| Prepared by Charles River Associates for the City of Richmond, California | Independent Peer Review Pension Obligation Bond Refinancing Options Summary City Council Presentation for: City of Richmond, California Prepared by: Charles River Associates April 26, 2022 FINAL v1.0 City of Richmond, California Independent Peer Review
| Prepared by Charles River Associates for the City of Richmond, California | 2 Independent Peer Review Summary Presentation Charles River Associates’ Independent Peer Review herein, is a summary City Council presentation, covering the following requirements pursuant to the City’s Request for Qualifications: 1) The reasonableness and accuracy of the methodology and assumptions, 2) Estimate of relative cost of three options provided by the City, and 3) Additional options of value to the City’s financial review and decision process. Our Independent Peer Review does not rank order, nor recommend, a specific financial action or derivative product be undertaken by the City.
City of Richmond, California Independent Peer Review
| Prepared by Charles River Associates for the City of Richmond, California | 3 Financing Snapshot Outstanding Synthetic Fixed Rate Debt Financing Element Description City’s Bond Issue $128 million floating rate Pension Obligation Bonds Issued to fund required payments to: California Public Employees’ Retirement System (CalPERS) City’s Interest Rate Swap $128 million floating-to-fixed swap Royal Bank of Canada § City Pays fixed rate of 7.06% § City Receives floating rate equal to LIBOR Index Swap converted the City’s floating obligation to a fixed rate of 7.06% Swap mandatory termination date: August 1, 2023 (15 months) Termination amount: $36 million payable to Royal Bank of Canada City of Richmond, California Independent Peer Review
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Financing Options Presented to City Council on October 5, 2021 Option 1 Market Outreach Description 1) Assemble working group for bond financing. 2) Commence outreach to financial markets. Option 2 Loan Program and New Swap Description 1) Implement City National Bank floating rate loan program. 2) Terminate Royal Bank of Canada swap. 3) Pay $36 million swap termination fee to Royal Bank of Canada. 4) Execute new Royal Bank of Canada interest rate swap. Option 3 Fixed Rate Bonds Description 1) Sell fixed rate bonds to refinance $128 million Pension Bonds. 2) Terminate $128 million Pension Bond interest rate swap. 3) Pay $36 million swap termination fee to Royal Bank of Canada.
City of Richmond, California Independent Peer Review
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Option 1 Market Outreach Ideas for the City’s Consideration § City engages Royal Bank of Canada and leads interest rate swap discussion. § City reaches out to financial community: • Banking firms • Derivative dealers § City selects and engages finance working group team: • City’s senior professionals • Banking team • Municipal and swap advisors • Bond counsel City of Richmond, California Independent Peer Review
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Option 2 Implement City National Bank Loan, Terminate Royal Bank of Canada Swap, Execute New Royal Bank of Canada Swap Challenges § Credit triggers increase the loan’s interest rate if City’s credit rating decline: City’s Rating Interest Rate “AA-” Floating Index plus 1.00% “BBB-” Floating Index plus 2.00% § Mandatory swap termination if City is downgraded to “BBB-“. § Not compliant with the City’s policy disallowing the use of interest rate swaps.1 1 City of Richmond’s “Guiding Fiscal Policies” (April 20, 2021) state: “VII. Debt Management E. The City will no longer be permitted to use interest rate swaps when issuing debt.” City of Richmond, California Independent Peer Review
| Prepared by Charles River Associates for the City of Richmond, California | 7 Option 3 Issue New Pension Bonds via Private Placement or Public Sale Ideas for the City’s Consideration § City commences, and leads, the issuance of new Pension Bonds via private placement or public sale: • Banking team engaged • Offering documents completed in four months, or less. § City engages Royal Bank of Canada to modify swap provisions favorable to City. § City examines efficacy of: • Keeping 25% to 50% of pension bonds floating. • Forming swap bidding group for competitive swap executions. • Identify, and target, current bondholders for future bond purchases.
City of Richmond, California Independent Peer Review
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Option 3 Issue New Pension Bonds via Private Placement or Public Sale Benefits § Perceived by credit rating agencies as a positive credit development: • Pension Bonds’ credit trigger and derivative risk eliminated. • Issuance of “plain vanilla bonds” de-risks City’s balance sheet. § Minimizes timeline to access superior market conditions. § Provides permanent solution to City’s Pension Bonds’ derivative exposure. § Compliant with the City’s swap policy.
City of Richmond, California Independent Peer Review
| Prepared by Charles River Associates for the City of Richmond, California | 9 Potential Next Steps2 Description 1) City of Richmond interviews and assembles bond finance working group: § City finance and legal professionals § Banking team § Municipal advisor and swap advisor 2) City engages Royal Bank of Canada in direct interest rate swap discussions. 3) Finance working group: § Monitor market for financing opportunities, § Recommends to City Council optimal financing plan. 4) City executes Pension Bond refinancing. City eliminates all derivative risk. 2 Each potential action is presented as a discrete step, executed concurrent or independent of the other actions.