HomeMy WebLinkAboutRDA 3 TAX ALLOCATION BOND REFUNDING 02-09-94 • RDA N0. 3
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Inter- Corn T+%DATE: FEBRUARY 2, 1994 !
TO: APPROVED STAFF RECO12MENDAMON
BIL � USTON, EXECUTIVE DIRECTOR
FROM: RON 'A NAULT, FINANCE DIRECTOR 3 5
SUBJECT: 1987 TAX ALLOCATION BOND REFUNDING �)S
RECOMMENDATION
Direct staff to proceed with the 1987 tax allocation bond refunding
on a negotiated, fixed rate basis; approve Stone and Youngberg as
Financial Advisor and further approve the use of an independent
pricing consultant to verify the fairness of underwriting discounts
and proposed bond pricings.
FISCAL IMPACT
The economics of the proposed refunding will save the agency
approximately $323, 000 in debt service over the remaining life of
the bonds.
DISCUSSION
At its meeting of January 3 , 1994 the Redevelopment Agency Board
directed staff to proceed with the proposed refunding of the
agency's 1987 tax allocation bonds and to do so as quickly as
possible to take advantage of current low interest rates. The
board approved staff' s recommendation to request proposals from a
limited number of financial advisors (FA) with a very short
response period and to allow staff to select an FA and proceed with
necessary steps to begin the refunding and keep the board informed
as it progresses.
Staff sent out several RFP' s and received five proposals. After
careful consideration of the overall qualifications of each firm
and the associated fees staff selected Stone and Youngberg as the
most qualified and cost effective proposal.
• •
To: Bill Huston, Executive Director (cont'd. )
February 2 , 1994
I 've asked Stone and Youngberg to prepare an evaluation of
negotiable vs. competitive sales and a variable vs. a fixed rate
refunding. This response is attached along with proposed schedules
for both a negotiable and competitive sale.
Being a major underwriter in California, see the attached ranking,
Stone and Youngberg has requested that they be allowed to bid on
the bonds. Per State law the Agency will have to give their
approval prior to either a competitive or a negotiatied sale. In
past negotiated sales we have used independent advisors as pricing
consultants. Stone and Youngberg would repropose underwriting fees
to the Agency along with a limited number of other underwriters.
The pricing consultant will evaluate the proposals, recommend the
best rate and fees to the Agency and help negotiate final pricing
at the time of sale. This process should not add significantly to
the proposed schedule and will ensure that the Agency receives the
best market price on the new bonds.
We intend to proceed with the refunding as quickly as possible with
a closing scheduled for March 29, about eight weeks in total . By
proceeding with a negotiated sale we will save approximately four
weeks on a typical competitive sale.
We will also be evaluating any potential savings from refunding the
1991 bonds as well . If there appears to be potential in this area
we will come back to the agency for further direction.
RAN:ab
Att.
• •
STONE & YOUNGBERG
MEMBERS: PACIFIC STOCK EXCHANGE
February I, 1994
Mr. Ron Nault
Finance Director
City of Tustin
300 Centennial Way
Tustin, California 92680
Dear Ron:
As a follow-up to your request, this letter provides additional information regarding the following
topics: negotiated vs. competitive financing,timelines for negotiated and competitive sales and the merits
of fixed rate and variable rate refundings.
Negotiated vs. Competitive Sales
While this topic has certainly consumed considerable attention in the municipal marketplace, the key
concern for issuers should be: "what is the total cost of the financing and how does the issuer benefit
most'?". This area lends itself to a number of levels of review:
"On the Market Pricing"
The traditional argument for a competitive sale is that the public bidding for bonds provides the
clearest possible demonstration of the "on the market price" for an issuer's securities. The bidding
process provides a ready form of assurance to a public agency of a fair price for its debt. However, to the
extent that, without pre-marketing, the bidding underwriters place a "risk premium" on the bonds (to
compensate for the risk of holding bonds during the marketing period), the issuer will realize a higher
rate.
In a negotiated sale, the issuer can obtain assurance of a fair market price through the use of a
"pricing consultant" to verify that the bonds are being priced on the market. Typically issuers engage
pricing consultants for a fee ranging from $500 to $2,500, depending on the final product required —
elaborate reports for complicated financings tend to result in higher fees.
Underwriting Spreads
Historically, competitive sales provided lower underwriting costs to issuers than negotiated
financings. However, the spread between the two alternatives has declined sharply over time and is now
negligible. According to the Bond Buyer, in 1984 the average gross spread for negotiated issues was 58%
higher than for competitive issues. By 1992, however, in addition to a general decline in underwriting
spreads, the differential had declined to under 4%. These comparisons exclude the additional cost an
issuer must bear to pay for a financial advisor to prepare the financing for the market in a competitive
sale, which in most cases would eliminate any differential.
15260 VENTURA BLVD.,SUITE 900•SHERMAN OAKS,CA 91403-(818)789-2663•(800)992-2121 •FAX(818)789-1321
Ron Nault • •
February 1, 1994
Page 2
Flexibility
Negotiated financings provide issuers with considerably more flexibility relative to competitive
issues. An issuer conducting a competitive sale has two choices when bids are opened: accept the best
bid offered or reject all bids and try again later. In a negotiated sale, the underwriter can work with the
issuer on a real time basis to optimize the financing by restructuring maturities, tailor term bonds to meet
specific areas of buyer interest, utilize or forego bond insurance on specific maturities or change call
protection provisions. The negotiated sale also offers the issuer the flexibility to shift the time of the
pricing should market conditions warrant; either by accelerating or delaying the pricing date to steer
around uneven markets or into rallying markets. With respect to the timing of a financing, we believe the
publishing, noticing and closing requirements of the competitive sale process will add about one month to
the negotiated sale alternative.
As a final note, the Agency should recognize the specific needs of the refunding itself. In addition to
coordinating the sale of tax-exempt bonds, the Agency will also be engaged in structuring a portfolio of
government securities to defease the prior bonds. The purchase price of the refunding escrow has a direct
bearing on the size of the refunding issue. The purchase price for the securities which comprise the
escrow are subject to market fluctuations which often work in the opposite direction of the tax-exempt
rates for the refunding issue. The Redevelopment Law acknowledges this greater complexity in allowing
for the negotiated sale of refunding bonds.
Financing Timelines
The attachment includes two schedules reflecting competitive and negotiated financings. Both
financings move along the same timeline through the City Council meeting date approving documents for
sale. Thereafter, the schedules diverge given the requirement to publish the Notice of Sale, provide 15
days notice, allow for Agency Board approval of the sale and provide lead time to coordinate the closing
with the winning underwriter. As mentioned above, these elements add about one month to the process.
Variable vs. Fixed Rate Refunding
Almost every refinancing conducted in the municipal market utilizes some form of fixed rate debt.
Executing a variable rate refunding program requires the issuer to solve the problem of determining bond
yield and ensuring that the bond yield is not exceeded by the yield on the refunding escrow. Should the
refunding escrow yield exceed bond yield, then the issue will violate key provisions of the Tax Code with
a significant potential for the refunding bonds being declared taxable. We believe there are three possible
solutions to the variable rate yield problem:
Fund the refunding escrow with tax-exempt securities
The Agency could side-step the tax regulations by investing the refunding escrow in tax-exempt
securities, if allowed by the original bond indenture. The 1987 Bond Indenture, for example, allows the
use of State of California General Obligation Bonds as escrow securities. However, the 1991 Bond
Indenture limits the list of refunding escrow securities to federal securities. Consequently, the Agency
would be precluded from including the 1991 Bonds in a variable rate refunding.
pab\tustin\rn020194
Ron Nault • •
February 1, 1994
Page 3
Synthetically fix the variable rate yield with a Swap
The Agency could issue a variable rate refunding bond and then utilize a swap agreement to convert
the issue to a synthetic fixed rate. Limitations on the availability of swaps would generally preclude a
smaller issue, such as a refunding of the 1987 Bonds alone. However, a refinancing of the combined
1987 and 1991 Bonds may provide a sufficient critical mass for the effort, albeit with a smaller size
financing than the typical floating-to-fixed swap. In addition, the Agency should anticipate that an
additional four to six weeks would be required to secure a swap and prepare the appropriate documents.
Furthermore, the Agency should be aware that the risk of a failure by the swap counter-party poses a
special consideration. If the swap counterparty is unable to fulfill its obligations, then the Agency would
need to seek out a new counterparty(and face new terms for the swap agreement) or revert to the variable
rate issue.
Issue a "Trombone Bond", i.e., a variable period refunding issue
Instead of selling variable rate bonds, the Agency may wish to consider selling variable period bonds.
Under this program, the Agency would select an interest rate (most likely the refunding escrow yield) to
be the refunding bond yield and market bonds with a put (a mandatory resale back to the issuer) at the
point on the yield curve that produces that yield. To provide an example: if the yield on the portfolio of
government securities comprising the refunding escrow is, say, 4.50% and the yield on a 30-year fixed
rate refunding bond is 5.50%, then the Agency will realize 100 basis points of negative arbitrage,
resulting in a certain amount of forgone savings because of the inefficiency of the refunding escrow. By
marketing refunding bonds with a put in 2004, the Agency could obtain a bond yield of about 4.50%. In
2004, the refunding bonds would be remarketed for whatever period of time (within the term of the
Bonds) is required to obtain the 4.50%yield target. The refunding bonds would continue to roll over until
the final maturity of the Bonds.
While the Trombone Bond solves the problem of an inefficient refunding escrow, the Agency would
bear somewhat higher costs because (i) a liquidity facility, i.e., a letter of credit, would probably be
required for the put and (ii) the bonds subject to the put would require a premium relative to conventional
bonds. Furthermore, some additional time would be required to structure the Trombone Bond and secure
a liquidity facility. Ultimately, the Agency would need to examine whether the additional savings
generated by an efficient refunding outweighs the additional costs and effort required to structure the
financing as a Trombone Bond.
We look forward to working with the Agency in its financing program. Please feel free to call us at
(818)906-0315 should you have any questions regarding this letter.
Sincerely,
STONE& YOUNGBERG
Stephen y James R. Cervantes
Partner Partner
pab\tustin\rn020194
• •
I.
ATTACHMENT A
Preliminary Financing Schedule
Negotiated Sale
pab\tustin\rn020194
• •
TUSTIN COMMUNITY REDEVELOPMENT AGENCY
1994 Tax Allocation Refunding Bonds
FINANCING SCHEDULE-NEGOTIATED SALE
Revised January 31, 1994
FEBRUARY 1994 MARCH 1994
S M T W T F S S M T W T F S
1 2 3 4 5 1 2 3 4 5
6 7 8 9 10 II 12 6 7 8 9 10 II 12
13 14 15 16 17 18 19 13 14 15 16 17 18 19
20 21 22 23 24 25 26 20 21 22 23 24 25 26
27 28 27 28 29 30 31
Financing Team
Agency - Tustin Community Development Agency
Counsel - Bond Counsel
KH - Katz Hollis, Fiscal Consultant
S&Y - Stone& Youngberg, Underwriter
Responsible
Date Action Parties
2/1/94 Select Underwriter Agency
2/4/94 Kick-off Financing Team Meeting Agency, KH,
• Define Objectives Counsel, S&Y
• Clarify Work Items/Schedule
2/1 I/94 Deliver Preliminary Project Area Information KH
• Ownership and Values
2/15/94 Release First Draft Preliminary Official Statement(POS) S&Y
Release First Draft Legal Documents Counsel
2/21/94 Release Draft Fiscal Consultant's Report KH
• Assessment Appeals Information
2/25/94 Financing Team Meeting; All Parties
• Document Review
• Due Diligence
pb\tustin\schedncg Page I
• Financing Schedule: Negotiate a'Sale
Responsible
Date Action Parties
2/28/94 Release Second Draft POS and Legals to Agency S&Y, Counsel
for Agenda Package & Bond Insurance Companies
2/28/94 Final Fiscal Consultant Report Delivered KH
3/07/94 Agency Board Meeting Agency
• Approval of POS and Legals
• Authorize Sale and Parameters Resolution
3/08/94 Receive Bond Insurance Commitments S&Y
3/09/94 POS to Printer S&Y, OMM
3/11/94 POS Released to Investors S&Y
3/15/94 Bond Pricing S&Y, Agency
3/28/94 Preclosing All Parties
3/29/94 Closing All Parties
pb\tustin\schedneg Page 2
• •
ATTACHMENT B
Preliminary Financing Schedule
Competitive Sale
r
pab\tustin\m020194
• •
TUSTIN COMMUNITY REDEVELOPMENT AGENCY
1994 Tax Allocation Refunding Bonds
FINANCING SCHEDULE - COMPETITIVE SALE
Revised January 31, 1994
FEBRUARY 1994 MARCH 1994 APRIL 1994
S M T W T F S S M T W T F S S M T W T F S
1 2 3 4 5 1 2 3 4 5 I 2
6 7 8 9 10 II 12 6 7 8 9 10 Il 12 3 4 5 6 7 8 9
13 14 15 16 17 18 19 13 14 15 16 17 18 19 10 Il 12 13 14 15 16
20 21 22 23 24 25 26 20 21 22 23 24 25 26 17 18 19 20 21 22 23
27 28 27 28 29 30 31 24 25 26 27 28 29 30
Financing Team
Agency - Tustin Community Development Agency
Counsel - Bond Counsel
KH - Katz Hollis, Fiscal Consultant
S&Y - Stone & Youngberg, Financial Advisor
Responsible
Date Action Parties
2/1/94 Select Financial Advisor Agency
2/4/94 Kick-off Financing Team Meeting Agency, KH,
• Define Objectives Counsel, S&Y
• Clarify Work Items/Schedule
2/11/94 Deliver Preliminary Project Area Information KH
• Ownership and Values
2/15/94 Release First Draft Preliminary Official Statement(POS) S&Y
Release First Draft Legal Documents Counsel
Notice Inviting Bids & Bid Form
2/21/94 Release Draft Fiscal Consultant's Report KH
• Assessment Appeals Information
2/25/94 Financing Team Meeting; All Parties
• Document Review
• Due Diligence
pb\tustin\schedcom Page I
•Financing Schedule: Competitiv ale
Responsible
Date Action Parties
2/28/94 Release Second Draft POS, Legals,Notice Inviting S&Y, Counsel
Bids& Bid Form to Agency for Agenda Package
Deliver POS & Legals to Bond Insurance Companies S&Y, Counsel
2/28/94 Final Fiscal Consultant Report Delivered KH
3/07/94 Agency Board Meeting Agency
• Approval of POS and Legals
• Authorize Notice of Sale
3/08/94 Receive Bond Insurance Commitments S&Y
3/09/94 Notice Inviting Bids to Bond Buyer Counsel
3/14/94 Notice Inviting Bids Published
3/21/94 POS and Bid Form to Printer S&Y, OMM
3/24/94 POS and Bid Form Released to Bidders S&Y
4/04/94 Bid Opening S&Y, Agency
4/04/94 Agency Board Meeting Agency
• Award Bonds
4/26/94 Preclosing All Parties
4/27/94 Closing All Parties
pb\tustin\schedcom Page 2
• •
Page 2 • CALIFORNIA Pusuc FINANCE January 31,1994
Underwriting Volume ... From Pagel t s krSH\Tatt y�
sues totaling$1.7 billion with 5.9%of the market.Merrill ' �� � ~ . a"`t rito
Lynch&Co.was in third place with 59 deals,and 5.4%of ` `"� k ��t �s
the market P \ 11t1"11 "��tS
Dollar Volume
If the firms were ranked on dollar volume,however, MM Principal
Merrill Lynch led the pack as the top lead underwriter on Share Amount
long-term California municipal issues.The underwriter lead- Managing Underwriter Issues Rank % ($mil.)
managed$5.7 billion of deals,garnering 15.1%of the market
share in California based on dollar volume. Stone&Youngberg 124 1 11.4 $1,799
Ranking second in the dollar volume category was PaineWebber Inc. 64 2 5.9 1,709
Goldman,Sachs&Co.,which underwrote$4.5 billion of Merrill Lynch& Co. 59 3 5.4 5,746
issues and cornered 11.8%of the market.In 1992,Goldman, Smith Barney Shearson Inc. 56 4 5.1 2,134
Sachs ranked first among California underwriters with a dol-
lar volume total of$4.33 billion,producing a 15.9%market Sutro&Co. 51 5 4.7 626
share. Bank of America NT&SA 50 6 4.6 1,409
CS First Boston ranked third in 1993,with a dollar volume Miller& Schroeder 47 7 4.3 671
total of$3.9 billion and market share of 10.1%. Goldman,Sachs& Co. 35 *8 3.2 4,481
There were 1,088 overall issues in the overall California
market last year,producing total dollar volume of$38.15 Grigsby Brandford &Co. 35 *8 3.2 1,077
billion. Rauscher Pierce Refsnes 35 *8 3.2 323
Co-Manager Rankings
Based on number of issues,California co-manager
rankings showed Stone&Youngberg first with 179,fol � �� �
. lowed by PaineWebber Inc.with 119 and Merrill Lynch with
111.
Co-manager rankings,based on dollar volume,put • rs r'
Goldman Sachs first with$14.05 billion,followed by Merrill
Lynch with$12.38 billion and Smith Barney Shearson Inc.
with$10.92 billion. Principal
Amount Mkt No. of
Long-Term Debt Issuers Issuers ($ mil.) RankShare Issues
Among issuers of long-term debt in California,the Califor-
nia State Public Works Board topped other municipal issuers CA Public Works Board $2,384.5 1 6.3 12
with 12 issues totaling$2.4 billion.The Public Works Board California 1,862.4 2 4.9 5
issues represented 6.3%of the state's market in 1993. •
The State of California,which was the number one issuer LA. Dept.of Water& Power 1,761.7 3 4.6 6
in 1992 based on volume,came in second last year.The state Los Angeles 1,258.6 4 3.3 17
issued five deals that totaled$1.9 billion and comprised San Joaquin Hills
4.9%of the market Trans.Corridor 1,169.6 5 3.1 2
The Los Angeles Department of Water&Power ranked
third with$1.8 billion and a total of six issues.The CA Statewide Community
department's market share was 4.6%for the year. Development Authority 1,084.5 6 2.8 21
LA.County M.T.A. 1,077.0 7 2.8 3
Ranking by Number of Issues Sacramento MUD 901.9 8 2.4 3
If issuers were ranked on the number of issues they
brought to market,the University of California Regents came San Jose Redevelopment 773.8 9 2.0 6
in first,with 29 issues and a total of$736 million in issues. CA Housing Finance Agency 765.1 10 2.0 8
The California Statewide Community Development Au-
thority was second based on number of issues,with 21 issues (for a total of$1.1 billion.Los Angeles came in third,with 17 I Source: Securities Data Co. /
issues and a total of$1.3 billion in debt issuance.
-Mary Moore
•