April 26, 2022
Finance Department
DATE: April 26, 2022
TO: Mayor Butt and Members of the City Council
FROM:
Anil Comelo, Interim Deputy City Manager
Subject:
Receive Update on the Refinancing of the Pension
Obligation Bonds (Pobs), and Peer Review Findings of
Charles Rivers Associates.
FINANCIAL IMPACT: None
PREVIOUS COUNCIL
ACTION:
April 6, 2021; October 5, 2021; December 7, 2021
STATEMENT OF THE
ISSUE:
On October 5, 2021, the City Council considered the
recommendations provided by the City’s Municipal
Advisor, PRAG, with respect to the refinance of the 2005 Pension Bonds and Swaps and directed staff to identify a suitable firm to conduct a review of the
recommendations. The selected consultant, CRA, has
completed the work and as part of the implementation of the resulting strategy, a Municipal Advisor, NHA
Advisors, has been hired to evaluate the refinancing
options and/or guide the potential sale of municipal
bonds.
RECOMMENDED ACTION:
RECEIVE update on the refinancing of the 2005 Pension
Obligation Bonds (POBs) and Peer Review Findings -
Finance Department (Anil Comelo/Delmy Cuellar 510-
620-6600).
AGENDA
REPORT
April 26, 2022
DISCUSSION:
On October 5, 2021 the City Council considered the recommendation from its Municipal Advisor, PRAG, to negotiate with Royal Bank of Canada (RBC) and City National Bank (CNB) with respect to the refinance of the Pension Bonds and related Swaps and directed staff to identify a suitable firm to conduct a peer review of the recommendations. There are two series of pension obligation bonds ("POB's" outstanding, an approximately $130 million series maturing in 2034 that needs to be refinanced, and an $18 million series that matures in 2023. In addition, the City needs to fund an estimated termination fee of $30 million with respect to the interest rate swaps on the POB's. Staff conducted an RFP, interviewed three firms, and subsequently City Council approved a contract with Charles River Associates (CRA) to conduct a peer review and to advise the City on the options that may be available to the City. The findings by CRA (attached) indicate that there is value in going to the market to refinance the POBs with a more conventional vehicle such as a municipal bond. The following were ideas that resulted from the CRA analysis:
1. City finance and legal professionals engage Royal Bank of Canada and commence direct interest rate swap discussions.
2. City of Richmond interviews and assembles bond finance working group:
- City finance and legal professionals
- Banking team
- Municipal advisor
- Swap advisor
3. Finance working group:
- Monitor market for financing opportunities,
- Recommends to City Council optimal financing plan.
4. Undertake compliance and regulatory review of past and current interest rate swaps.
The City’s POB team is essentially implementing each of the above ideas.
City staff is actively hiring professionals and seeks to provide the City Council with private placement offers from banks, if available. Additionally, by hiring the consultants, the City Council will likely also be provided the opportunity to seek conventional financing as a publicly offered municipal bond.
We are in a dynamic rate environment where interest rates are highly likely to increase significantly. In fact, the Fed has already indicated that the interest rate could be increased by as much as 1 percentage points in the next 8 weeks. Therefore, the sooner we can form a City bond team, the sooner we will be able to refinance the $160+ million debt. ($130 million in POB's maturing in 2034 plus the $30 million termination fee). We do note, however, that it is believed that the swap itself may negate any
April 26, 2022
benefit from low interest rates because the termination payment amount is linked to the interest rate (such that as the interest rate increases, the swap payment decreases by a corresponding amount) and thus there may be zero savings on the B-2 Bonds regardless of when it is refinanced. City staff members and consultants are reviewing this further.
City staff is clear that the goal is to refinance the POBs with minimal cost and risk (recognizing that there is an inverse relationship between cost and risk). To that end, City staff members will be bringing to City Council, at this meeting, recommendation on a bond underwriting team, including bond counsel and disclosure counsel.
At an upcoming meeting in May and/or June, City staff members will be bringing information regarding interest from banks and/or a recommendation to float a publicly offered bonds. With one of the proposals for underwriter, the City did receive a letter of interest from one bank.
The following are key milestones/goals for both a private placement and a publicly offered bond. Note again, that staff will present the information required for City Council to make a final decision on which option at a subsequent City Council meeting.
Below are tentative schedules for the financings (dates and timing may change):
Private Placement - Tentative Schedule
Task Date
City receives term sheet from at least one
bank for private placement April 26
City gives tentative approval to a bank term
sheet May 10
Bond counsel releases first draft of legal
documents May 17
Bank completes credit review May 24
Bank delivers rate lock for financing May 25
Bond Counsel releases near final draft of
legal documents June 1
City Council approves legal documents for
closing June 21
Bond closing June 28
April 26, 2022
Public Offering - Tentative Schedule
Task Date
Bond counsel releases first draft of legal
documents May 13
Credit rating package provided to S&P May 20
Bond Counsel releases near final draft of
legal documents June 1
Receive credit rating from S&P June 20
City Council approves legal documents for
bond sale and closing June 28
Preliminary official statement released to
potential investors July 1
Bond sale (equivalent of rate lock on private
placement) July 12
Bond closing July 26
DOCUMENTS ATTACHED:
Attachment 1 – Independent Peer Review Report - CRA