COUNCIL COMMUNICATION

Transcription

1 COUNCIL COMMUNICATION Title: City of Roseville Annual Swap Reporting Requirements FY16 Contact: Vanessa Lieberman CC #: 7905 File #: 0202 Meeting Date: 8/17/2016 Item #: RECOMMENDATION TO COUNCIL Accept the following informational report on the City's outstanding interest-rate swaps for the Electric System bonds. BACKGROUND In accordance with the City of Roseville Swap Policy, a written report detailing the status of all interest-rate swap agreements entered into by the City is required to be provided to the City Council on an annual basis. In 2002, Roseville Electric began to diversify their debt portfolio with the use of interest-rate swaps. The purpose of the interest-rate swaps was to reduce debt service costs while limiting the unpredictability of variable rate debt as compared to fixed-rate bond issues. Interest-rate swaps reduce debt service costs by taking on additional risks including but not limited to basis risk, liquidity renewal risk, and counterparty risk. These instruments are not used for speculative reasons. As a result of the interest-rate swaps, the City makes fixed interest payments to Morgan Stanley and Bank of America in exchange for floating rate interest payments. In 2012 and renewed in 2016, the 2008A Electric System bonds were refunded with a Direct Purchase agreement with US Bank. This refunding removed the liquidity bank trading risk, remarketing risk, and any LIBOR manipulation. As illustrated in the report, Roseville pays a percentage of LIBOR plus 55 basis points to US Bank. The LIBOR payments will net to zero leaving the Electric System debt with a low fixed rate swap payment of plus 55 basis points. The interest-rate swaps have saved over $8.9 million in debt service payments in total when compared to conventional fixed-rate bond issues. The report demonstrates the combined debt service of the 2008A Electric System and the 2012 Electric Direct Purchase bonds payments. The interest-rate swaps have helped Roseville Electric control their debt service payments and have generally performed as expected. In addition, the report outlining how the swap functions and the savings achieved from June 30,

2 2006 to June 30, FISCAL IMPACT Since the inception of the interest-rate swaps, the Electric System bonds has achieved total savings of $8.9 million as compared to a fixed-rate bond issue. ECONOMIC DEVELOPMENT / JOBS CREATED The item presented is an informational report. No economic development or jobs were created. ENVIRONMENTAL REVIEW The informational report is statutorily exempt from the California Environmental Quality Act (CEQA) based on Section of the CEQA Guidelines. No other CEQA action is required. Respectfully Submitted, Vanessa Lieberman, Financial Analyst Monty Hanks, Finance Director Rob Jensen, City Manager ATTACHMENTS: Description Electric Swap Annual Report FY16 FY16 Swap Performance

3 INTEREST RATE SWAP REPORT PERIOD ENDING 6/30/2016 Prepared by Vanessa Lieberman Financial Analyst City of Roseville

4 Interest Rate Swaps An interest rate swap is a contract between two parties to exchange a series of fixed rate and floating rate interest payments over a predefined period of time, without exchanging the underlying principal amount referred to as a notional principal amount. Interest rate swaps are used to convert interest rate basis (e.g., from floating to fixed or fixed to floating) to enable issuers to lower their costs of borrowing. Structure The counterparties exchange interest payments on specific dates, according to a predetermined formula. Only the net payment amount is exchanged. The floating rate resets are generally based on LIBOR 1 or SIFMA 2 index. The City has two swaps that are structured as Floating-to-Fixed Swaps. The City makes fixed interest payments to a counterparty in exchange for floating rate interest payments (SIFMA or percent of LIBOR) made by the counterparty. A floating-to-fixed swap enables an issuer to structure a synthetic fixed rate liability. Swap Risks 1. Basis Risk: (1) the degree to which the difference between two prices fluctuates; (2) the residual risk that remains after a hedge has been placed; (3) the risk from receiving one floating rate, such as SIFMA and paying another, such as the interest rate on your own obligations. 2. Counterparty Risk: The risk that the party on the other side of a swap transaction does not fulfill its obligations under the swap. 3. Rollover Risk: Rollover risk occurs when the term of the swap does not match the term of the asset or liability that the swap is intended to hedge. 4. Tax Risk: Tax risk arises since SIFMA is a tax-exempt index whereas LIBOR is a taxable index, implying that the ratio of SIFMA to LIBOR should approximately be 1-Marginal tax rate. As tax rates increase, SIFMA as a percent of LIBOR decreases, whereas if tax rates decrease, the reverse would hold true. Historically the ratio has averaged at approximately 67% of 1-Month LIBOR. Simply stated, basis/tax law risk is the risk of a change in the SIFMA/LIBOR ratio. 5. Termination Risk: During the term of the swap either party may decide to terminate the swap or some contractual provisions may require the swap to be terminated. Unless the swap is at the market, upon termination one of the parties will need to make a termination payment depending upon market interest rates relative to the swap fixed rate. If market rates are higher than the swap fixed rate the party receiving the fixed rate will need to make the termination payment and vice versa. 1 London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks. 2 The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index is a 7-day high-grade market index comprised of tax-exempt VRDOs.

5 2008 Electric System Revenue Certificates of Participation Series A BACKGROUND Due to the liquidity crunch in early 2008, the auction-rate market began to fail. The City took quick action to resolve the high reset rates and downgrade of the bond insurer (FGIC) by terminating the 2005 Electric swap and refunding the outstanding par. On May 13, 2008 the City issued Certificates of Participation Series A and Series B in the original principal amounts of $90,000,000 and $64,500,000 respectively, to defease the 2005 Electric COPs Series B & C. The Series A COPs were issued as variable rate securities (VRDOs) with interest calculated weekly. The rate fluctuates according to the market conditions but is capped at 12%. The City entered into a 27-year interest rate swap agreement with Morgan Stanley (60%) and Bank of America (40%) for the entire amount of the Series A COPs. The combination of the variable rate Series A COPs and a floating rate swap creates synthetic fixed-rate debt for the City. In November 2012 the Series A COPs were refunded in to a Direct Purchase Agreement with US Bank. The Direct Purchase Agreement acts similar to a loan and was analyzed as the most cost effective option regarding the refunding of the 2008A Electric bonds. The Direct Purchase option removed the liquidity bank trading risk, remarketing risk, and any LIBOR manipulation. Risks associated with the viability of a LOC provider are essentially removed. US Bank offered a 3.5- yr term based on 70.5% of one month LIBOR plus 62.5 bps. In May 2016 US Bank renewed the terms of the Direct Placement and offered a 3.5yr term based on 70.5% of one month LIBOR plus 55 bps. ANNUAL REPORTING REQUIREMENTS 2008 Electric, Series A Description Original Notional Amount $90,000,000 Type Variable to Fixed Variable Rate Debt VRDOs Payment Terms Fixed Swap Rate 3.321% & 3.364% Floating Rate 70.5% of 1m LIBOR Priced Weekly Payment Monthly Direct Purchase (US Bank) 70.5% of one month LIBOR + 55 bps Swap Terms Average Life 21 years Maturity 2/1/2035 FY16 Detail Current Notional Amount $90,000,000 Principal Retired -0- Average Floating Rate Received 0.33% Direct Purchase 0.691%

6 Swap Counterparty Counterparty / Rating Morgan Stanley (A- / Baa2) MTM Value at 6/30/16 ($14,906,151) Counterparty / Rating Bank of America, NA (A / A2) MTM Value at 6/30/16 ($10,123,216) Swap Agreements Material Changes No information to report Defaults (City or Counterparty) No information to report SUMMARY OF PAYMENTS 2008 ELECTRIC SERIES A COP

7 FISCAL IMPACT The following chart details the 2008 Electric Series A and 2012 Direct Purchase Bonds savings when compared to a conventional fixed rate issue. For FY16, the 2008/2012 bonds had savings of $972,599 and have achieved total savings of over $8.9 million compared to a conventional fixed rate issue.

8 The Electric Swap is structured as follows: This table shows the Planned Debt Service for the Swap, Conventional Debt Service, and the savings between the two. The next column has the Actual Debt Service Paid and the Actual Savings which compares the Actual Debt Service to the Convention Fixed Debt Service.