As outlined in the City’s Financial Management Policy Statements (FMPS), the City’s financial advisor (FA) monitors the bond market for potential refunding opportunities that will provide the City savings in repayment of outstanding bond obligations compared to current bond structures. As a general rule in the FMPS, the net present value savings of a particular refunding should exceed 3.0% of the refunded maturities. The City will utilize a negotiated process when the issue is, or contains, a refinancing that is dependent on market/interest rate timing. The City shall award the bonds based on a true interest cost (TIC) basis.

First Southwest, a Division of Hilltop Securities  - the City’s FA, has brought forward an opportunity to refund an outstanding bond issue for significant savings. The issue is an advance refunding, meaning the delivery of funds is over 90 days in advance of the call date, and will require an escrow account to be structured to meet the call dates of the bonds to be refunded. Based on current market volatility and the need to structure the escrow to match the refunding needs, the FA recommends that the transaction be conducted as a negotiated sale.

The issue to be refunded is the 2011 Certificates of Obligation, which were issued to construct the City's Surface Water Treatment Plant and related infrastructure.  Debt service on this issue is paid 100% from the Surface Water Fund.  The bonds, with maturity dates in 2021-2041, are callable on February 15, 2020.  The recommended principal to be refunded is $80.935 million, and the average current coupon is 4.801%. 

Based on November 6 market conditions, with a new par amount of $76.69 million and a true interest cost of 3.22%, the refunding could yield $9.26M in net present value savings; with total estimated debt service savings of $13.59 million, and an average annual debt service savings of $617,859 for 22 years.  Present Value savings is equal to 11.4462% of the refunded bonds - well above the minimum in the FMPS.

Based on MSRB Rule G-17, the FA may no longer recommend underwriters to participate in a negotiated transaction. Recommended underwriters for this transaction are Citigroup Global Markets and JP Morgan Securities. Initially, Citigroup was recommended; at the suggestion of the City Council Finance / Audit Committee, staff explored adding a second underwriter to ensure competitive pricing and has added JP Morgan to the recommendation. Citigroup has broad reach and a variety of institutional investors, and JP Morgan also had broad reach and significant retail market presence.

Finance staff are already working with First Southwest (Hilltop Securities) and Andrews Kurth Kenyon to prepare the bond offering documents, schedule rating calls, allow for due diligence by the underwriters and get the refunding to the market on a very aggressive schedule to ensure that the City does not lose this opportunity due to potential changes from the proposed federal Tax Reform Act. A preliminary official statement has been distributed to rating agencies, and ratings calls are scheduled for the week of November 20.

The proposed refunding was reviewed with the Finance/Audit Committee on November 13.