The URL can be used to link to this page

Home My WebLink About03.e. (Handout) Updated Position Paper Item 3.e. (Handout) CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER (UPDATED 6/26/2018) MEETING DATE: JUNE 26, 2018 SUBJECT: REVIEW DRAFT POSITION PAPER TOADOPT RESOLUTION RECOMMENDING APPOINTMENT OF FINANCING TEAM FOR REFINANCING OF EXISTING 2009 OUTSTANDING DEBT OBLIGATIONS AND AUTHORIZE NEGOTIATED SALE OF REFINANCING BONDS SUBMITTED BY: INITIATING DEPARTMENT: PHI LI P R. LEI BER, DI RECTOR OF FI NANCE AND ADMI NISTRATI ON-FI NANCE ADMINISTRATION REVIEWED BY: THEA VASSALLO, FINANCE MANAGER ANN SASAKI, DEPUTY GENERAL MANAGER ROGER S. BAILEY GENERAL MANAGER ISSUE Per Board Policy 029-Debt Management and Continuing Disclosure Policy, Board approval is required for the selection of the financing team that will assist with the execution of the 2009 bond refinancing transaction. The financing team includes the appointment of a financial advisor, bond counsel/disclosure counsel and a senior managing underwriter to issue the bonds through a negotiated bond sale. BACKGROUND At previous Finance Committee and Board meetings,staff have discussed the potential to achieve savings through refinancing Central San's 2009 outstanding debt. The attached memo addresses current market conditions,anticipated saving from a refinancing,and recommendations on the structure for the refunding. Key issues still outstanding and included in the attached memo include: • Whether to issue Certificates of Participation or Revenue Bonds. • Whether to proceed with refinancing only on the Series 2009A bonds,or in addition,the Series 2009B bonds. In addition to seeking the Board's input on the issues listed above,staff is seeking the Board's approval on the appointment of the financing team to assist in issuance of the refunding bonds. The team is comprised of a Financial Advisor, Bond Counsel/Disclosure Counsel and Underwriter. • The Financial Advisor is PFM Financial Advisors LLC ("PFM"). Central San appointed PFM and Sperry Capital as financial advisors in December 2017,with PFM to serve as the financial advisor for this refinancing transaction. P F M's work on this matter will include financial analysis related to the potential refunding savings,assistance in selecting an underwriter,evaluation of bond structuring alternatives, bond document review, bond pricing, interfacing with the rating agencies,and assistance with state and federal initial and continuing disclosure compliance. P F M's fee for this work, payable from bond proceeds,will be$47,500. • The law firm of Jones Hall served as both bond counsel and disclosure counsel to Central San in the 2009 bond issuance. The District has been well served by their previous work,and staff believes it is prudent and cost effective to have this firm continue in those roles. Jones Hall drafted the documents related to the existing bonds,and they are well situated to draft new agreements on the refunding bonds. As to the disclosure counsel work,their familiarity with Central San,and the existing bond official statement will allow them to assist with constructing required disclosures for the new bonds in the most timely and cost effective manner. Jones Hall's fees for bond counsel are$60,000,and for disclosure counsel are$40,000. Both of these fees are payable from bond proceeds as a cost of issuance. • Underwriter: Staff recommends appointing Piper Jaffrey as senior managing underwriter. PFM conducted a RFP process in early J une by notifying a total of 9 underwriting firms of Central San's proposed bond refunding. The list of firms notified was comprised of three firms that approached Central San to indicate the District should consider refunding existing debt to save money, plus another six firms who are active issuers for water and wastewater bonds. These firms were asked to address several issues including the optimal bond structure and anticipated yields, marketing approach,and underwriting cost. Six firms presented written proposals: Barclays, Piper Jaffrey, Prager&Co., Raymond James, Stifel,Wells Fargo. Based on qualifications, proposed structure and cost as outlined in the informal RF P,staff and P F M narrowed the underwriter selection to two firms: Stifel and Piper Jaffrey. Final interviews to select the proposed underwriter were conducted on June 20-21,2018. The following factors set forth in the request for proposal were considered in the selection: A. Quality of proposal and responses to specific questions included in this RFP. B. Ability to structure and market the bonds in a manner that will result in the lowest possible cost of capital; C. Experience on similar financings in California. D. Relevant qualifications of key personnel assigned to this financing. E.Accessibility of key personnel to the District's staff during the engagement. F. Understanding of the District's financing objectives. G. Distribution capabilities. H. Reasonableness of fees. Both firms submitted excellent proposals and were highly qualified. Piper Jaffrey distinguished themselves with respect to items CID and F, including very strong wastewater experience,and view of current and longer term financing District needs. With respect to underwriter's cost,this is a specified dollar amount per bond that covers their fees(take-down fee)and a provision for other expenses including underwriter's counsel. The proposed fees are as follows: $3.19 per$1,000 bond. This equates to about$51,100 for Series 2009 A,and an additional 20%of that if the Series 2009B bonds are also financed. The costs of the debt to Central San would include those fees, plus the yield on the bonds,which are typically quoted as a spread over a benchmark(called MMD,for Municipal Market Data)index of"AAA"tax exempt bonds. This spread is to be negotiated with the assistance of P F M near the time of issuance. This spread is to allow the underwriter to market the bonds to investors after the underwriter purchases the bonds from the District. Setting this spread too high could result in the District paying a higher interest cost than necessary and setting it too low could result in the underwriter losing money on the bonds if they are unable to resell them to investors at a price equal or higher than they paid Central San. The anticipated savings related to the refinancing are net of the cost of issuing the new bonds,and the steps necessary to defease the existing debt. The direct costs to refinance the Series 2009A bonds apart from underwriter costs are anticipated to be approximately $200,000,consisting of: Financial Advisor Fee $475500 Bond Counsel $60,000 Disclosure Counsel $40,000 Moody's Rating $24,000 S&P Rating $245000 Other miscellaneous cost 4 500 Total costs without underwriter costs $200,000 If the Series 2009B bonds are also refinanced,certain additional minor costs may also be incurred by Central San. An updated cost schedule will be provided at the July meeting if it appears likely the Series B bonds will be refinanced. Schedule and Next Steps An initial financing schedule was prepared by PFM in May and provided to the Finance Committee on May 21,2018. An updated version of the schedule is provided as Attachment 3,with some of the mid-course milestones dates updated. The targeted issuance date remains early to mid-September, but with targeted pricing in August. The next key milestone for Board and Finance Committee involvement will be approval of several key documents related to the Financing in July,as noted below: 1. Adoption of the Refinancing Resolution,authorizing the refinancing of existing debt to take advantage of interest cost savings. 2. Approval of draft Preliminary Official Statement for the refunding obligations 3. Approval of other necessary documents to authorize and implement the refinancing At the July Finance Committee and related Board meetings, Financing Team members will available to answer any questions the Board may have. ALT ERNAT IVES/CONSIDERAT IONS Do not refinance the bonds. FINANCIAL IM PACTS The 2009 obligations,whether Series A alone,or also with Series B,will be refinanced only if cost effective and will result in savings to Central San. Preliminary indications are that savings on the order of$1 million to$1.4 million are possible for the Series A bonds,and potentially another$100,000 or so for the Series B bonds. This is anticipated to result in a potential reduction in the Sewer Service Charge of approximately 75 cents per year through 2029(ranging from about$1 per year in the first five years and declining to about 20 cents in 2029 as the amount of bonds outstanding declines). COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its meeting on June 26,2018 and recommended that the Board: RECOMMENDED BOARD ACTION Staff recommends that the Board: 1. Adopt the proposed resolution appointing the financing team proposed for the refinancing of 2009 obligations consisting of P F M Financial Advisors LLC as financial advisor, Jones Hall as disclosure and bond counsel,and Piper Jaffrey as senior managing underwriter;and 2. Authorize that the refunding securities be sold on a negotiated basis with the senior managing underwriter. Strategic Plan Tie-In C GOAL THREE:Be a Fiscally Sound and Effective Water Sector Utility Strategy 2-Manage costs ATTACHMENTS: 1. Memo To General Manager 2. Updated Transaction Calendar