School Board of Palm Beach County Finance Committee Meeting November 4, 2016

Transcription

1 School Board of Palm Beach County Finance Committee Meeting November 4, S. Orange Avenue Suite 1170 Orlando, FL fax

2 Table of Contents I. Market Update II. Summary of Outstanding Debt III. Certificates of Participation, Series 2014A FRN Expiration IV. Refunding Analysis V. Swap Termination Plan 2

3 I. Market Update

4 General Market Data MMD AAA G.O. Curve MMD AAA G.O. Yield Curve Change Spot Rates Current 1 Week Ago 1 Month Ago 1 Year Ago 2 Year Year Year Year Year Change in Spot Rates (basis points) vs. 1 Week Ago vs. 1 Month Ago vs. 1 Year Ago 2 year Year Year Year Year Source: Thomson Reuters as of October 28,

5 Credit Spreads Credit spreads have narrowed over the last two years. Currently, spreads are off the lows Revenue Spreads to AAA MMD (10yr) Source: Thomson Reuters as of October 28,

6 Supply and Demand Monthly Mutual Fund Inflows (Outflows) Cumulative Inflows (Outflows) Fund Inflows (Outflows) Range Amount in Millions Maximum $ 7,813 Minimum $ (1,576) Average $ 3,156 Current $ 1,273 Source: Thomson Reuters as of October 28,

7 II. Summary of Outstanding Debt

8 Palm Beach County Schools COP Summary Millions The School District of Palm Beach County Outstanding Certificates of Participation B 2004 QZAB 2005 QZAB 2007A 2007C 2007E 2010 QSCB 2011A 2011C 2011D 2012A 2012B 2012C 2014A 2014B 2014C 2015A 2015B 2015C 2015D Principal Series Outstanding 2003B 124,295, QZAB 588, QZAB 538, A 13,990, C 177,265, E 5,215, ,665, A 44,520, C 1,585, D 19,650, A 20,085, B 107,120, C 63,645, A 115,350, B 153,725, C 33,280, A 84,150, B 145,535, C 62,970, D 221,640,000 Total 1,462,811,616 8

9 Palm Beach County Schools COP Summary The District s outstanding COPs, and their respective refunding eligibility are summarized below In the current market, issues with call dates from today through 2017 may be viable refunding candidates Series Mode Issue Size Outstanding Par Call Date Refunding Status Series 2004 QZAB 2,353, ,474 - Non-callable Series 2005 QZAB 1,614, ,142 - Non-callable Series 2007A Fixed 268,545,000 13,990,000 - Non-callable Series 2007C Fixed 192,310, ,265,000 8/1/2017 Forward Series 2007E Fixed 147,390,000 5,215,000 - Non-callable Series 2010A QZAB 67,665,000 67,665,000 - Non-callable Series 2011A Fixed 112,425,000 44,520,000 8/1/2021 Advance Series 2011C Fixed 15,355,000 1,585,000 - Non-callable Series 2011D Fixed 25,065,000 19,650,000 - Non-callable Series 2012A Fixed 20,085,000 20,085,000 8/1/2022 Advance Series 2012B Fixed 116,555, ,120,000 - Non-callable Series 2012C Fixed 67,145,000 63,645,000 8/1/2022 Forward Series 2014A Fixed 115,560, ,350,000 - Current Series 2014B Fixed 166,010, ,725,000 - Non-callable Series 2014C Fixed 33,280,000 33,280,000 8/1/2024 Advance Series 2015B Fixed 145,535, ,535,000 8/1/2025 Forward Series 2015D Fixed 221,640, ,640,000 8/1/2025 Forward Series 2015A Fixed 106,315,000 84,150,000 - Non-callable Series 2015C Fixed 62,970,000 62,970,000 8/1/2025 Forward 9

10 Certificates of Participation Summary Annual COP payment budget is $146 million in FY 2017, $145 million in FY 2018 and 2019 then increases thereafter to allow capacity for additional capital needs COP budget includes bank fees, cushion for variable rate debt fluctuations, etc. The School District of Palm Beach County Outstanding Certificates of Participation $ Millions Outstanding Debt Service Series 2003B Series 2012B Series 2014A Budgeted Annual Debt Service Payment 10

11 III. Certificates of Participation, Series 2014A FRN Expiration

12 Palm Beach Schools Debt Timeline The District s ongoing debt management strategy has generated over $126 million in savings Approximately 15% of the COPs (down from approximately 30%) are variable rate and will be managed over time rollovers are spread out over time to limit exposure to temporary market challenges; 2003B runs to maturity and thus does not have rollover risk Swaption $145,850,000 As of October 13,

13 Series 2014A FRN Expiration Floating-to-Fixed Interest Rate Swap Series 2002B/2014A Initial Notional Amount: $115,350,000 Current Notional Amount: $115,350,000 End Date: August 1, % 1-mo LIBOR or SIFMA 70% 1-mo LIBOR or SIFMA + 46bps District 4.22% Citigroup Financial Products Banc of America (02/01/ /1/2017) As of October 13,

14 FRN Renewal Process The District is undertaking a process similar to prior variable rate rollovers Distributed a Request for Proposals ( RFP ) for the upcoming Series 2014A FRN expiration on February 1, 2017 Responses due to the RFP on November 8, 2016 for financing solutions for the Series 2014A Analyze options and select provider by November 21, 2016 Present to Board for approval on December 7,

15 IV. Refunding Analysis

16 Certificates of Participation, Series 2007C Certificates of Participation, Series 2007C Original Par Amount: $192,310,000 Currently Outstanding: $177,265,000 Final Maturity: August 1, 2027 Series 2007C Certificates advance refunded Series 2001A Certificates Only eligible for Forward, Current or Taxable Refunding under tax law provisions The 2007C Certificates maturing on or after August 1, 2018 are subject to prepayment on or after August 1, 2017 at par Callable Par Amount: $176,660,000 Certificates of Participation Forward Refunding Series 2007C Forward Refunding Current Refunding Estimated Closing 5/5/2017 5/5/2017 COP Call Date 8/1/2017 8/1/2017 Average Annual Savings 1,680,440 2,274,747 Net PV Savings of refunded 18,066,483 24,585,422 % Savings of refunded bonds 10.22% 13.91% *Rates as of 10/31/2016 As of November 1,

17 Forward Refunding Risk Forward Refunding Structure The District completes the financing process just like a typical refunding, EXCEPT the COPs do not legally close until May 2017 Documents are completed Interest rates and thus the savings are locked in In May 2017 the Bank must close on the COPs with very limited exceptions Change in Federal law Shutdown of Certificate of Participation program If the District elects not to close the transaction, the District would possibly have to pay a breakage fee as calculated in the forward delivery agreement 17

18 Forward Refunding Structure January 2017 Structure Certificates of Participation, Series 2017 Late March 2017 Price COPs and lock in rates August 1, 2017 Redeem Certificates of Participation, Series 2007C Jan Feb Mar Apr May June July Aug February 2017 Board Approval Lock-in Rate & Sign Documents May 2017 Close Certificates of Participation, Series 2017 Standard Procedure for any Refunding transaction 18

19 V. Swap Termination Plan

20 Swap Overview The District s Interest Rate Hedging Program has generated significant cash flow savings through the years Savings / Benefit Derived from Swaps and Swaptions as of June 30, 2016 Swap Type/Terms Initial Notional Amount Current Notional Amount Counterparty Savings Since Inception 1 Up-front Payment Received Amount Paid for Termination 2 Total Cumulative Benefit Terminated Swaps 2006 CMS Trade: Pay 67% of 1-month 2006 CMS LIBOR -- Receive 59.93% of 10-yr LIBOR 100,000,000 UBS 12,273, D Basis Swap: Pay BMA less spread -- Receive 67%*LIBOR 100,000,000 Citigroup 6,531, B 2001B Swap 162,980,000 Citigroup 5,870,414 Active Swap / Swaption 2002B Fixed-Payor Swap: Receive Pay 4.22% -- BMA [or 67% * LIBOR (alternate rate)] 115,350, ,350,000 Citigroup 3,464,451 6,142,000 (2,075,000) 7,531, B 2003B Fixed-Payor: Pay 3.91% -- Receive BMA [knockout option] 124,295, ,295,000 UBS 2,939,577 3,010,000-5,949, B 2002D Swap 116,555, ,225,000 Citigroup (521,412) 4,240,000-3,718, Total 356,200, ,870,000 5,882,616 13,392,000 (2,075,000) 41,874,645 Savings on the 2002B, 2003B and 2012B compared to theoretical fixed rate financing (callable) as if priced on effective date of swap Amount shown on 2002B - ($2,075,000) is the actual amount paid to purchase back cancellation option ($2,714,000) less accrued interest earnings of 3.0% through FY 2009 on up-front payment ($639,000) As of June 30,

21 Potential Swap Termination Why terminate the swaps? Eliminate/reduce risk: How? Rollover risk Basis risk Swap counterparty credit risk District rating downgrade risk Refunding the COPs Swap termination is paid from bond proceeds A significant portion of the swap termination payments would be offset by lower interest rates on the refunding certificates Sources: Bond Proceeds: Par Amount 166,010, Premium 25,747, ,757, Other Sources of Funds: Swap Accrued Interest Account 2,842, FRN Accrued Interest Account 585, August 1, 2014 Principal 150, ,578, Total: 195,336, Uses: Sample Sources and Uses of Funds (from Series 2014 Swap Termination Financing Completed 6/2014) Refunding Escrow Deposits: Cash Deposit 165,893, Delivery Day Expenses: Cost of Issuance 393, Underwriter's Discount 627, Swap Termination Payment 28,422, ,442, ,336,

22 Swap Overview Series 2014A Floating-to-Fixed Cancelable Interest Rate Swap Series 2002B/2014A Initial Notional Amount: $115,350,000 Current Notional Amount: $115,350,000 End Date: August 1, 2027 Cancellation option terminated in 2009 Current MTM: $(26,122,769.57) SIFMA or 70% 1-mo LIBOR + 46bp District 67% 1-mo LIBOR or SIFMA 4.22% Citigroup Financial Products Banc of America (08/01/ /01/2017) As of October 13,

23 Swap Overview Series 2003B Floating-to-Fixed Knockout Interest Rate Swap Series 2003B Initial Notional Amount: $124,295,000 Current Notional Amount: $124,295,000 End Date: August 1, 2029 Knock out expires August 1, 2018 Current MTM: $(34,464,661.23) SIFMA District UBS 3.91% SIFMA + 65 bps Dexia As of October 13,

24 Swap Overview Series 2012B Floating-to-Fixed Interest Rate Swap Series 2002D/2012B Initial Notional Amount: $116,555,000 Current Notional Amount: $107,120,000 End Date: August 1, 2028 Current MTM: $(32,361,418.96) SIFMA District 4.71% Citigroup Financial Products SIFMA+ 49bps Wells Fargo (08/01/ /01/2018) As of October 13,

25 Swap Termination Program Strategy Terminate swaps individually or in aggregate as soon as practical and at the lowest possible cost Very low interest rates combined with a steep yield curve drive swap MTM up Other factors Credit spreads on fixed rate bonds, steep yield curve and relationship between taxable and taxexempt market are not favorable As duration of the swaps declines, in a steep yield curve MTM does not decline as much as in a flat yield curve Current market dynamics are not favorable Factors can change quickly 3.00% 2.50% Market Conditions 2.00% 1.50% 1.00% 0.50% 0.00% /12/2016 AAA MMD 20 Year AAA MMD (3-Year Average) 25

26 Current Termination Cost The table below highlights the net cost associated with terminating the swaps Series 2002B Series 2003B Series 2012B Bank Loan Bond Issue Bank Loan Bond Issue Bank Loan Bond Issue MTM Values (1) (26,122,770) (34,464,661) (32,361,419) Final Maturity 8/1/2027 8/1/2027 8/1/2029 8/1/2029 8/1/2028 8/1/2028 Par Amount 141,725, ,705, ,435, ,440, ,125, ,520,000 Principal Refunded 115,350, ,350, ,295, ,295, ,120, ,120,000 Interest Rate 1.70% AAA MMD + 65bps 2.10% AAA MMD + 65bps 1.90% AAA MMD + 65bps All-In TIC (2) 5.20% 5.81% 4.88% 5.82% 5.55% 6.44% Net PV Savings (4,149,287) (8,539,325) (4,278,935) (15,605,950) (3,433,843) (11,102,010) % Savings -3.60% -7.40% -3.44% % -3.21% % (1) As of 10/13/2016 (2) Includes impact of swap termination payment 26

27 Alternate Termination Strategy As an alternative, PFM has developed a strategy where the District terminates the swap and issues a bank loan to refund the outstanding COPs In order to reduce the potential cost, the District would issue the COP with the same final maturity (2028). BUT, the bank loan has a put in This reduces the interest rate on the financing (sliding down the yield curve) reducing debt service cost But, this leaves the District exposed to interest rates in 2021 Par amount outstanding in 2021 is $117,510,000 The rationale for pursing this is to eliminate as much risk as possible (basis risk, counterparty risk, etc.) without increasing debt service. The remaining risk is market rates in 2021 Series 2012B 5-year Bullet MTM Values (1) Final Maturity (32,361,419) 8/1/2021 Par Amount 141,125,000 Principal Refunded 107,120,000 Interest Rate 1.50% All-In TIC (2) 8.12% Net PV Savings 795,366 % Savings 0.74% (1) As of 10/13/2016 (2) Includes impact of swap termination payment MMD Rates Over Time (Past 10 Yrs.) Source: Thomson Reuters as of October 28,

28 Action Items 1. Staff move forward with RFP for bank facility providers for the 2014A 2. In the bank facility RFP request proposals for alternatives to refund the 2012B COPs 3. Update swap termination authorization (new POS) 28