HomeMy WebLinkAbout5C OCRCITY COUNCIL STAFF REPORT
DATE: October 22, 2020 NEW BUSINESS
SUBJECT: APPROVE REFINANCING OF LEASE REVENUE BONDS, SERIES 2012
B AND AUTHORIZE ACCEPTANCE OF REFINANCING PROPOSAL
FROM CAPITAL ONE PUBLIC FUNDING, LLC
FROM: David H. Ready, City Manager
BY: Nancy Pauley, Director of Financeffreasurer
SUMMARY
In 2012, the City of Palm Springs Financing Authority (Authority) issued Lease Revenue
Bonds to fund public improvements in the Downtown. The 2012 Bonds mature in 2035
and bear interest at 4.5%. The City and the Authority can refinance the 2012 Bonds at
this time and save approximately $3.6 million over the next 2 years.
In 2013, the City and the Authority entered into lease financing with Capital One Public
Funding to finance energy conservation equipment. The 2013 Lease matures in 2034
with an average interest rate of 4.06%. The City and the Authority can refinance the
2013 Lease at this time and save approximately $1.4 million over the next 13½ years.
RECOMMENDATION:
1. Authorize the City Manager to execute the Capital One Public Funding term sheet,
accepting the interest rate and other terms and conditions of their offer to refinance
the 2013 Lease; and
2. Authorize the City Manager to direct financing consultants to prepare documents
required for the refinancing of the 2012 Bonds and the 2013 Lease, and schedule
action for the November 12, 2020, City Council meeting.
BUSINESS PRINCIPAL DISCLOSURE:
The lease agreement to refinance the 2013 Lease will be assigned to Capital One
Public Funding LLC, a Delaware corporation (COPF). COPF is a corporation and
wholly-owned subsidiary of Capital One Financial Corporation, a diversified financial
services holding company with banking and non-banking subsidiaries, offering a broad
array of financial products and services to consumers, small businesses and
BTEM No._5 _____ C __
City Council Staff Report
October 22, 2020 -Page 2
2012 Bond Refinance 12013 Lease Refinance
commercial clients. According to financial information from March 2020, the largest
shareholder of Capital One Financial Corporation stock is an investor management
fund, Dodge & Cox, with just under 9% of the company, followed by mutual fund
operator The Vanguard Group Inc., with a reported 7.82% ownership. No individual
owns 5% or more of Capital One Financial Corporation stock.
BACKGROUND
The City has several outstanding debt obligations payable from the General Fund as
shown in the table below:
-~-~; .. ;!':'. _,T~-~-~1:~:~~;~---.~ ---. -.. _, -.-,
~ t-.~ ...... :i"ssu'e :Name -·, =. . .:...iif :Fin'al ,Maturitv.:./ •Call lDate --· __ Pu_r~ose --~~
4/17/2007 $19,832,588 $ 18,912,276 2007 Taxable Pension
Obligation Bonds
2/22/2012 23,980,000 13,765,000 Lease Revenue Bonds,
2012 Series A
6/28/2012 Lease Revenue Bonds, 44,965,000 34,070,000
2012 Series B
7/23/2013 18,402,793 16,037,963 Lease Agreement with
Capital One
8/19/2014 45,550,000 40,770,000 Lease Revenue Bonds,
2014 Series A
12/15/2015 5,680,000 4,555,000 2015 Lease Revenue
Bonds
10/14/2016 3,270,628 2,713,960 Lease Agreement
6/13/2017 2017 Lease Revenue 9,970,000 7,300,000
Refunding Bonds
11/30/2017 766,431 314,007 Lease Agreement
12/22/2017 1,014,725 395,425 Lease Agreement
12/5/2019 1,376,623 1,376,623 Lease Agreement
<1) Charged to Measure J Fund
<2) Callable prior to redemption with premium
<3) A portion allocable to the Golf Course
6/1/2031 None Finance PERS UAL
11/1/2025 11/1/2022 Refund 2001 Convention
Center Bonds
6/1/2035 6/1/2022
Downtown Revitalization
Project(ll
8/1/2033 8/1/2023 Finance Cooling Tower and
Energy Efficiency Equipment
8/1/2035 11/1/2024 Refund 2004 Convention
Center Bonds (Expansion)
11/1/2027 None Refund 2002 COP-
Downtown Parkine: Structure
10/14/2031 Any Date121 Acquire Fire Apparatus
5/1/2027
Refund 2007 Lease Revenue
None
Bonds -Multiple Projects (3 l
1/1/2022 Any Date121 Acquire Police Vehicles
2/28/2023 Any Date121 Acquire Golf Course
Equipment
10/1/1934 Any Date121 Acquire Fire Apparatus
Periodically Staff and the City's Financial Advisor (Harrell & Company) review the debt
to determine if there are any opportunities to refinance and generate debt service
savings. Due to the tax law changes in 2017, outstanding tax-exempt bonds that
previously could be refinanced ( or "refunded") prior to their earliest call date on a tax-
exempt basis, now can only be refinanced on a taxable basis if they are refunded more
than 90 days prior to their earliest call date. For most tax-exempt bonds, the earliest call
date is generally a date about 10 years after the issue date, providing bond holders with
some limited call protection from having their bonds redeemed prior to maturity.
2
City Council Staff Report
October 22, 2020 -Page 3
2012 Bond Refinance 12013 Lease Refinance
Most of the City's General Fund bonds or lease debt were issued after 2011 and can
only be refinanced at this time at taxable municipal bond rates instead of tax-exempt
municipal bond rates due to the 2017 tax law changes. While we are still in a low
interest rate environment, taxable municipal interest rates are still higher than tax-
exempt municipal interest rates, and the use of taxable municipal interest rates has an
impact on the amount of potential savings resulting from any refinancing.
Leases and Lease Revenue Bonds
The method that cities in California usually employ to issue long-term debt for General
Fund purposes is to enter into a long-term lease agreement. The lease payments are
subject to annual appropriation and the lease payments are then used to secure bonds.
This method of issuing long-term debt does not require voter approval. However, the
assets subject to the lease need to provide enough value for the lease payments being
made.
Typically, if a lease payment is missed, the only remedy available to bond holders is for
the bond trustee to "re-let" the property to another party and obtain lease payments from
another source. There is no mortgage or deed of trust on the leased property and the
trustee cannot foreclose on the property. Due to the governmental purpose of the
property leased, a court may not allow the re-leasing of such property to another party,
and there are very few instances in which this has occurred. Bond holders are familiar
with this limitation.
STAFF ANALYSIS:
Refinancing Opportunities
Lease Revenue Bonds.
After reviewing all the outstanding bond obligations, Harrel & Company determined that
the only lease revenue bonds that can be refinanced at a savings at this time are the
Lease Revenue Bonds, 2012 Series B (Downtown Revitalization Project) ("2012
Bonds"). The 2012 Bonds are callable on June 1, 2022, and the refunding bonds would
be issued at taxable interest rates. There is enough differential between the existing
rates (2.4% current taxable compared to 4.5% existing non-taxable) to produce more
than 8% reduction in payments.
Harrell & Company prepared several structures for review by the Finance
Subcommittee with options for:
(1) A level annual savings every year (9.6% reduction);
(2) A large savings in FY 2020-21 and smaller annual savings every year thereafter
(8.9% reduction); or
3
City Council Staff Report
October 22, 2020 -Page 4
2012 Bond Refinance I 2013 Lease Refinance
(3) A large savings in FY 2020-21, a moderate savings in FY 2021-22 and no annual
savings thereafter (8.3% reduction).
The third option is structured to provide all the savings that would have been received
over time in the first two critical years following the COVI D-19 budget impacts. Staff
recommends, with Finance Subcommittee concurrence (Mayor Kors/Councilmember
Middleton) that refunding bonds be structured using the third option -in a manner that
provides all the savings in the first two fiscal years.
The following chart shows the estimated savings per year is based on interest rates
current as of October 6, 2020, assuming AA Credit Rating.
June 1, 2021 $2,396,906 $ (4,000) $2,392,906 $ 312,000 $2,080,906
FY 2022 3,186,363 (8,000) 3,178,363 1,757,000 1,421,363
FY 2023 3,183,763 (16,000) 3,167,763 3,140,000 27,763
FY 2024 3,186,013 (16,000) 3,170,013 3,142,000 28,013
FY 2025 3,183,763 (24,000) 3,159,763 3,137,000 22,763
FY 2026 3,187,175 (24,000) 3,163,175 3,139,000 24,175
FY 2027 3,185,075 (32,000) 3,153,075 3,140,000 13,075
FY 2028 3,187,463 (32,000) 3,155,463 3,138,000 17,463
FY 2029 3,187,063 (48,000) 3,139,063 3,137,000 2,063
FY 2030 3,188,063 (48,000) 3,140,063 3,138,000 2,063
FY 2031 3,187,513 (48,000) 3,139,513 3,141,000 (1,488)
FY 2032 3,186,988 (48,000) 3,138,988 3,140,000 (1,013)
FY 2033 3,186,200 (64,000) 3,122,200 3,138,000 (15,800)
FY 2034 3,184,975 (64,000) 3,120,975 3,138,000 (17,025)
FY 2035 3,188,063 (3,188,063)
FY 2036
FY 2037 l 3l
47,005,381 (3,664,063) 43,341,319 39,737,000 3,604,319
% Reduction 8.3%
(1) 2012 Bonds Issued with 23 Years of Debt Service to be fully repaid prior to
expiration of Measure J
(2) $3, 188,063 Held by Trustee and Used to Offset Final Payment; Annual Earnings
Estimated between .25% and 2.0% over life of Bonds.
(3) Measure J Sales Tax Expires March 31, 2037
4
City Council Staff Report
October 22, 2020 -Page 5
2012 Bond Refinance 12013 Lease Refinance
The 2012 Bond payments are structured to be paid directly from the Measure J sales
tax and the final maturity is slightly before the expiration of Measure J in 2037. The
Measure J Fund carries an annual debt service payment of approximately $3.2 million
for the 2012 Bond payments.
The soonest that the 2012 Bonds could be refinanced would be early December 2020
with documents presented for the City Council's consideration and approval at its next
meeting on November 12, 2020. The issuance process involves preparing an official
statement (the document that is used to offer bonds to investors) as well as the
indenture and lease agreement necessary to detail the security for the 2020 Bonds.
S&P would review the City's credit rating during this time.
It is not certain if there will be a change in the City's existing credit rating as a result of
the COVID-19 impact on the City's revenues. The table below provides a range of
savings estimates based on varying credit ratings. If the City can maintain its current AA
lease revenue bond rating because of better than anticipated revenue numbers and the
cost cutting measures already implemented, the savings are estimated at 8.3%. If there
is a downgrade in the credit rating to AA-minus, the savings will decrease. If there is an
increase or decrease in interest rates generally, the savings will also change. The table
below shows the sensitivity of the percent savings to possible credit rating or interest
rate changes.
.... ,j.• . ..:,\.
0 tion 8.3°/c · 7.6°/c 6.8% _-. 10.0%
Since the Bonds would be issued after the November 3 election, it is not possible to
predict finance rates after November. If the savings were not sufficient to achieve the
City's savings goal for the refunding, the City can wait for possibly better interest rates
after the first of the year before issuing the Bonds. The City's debt policy requires at
least a 4% savings for refunding (absent some other specific reason for restructuring
debt).
Lease Agreements.
After reviewing all the outstanding lease obligations, Harrell & Company determined that
the lease that can be refinanced at a savings at this time is the 2013 Lease Agreement
("2013 Lease"). The 2013 Lease was entered into directly with Capital One Public
Funding ("Capital One") and there are no bonds associated with this lease. The 2013
Lease is the financing instrument used to generate the capital funds for the City's $18
million City-wide energy management project that resulted in upgrading irrigation meters
and systems at all City facilities and park, upgraded interior and exterior lighting to LED,
and reconstructed the City's Co-Generation Plants at City Hall and Sunrise Plaza .
5
City Council Staff Report
October 22, 2020 -Page 6
2012 Bond Refinance I 2013 Lease Refinance
Capital One has offered to amend the lease to change the earliest call date to
December 1, 2020 with no premium, which would allow the City to refinance the 2013
Lease on a tax-exempt basis. Capital One makes this concession only if the City enters
into a new lease with them on similar terms as the existing lease to refinance the
outstanding balance, but with a lower interest rate. The rate Capital One is offering is an
average 2.96% interest rate, compared to the existing average rate of 4.06%. Executing
the new lease agreement with Capital One would reduce the payments by an average
6.8% ($1.4 million) over the remaining 13 ½ years. The savings are shown below.
6/30/2021 $
6/30/2022
6/30/2023
6/30/2024
6/30/2025
6/30/2026
6/30/2027
6/30/2028
6/30/2029
6/30/2030
6/30/2031
6/30/2032
6/30/2033
6/30/2034
$
604,000 $
1,254,000
1,299,000
1,343,000
1,390,000
1,440,000
1,494,000
1,549,000
1,607,000
1,662,000
1,724,000
1,789,000
1,857,000
1,928,000
20,940,000 $
% Payment Reduction
567,000 $
1,177,000
1,219,000
1,262,000
1,305,000
1,352,000
1,402,000
1,453,000
1,508,000
1,533,000
1,591,000
1,650,000
1,713,000
1,778,000
19,510,000 $
37,000
77,000
80,000
81,000
85,000
88,000
92,000
96,000
99,000
129,000
133,000
139,000
144,000
150,000
1,430,000
6.8%
6.1%
6.1%
6.2%
6.0%
6.1%
6.1%
6.2%
6.2%
6.2%
7.8%
7.7%
7.8%
7.8%
7.8%
Without the amendment proposed by Capital One to change the early redemption and
enter into a new lease with them, there is no potential for savings by refinancing the
2013 Lease with a traditional bond issue at this time, or by combining it with the
refunding of the 2012 Bonds.
The terms of the Capital One lease require the City to execute a Term Sheet stating the
conditions of the new lease by October 23, 2020 in order to lock the interest rate, and to
enter into the new lease and payoff the 2013 Lease by December 1. There is no
issuance of bonds involved in this refinancing. Staff recommends that the City Council
6
City Council Staff Report
October 22, 2020 -Page 7
2012 Bond Refinance 12013 Lease Refinance
move forward on this refinancing and authorize the City Manager to execute the Term
Sheet on October 23. Final lease documents for the City Council's consideration and
approval will be presented at the November 12, 2020 City Council meeting.
The Term Sheet is included as Attachment 1.
ENVIRONMENTAL IMPACT:
Pursuant to the California Environmental Quality Act (CEQA), this item is categorically
exempt under CEQA, in that it can be seen with certainty that there is no possibility that
this action will have any effect on the environment.
FISCAL IMPACT:
The refinancing of the 2012 Bonds is expected to save approximately $3.6 million in
debt service payments during Fiscal Years 2020-21 and 2021-22.
The refinancing of the 2013 Lease is expected to save approximately $1.4 million in
debt service payments over the next 13 ½ years. Most of these savings will be realized
by the General Fund, with a small portion realized by the Airport Fund.
SUBMITTED:
Nancyuley 8
Director of Finance/Treasurer
Attachments:
1. Term Sheet
.
MarcusFuller,PE MPA
Assistant City Manager/City Engineer
7
ATTACHMENT 1
8
October 2, 2020
Suzanne Harrell
s.harrell@harrellco.com
Subject: City of Palm Springs, California
Potential Refunding of 2013 Leases
Dear Suzanne:
This term sheet is presented by Capital One Public Funding, LLC ("COPF") to the City of Palm Springs,
California, ("Borrower or City") in connection with our discussions regarding the potential refunding of the
2013 leases held by COPF. COPF is the 100% owner of the City's 2013 Lease for the Unity Center and park
space with a final maturity of 08/01/33 ("Loan l ") and 2013 Lease for a Cogeneration Facility and ECMs
with a final maturity of05/01/29 ("Loan 2") (together "2013 Loans"). As per our recent discussions, although
the 2013 Loans are not currently callable, COPF is willing to allow the City to prepay the vast majority of
the 2013 Loans no later than December 1, 2020, upon 5 days prior written notice, on the following terms:
Loan 1:
• For Loan 1, COPF shall allow the special prepayment of all mandatory redemptions due and
payable on 05/01/21 through and including 08/01/33 ($11,303,180) at 100% of the prepaid
amount plus accrued interest to the prepayment date;
• The remaining $54,791 of Loan 1 due and payable on 02/0 l/21 shall either remain unrefunded or
may be defeased, at the City's option;
• The amortization of the Loan shall substantially track the amortization of the Loan 1; and
• The Refunding of Loan 1 shall a) have an interest rate of3.10%; and b) be callable beginning
08/0 l /28 at 102% on any interest payment date.
Loan 2:
• For Loan 2, COPF shall allow the special prepayment of all mandatory redemptions due and
payable on 05/01/21 through and including 05/01/29 ($4,294,767) at 100% of the prepaid amount
plus accrued interest to the prepayment date;
• The remaining $91,881 of Loan 2 due and payable on 02/01/21 shall either remain unrefunded or
may be defeased, at the City's option;
• The amortization of the Loan shall substantially track the amortization of the Loan 2; and
• The Refunding of Loan 2 shall a) have an interest rate of2.30%; and b) be callable beginning
05/01/27 at 102% on any interest payment date.
9
ea;;~~-
Public Funding
Interest Rate Assumptions
The above-quoted interest rates are based upon the assumptions set forth above regarding average life and
final maturity. Any changes from the assumptions may require an adjustment to the quoted rates. The rates
may also be subject to change if the contemplated Loan is not closed by December 1, 2020.
Documentation
Loan documentation shall be prepared by qualified bond counsel subject to review by COPF and its counsel.
Borrower shall provide, at its expense, an opinion oflegal counsel (acceptable to COPF) attesting to the legal,
valid, and binding nature of the transaction and the tax-exempt nature of the interest component of the Loan
payments. Upon selection ofCOPF, the Borrower shall provide COPF the draft authorizing document for its
review and comment.
Costs of Issuance
The Borrower shall be responsible for normal borrower costs of issuance including a financial advisor,
placement agent and bond counsel. No fees will be due to COPF, which shall be responsible for the costs of
its own legal review.
Direct Purchase
The Loan shall be directly funded/purchased by (and registered in the name of) COPF and delivered in
physical, non-book-entry, certificated form. The Loan shall not be (i) assigned a separate rating by any rating
agency; (ii) registered with the Depository Trust Company or any other securities depository; (iii) issued
pursuant to any type of official statement, private placement memorandum or other offering document; or
(iv) assigned a CUSIP number.
Audited Financial Statements
Upon request, as soon as available, the Borrower shall send COPF a copy of its audited financial statements
as of the end of the fiscal year.
Municipal Advisor Rules
This term sheet is provided to the Lessee pursuant to and in reliance upon the "bank exemption" provided
under the municipal advisor rules of the Securities and Exchange Commission, Rule 158a 1-1 seq.
Role of Capital One Public Funding, LLC
The Borrower acknowledges and agrees that: (i) the information contained in this term sheet is for discussion
purposes only and sets forth certain proposed terms and conditions of an arm's-length commercial transaction
between the Borrower and COPF and does not constitute advice, an opinion or a recommendation by COPF;
(ii) the Borrower will make its own determination regarding whether to enter into the proposed transaction
and the terms thereof, and will consult with and rely on the advice of its own financial, accounting, tax, legal
and other advisors; (iii) COPF is acting solely for its own account in connection with the proposed
transaction, and is not acting as a municipal advisor, financial advisor, agent or fiduciary to the Borrower or
any other person or entity (including to any financial advisor or placement agent engaged by the Borrower)
and the Borrower, its financial advisor and placement agent are free to retain the services of such advisors
(including as it relates to structure, timing, terms and similar matters and compliance with legal requirements
applicable to such parties) as it deems necessary or appropriate; (iv) COPF has no fiduciary duty pursuant to
Section 158 of the Securities Exchange Act of 1934 to the Borrower with respect to the transaction
contemplated hereby and the discussions, undertakings and procedures leading thereto; (v) neither COPF nor
any of its affiliates is acting as a broker, dealer, underwriter or placement agent with respect the transactions
contemplated hereby; (vi) the only obligations COPF has to the Borrower with respect to the transaction
contemplated hereby expressly are set forth in this term sheet; and (vii) COPF is not recommending that the
Borrower take an action with respect to the transaction contemplated by this term sheet. Before taking any
action with respect to the Loan, the Borrower should discuss the information contained herein with the
Borrower's own legal, accounting, tax, financial and other advisors, as it deems appropriate. If the Borrower
City of Palm Springs, California
Potential Refunding of 2013 Leases
October 2, 2020
Page2
10
would like a municipal advisor in this transaction that has legal fiduciary duties to it, Borrower is free to
engage a municipal advisor to serve in that capacity.
Other Information
To the extent that updated financial and other credit materials have not already been provided to COPF or
are not available through public resources, COPF may require and request the following: audited and
unaudited financial statements; budgets; information on outstanding bond issues, lease transactions, and
contingent/material liabilities; tax base details; and other reasonable and customary information relevant to
the Borrower's credit quality and the source of repayment.
Confidentiality
The information contained herein is strictly confidential and is intended for review by the parties, their
advisors and legal counsel only and may not be disclosed to any other person or entity, except as required by
law or otherwise consented to by COPF.
Closing
Closing is anticipated to take place on December 1, 2020. The funding of the Loan will occur only after,
among other things, COPF, the Borrower, and their respective counsels are fully satisfied with the terms of
the Loan documents and all of the terms and conditions contained herein and in the Loan documents have
been met.
Term Sheet Expiration
This term sheet shall expire ifnot accepted by the Borrower by October 23, 2020. Once accepted, this Term
Sheet shall expire if the transaction has not closed by December 1, 2020, unless extended by COPF at its ole
discretion.
Subiect to Final Credit Approval
Specifically, but without limitation, this Term Sheet has not yet received all necessary internal and committee
approvals of COPF. Any obligation of COPF to provide financing or otherwise shall arise only upon the
execution of final Loan documents signed by authorized signatories of COPF and not from statements ( oral
or written) made during the course of discussions among the parties (whether or not prior to or after the date
hereof).
Should the above-stated terms be acceptable to you, formal approval through COPF's internal credit
process will be pursued as quickly as possible.
Thank you for the opportunity to offer this term sheet. Should you have any questions, please do not
hesitate to contact me at 505.503.7629 or jeffrey.sharp@capitalone.com.
Sincerely,
I ;\ ()
.
LI +/.t:. tU . .-f )J_ Ji~ .. ,t1_ ·~
/:(:..(, 1 v .f . -~·r· c./ l .
Jeffrey D. Sharp
Senior Vice President, Director of Business Development
Capital One Public Funding, LLC
cc: Jonathan Lewis, Capital One Public Funding, LLC
Brenda Barnes, Capital One Public Funding, LLC
City of Palm Springs, California
Potential Refunding of 2013 Leases
October 2, 2020
Page3
11
ACCEPTED BY: City of Palm Springs, California
By
Name
Title
City of Palm Springs, California
Potential Refunding of 2013 Leases
October 2, 2020
Page4
12