restated Electric Revenue Bond Indenture, the City is obligated to set electric rates in an amount sufficient, together with available amounts in the Electric Utility Fund’s Rate Stabilization Reserve, to pay the annual debt service on all outstanding City Electric Revenue bonds.
Escrow Agreement
Provides for the deposit and application of Series 2018 A Bonds proceeds to refund and retire all outstanding Series 2008 B Bonds.
Swap Termination (Confirmation)
Provides for the termination of the JPMorgan Swap Agreement. The Swap Termination Agreement includes an option for the City to reinstate the JPMorgan Swap Agreement with an adjustment in the fixed rate payable in the event the Series 2018 A Bonds are not delivered and the Series 2008 B Bonds are not refunded for any reason after the date of pricing of the Series 2018 A Bonds and the trade date of the swap termination.
Continuing Disclosure Agreement
The City’s agreement to provide certain annual information and notices to the secondary market of certain events in connection with the Series 2018 A Bonds.
Bond Purchase Contract
Provides the terms and conditions under which the underwriter will purchase the Series 2018 A Bonds from the City for reoffering to the public and the circumstances under which the underwriter may terminate its obligation to purchase such bonds after the sale and prior to the time the Series 2018 A Bonds are delivered. The underwriter’s discount (compensation for fees and expenses) in connection with the Series 2018 A Bonds will not exceed 0.30% of the bonds being sold.
Preliminary Official Statement
Disclosure document prepared by the City that provides information to potential investors regarding the City and the Electric Utility and the terms of the bond sale. A final Official Statement will be prepared after the sale of the Series 2018 A Bonds for distribution to purchasers of the Series 2018 A Bonds. Pursuant to federal securities laws, these disclosure documents are required to contain all information material to investors for making a decision whether to purchase the City’s bonds and the Official Statement must not contain any untrue statement of a material fact or omit to state any material fact that an investor would consider important in making his or her investment decision with respect to the City’s electric bonds.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(a) as it has no potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment.
FISCAL IMPACT
Based on current interest rates, this transaction is expected to achieve a net present value savings of approximately $250,000, while reducing the City’s risk exposure. The action is a refinancing of existing debt. City is not incurring any additional debt amount.
COORDINATION
This report has been coordinated with the Finance Department and City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov> or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
Adopt the Resolution authorizing and approving the issuance of the City Electric Revenue Refunding Bonds, Series 2018 A, approving the form of and authorizing certain documents, in substantially the form presented, in connection with the issuance, and authorizing certain actions related thereto.
Staff
Reviewed by: John C. Roukema, Chief Electric Utility Officer
Approved by: Deanna J. Santana, City Manager
ATTACHMENTS
1. Resolution
2. Third Supplemental Electric Revenue Bond Indenture
3. Escrow Agreement
4. Swap Termination (Confirmation)
5. Continuing Disclosure Agreement
6. Bond Purchase Contract
7. Preliminary Official Statement