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Item #4&5- Refunding Bond
- 1. City of Alamo Heights
Refunding Analysis of Combination Tax and Revenue
Certificates of Obligation, Series 2007
March 8, 2016
- 2. M A R K E T U P D AT E
- 4. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
AAA MMD Yield Comparisons(1)
4
(1) Source: Thomson Reuters Municipal Market Data.
- 5. R E F U N D I N G O P P O RT U N I T Y
- 6. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
Proposed Refunding Opportunity
6
The Series 2007 CO’s funded
both General Fund and Utility
System The Projects were funded
in one bond issue in order to
reduce the costs of issuance
The two structures were
formulated independently, but
then aggregated for purposes of
the bond sale
The information to the right is the
aggregate debt structure
Original Principal Amount $7,500,000
Callable Principal $3,010,000
Callable Maturities 2018 - 2027
Coupons 3.990%
Call Date 8/15/2017
Combination Tax and Revenue Certificates of
Obligation, Series 2007
Maturity Interest Rate Principal Call Date
8/15/2018 3.990% 630,000$ 8/15/2017
8/15/2019 3.990% 660,000 8/15/2017
8/15/2020 3.990% 685,000 8/15/2017
8/15/2021 3.990% 130,000 8/15/2017
8/15/2022 3.990% 135,000 8/15/2017
8/15/2023 3.990% 140,000 8/15/2017
8/15/2024 3.990% 150,000 8/15/2017
8/15/2025 3.990% 155,000 8/15/2017
8/15/2026 3.990% 160,000 8/15/2017
8/15/2027 3.990% 165,000 8/15/2017
3,010,000$
Combination Tax and Revenue Certificates of Obligation,
Series 2007
- 7. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
Proposed Refunding Opportunity
7
The schedules below show the specific information for the Tax Portion and Utility System Portion respectively
Original Principal Amount $5,165,000
Callable Principal $1,615,000
Callable Maturities 2018 - 2027
Coupons 3.990%
Call Date 8/15/2017
TAX PORTION ONLY
Combination Tax and Revenue Certificates of
Obligation, Series 2007
Maturity Interest Rate Principal Call Date
8/15/2018 3.990% 115,000$ 8/15/2017
8/15/2019 3.990% 120,000 8/15/2017
8/15/2020 3.990% 125,555 8/15/2017
8/15/2021 3.990% 130,000 8/15/2017
8/15/2022 3.990% 135,000 8/15/2017
8/15/2023 3.990% 140,000 8/15/2017
8/15/2024 3.990% 150,000 8/15/2017
8/15/2025 3.990% 155,000 8/15/2017
8/15/2026 3.990% 160,000 8/15/2017
8/15/2027 3.990% 165,000 8/15/2017
1,395,555$
UTILITY SYSTEM PORTION ONLY
Combination Tax and Revenue Certificates of Obligation,
Series 2007
Maturity Interest Rate Principal Call Date
8/15/2018 3.990% 515,000$ 8/15/2017
8/15/2019 3.990% 540,000 8/15/2017
8/15/2020 3.990% 560,000 8/15/2017
1,615,000$
TAX PORTION ONLY
Combination Tax and Revenue Certificates of Obligation,
Series 2007
Original Principal Amount $2,335,000
Callable Principal $1,395,555
Callable Maturities 2018 - 2027
Coupons 3.990%
Call Date 8/15/2017
UTILITY SYSTEM PORTION ONLY
Combination Tax and Revenue Certificates of
Obligation, Series 2007
- 8. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
Just as the General Fund and Utility System original debt service requirements were structured
to account for the useful life of the projects, the then outstanding debt service and the tax rate
and system net available for debt at the time of issuance, the proposed refunding structures
would be viewed in the same manner to try to achieve the optimal savings and resulting debt
service requirements
To assist the City Council in analyzing this information, we have undertaken different analysis
relative to the proposed savings structure based on the original bond issue
Our first step in refunding analysis is to solve for level and proportional savings; with our next
step being to allocate the proposed savings within the context of the respective funding source
for the debt service
Proposed Refunding Opportunity
8
- 9. R E F U N D I N G A N A LY S I S - A G G R E G AT E
- 10. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
Proposed Refunding Opportunity – Aggregate Savings (1)
10
Refunding Par Amount $3,120,000
Gross Savings $146,782
Average Annual Debt Service $13,344
Net Present Value Savings $131,760
Present Value Benefit (%) 4.377%
True Interest Cost 1.895%
Negative Arbitrage $38,520
LEVEL SAVINGS
Combination Tax and Revenue Certificates of
Obligation, Series 2007
Prior Refunding Projected
Date Debt Service Debt Service Savings
9/30/2016 658,491$ 658,491$ -$
9/30/2017 744,039 729,196 14,843
9/30/2018 750,099 734,456 15,643
9/30/2019 754,962 741,056 13,906
9/30/2020 753,628 742,256 11,372
9/30/2021 171,297 158,156 13,140
9/30/2022 171,110 160,456 10,653
9/30/2023 170,723 157,656 13,067
9/30/2024 175,137 159,856 15,281
9/30/2025 174,152 161,775 12,377
9/30/2026 172,968 158,400 14,568
9/30/2027 171,584 159,650 11,934
4,868,188$ 4,721,406$ 146,782$
LEVEL SAVINGS
Combination Tax and Revenue Certificates of
Obligation, Series 2007
Refunding Par Amount $3,120,000
Gross Savings $142,269
Average Annual Debt Service $12,934
Net Present Value Savings $130,325
Present Value Benefit (%) 4.330%
True Interest Cost 1.908%
Negative Arbitrage $38,998
PROPORTIONAL SAVINGS
Combination Tax and Revenue Certificates of
Obligation, Series 2007
Prior Refunding Projected
Date Debt Service Debt Service Savings
9/30/2016 658,491$ 658,491$ -$
9/30/2017 744,039 739,296 4,743
9/30/2018 750,099 719,356 30,743
9/30/2019 754,962 726,256 28,706
9/30/2020 753,628 722,756 30,872
9/30/2021 171,297 164,056 7,240
9/30/2022 171,110 166,256 4,853
9/30/2023 170,723 163,356 7,367
9/30/2024 175,137 170,456 4,681
9/30/2025 174,152 167,163 6,990
9/30/2026 172,968 163,675 9,293
9/30/2027 171,584 164,800 6,784
4,868,188$ 4,725,918$ 142,269$
PROPORTIONAL SAVINGS
Combination Tax and Revenue Certificates of
Obligation, Series 2007
(1) Market rates as of March 8, 2016 + 25 bps.
- 11. R E F U N D I N G A N A LY S I S – L E V E L S AV I N G S
- 12. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
Proposed Refunding Opportunity – Level Savings (1)
12
FYE
9/30/2016 572,743$ 572,743$ -$
9/30/2017 573,990 562,539 11,450
9/30/2018 579,439 567,355 12,084
9/30/2019 583,890 573,135 10,755
9/30/2020 582,344 573,557 8,787
9/30/2021 - - -
9/30/2022 - - -
9/30/2023 - - -
9/30/2024 - - -
9/30/2025 - - -
9/30/2026 - - -
9/30/2027 - - -
2,892,405$ 2,849,328$ 43,076$
FYE
9/30/2016 169,239$ 166,388$ -$
9/30/2017 170,050 168,083 3,392
9/30/2018 170,661 168,630 3,559
9/30/2019 171,072 168,529 3,151
9/30/2020 171,284 168,984 2,585
9/30/2021 171,297 160,475 13,140
9/30/2022 171,110 156,100 10,653
9/30/2023 170,723 156,725 13,067
9/30/2024 175,137 162,175 15,281
9/30/2025 174,152 162,275 12,377
9/30/2026 172,968 162,200 14,568
9/30/2027 171,584 161,200 11,934
2,059,274$ 1,961,765$ 103,706$
Prior Debt
Service
Refunding
Debt Service
Gross
Savings
PROJECTED TAX SUPPORTED SAVINGS
PROJECTED UTILITY SUPPORTED SAVINGS
Prior Debt
Service
Refunding
Debt Service
Gross
Savings
$550,000
$555,000
$560,000
$565,000
$570,000
$575,000
$580,000
$585,000
$590,000
1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/2020
Projected Debt Service Comparison
(General Fund Portion)
Prior Debt Service Refunding Debt Service
$145,000
$150,000
$155,000
$160,000
$165,000
$170,000
$175,000
$180,000
Projected Debt Service Comparions
(Utility System Fund)
Prior Debt Service Refunding Debt Service
(1) Market rates as of March 8, 2016 + 25 bps.
- 13. R E F U N D I N G A N A LY S I S – P R O P O RT I O N A L S AV I N G S
- 14. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
Proposed Refunding Opportunity – Proportional Savings (1)
14
(1) Market rates as of March 8, 2016 + 25 bps.
FYE
9/30/2016 572,743$ 572,743$ -$
9/30/2017 573,990 570,331 3,659
9/30/2018 579,439 555,690 23,748
9/30/2019 583,890 561,689 22,201
9/30/2020 582,344 558,489 23,855
9/30/2021 - - -
9/30/2022 - - -
9/30/2023 - - -
9/30/2024 - - -
9/30/2025 - - -
9/30/2026 - - -
9/30/2027 - - -
2,892,405$ 2,818,941$ 73,463$
FYE
9/30/2016 169,239$ 166,388$ -$
9/30/2017 170,050 168,083 1,084
9/30/2018 170,661 168,630 6,995
9/30/2019 171,072 168,529 6,505
9/30/2020 171,284 168,984 7,017
9/30/2021 171,297 160,475 7,240
9/30/2022 171,110 156,100 4,853
9/30/2023 170,723 156,725 7,367
9/30/2024 175,137 162,175 4,681
9/30/2025 174,152 162,275 6,990
9/30/2026 172,968 162,200 9,293
9/30/2027 171,584 161,200 6,784
2,059,274$ 1,961,765$ 68,806$
Prior Debt
Service
Refunding
Debt Service
Gross
Savings
PROJECTED TAX SUPPORTED SAVINGS
PROJECTED UTILITY SUPPORTED SAVINGS
Prior Debt
Service
Refunding
Debt Service
Gross
Savings
$540,000
$545,000
$550,000
$555,000
$560,000
$565,000
$570,000
$575,000
$580,000
$585,000
$590,000
1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/2020
Projected Debt Service Comparison
(General Fund Portion)
Prior Debt Service Refunding Debt Service
$145,000
$150,000
$155,000
$160,000
$165,000
$170,000
$175,000
$180,000
Projected Debt Service Comparions
(Utility System Fund)
Prior Debt Service Refunding Debt Service
- 15. A D VA N C E D R E F U N D I N G A N D N E G AT I V E A R B I T R A G E
- 16. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
“Advance” Refunding versus “Current” Refunding
16
An advance refunding occurs when the refunding issue is sold more than 90 days in advance of
the date on which the outstanding bonds can be called. If a refunding issue is sold with less than
90 days in advance of the call date, the refunding bond issue is considered a current refunding.
Tax law allows a bond issue to be advance refunded only once:
– Example: if the proposed Series 2016 Refunding Bonds were to advance refund the Series
2007, a subsequent refunding bond issue would be prohibited from advance refunding the
hypothetical Series 2016 Refunding Bonds.
By waiting until there are less than 90 days until the August 15, 2017 call date, the City preserves
the option to advance refund the proposed Series 2016 Refunding Bonds in the future.
Another potential consideration related to an advanced refunding is Negative Arbitrage.
- 17. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
17
Refunding Bonds in advance of the call date, an
“advance refunding”, produces an “opportunity cost”
otherwise known as “Negative Arbitrage”, particularly
in a low interest rate environment.
To the extent the escrow earns less than the
arbitrage yield on the refunded bonds, the escrow
must be over-funded with refunding bond proceeds
in order to provide for the scheduled principal and
interest payments on the refunded bonds.
As the call date approaches on the refunded bonds,
the City’s opportunity cost is minimized, but the
refunding is subject to interest rate risk as time
passes.
Negative Arbitrage
Series
Refunded
Value of Neg.
Arbitrage
Call Date
Series 2007
$38,520 or
$38,998
8/15/2017
Example: Refunds Series 2007, Level savings scenario shown
for illustrative purposes.
When we analyze the cost effectiveness of advance refunding, we calculate Negative Arbitrage as a
percent of Net Present Value Savings. We believe that the Negative Arbitrage as a percent of Net
Present Value Savings should be targeted to not exceed more than 25%.
(1) Market rates as of March 8, 2016 + 25 bps.
- 18. PA R A M E T E R B O N D S A L E
- 19. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
Parameter Bond Sale
19
City Council delegates final pricing authority to Pricing
Officer(s)
City Counsel establishes bond sale parameters:
Maximum Interest Rate
Minimum Savings Threshold for Refunding
Aggregate Principal Amount of Issue
Final Maturity Date
Expiration of Delegated Authority
• 6 Months
Pricing Officer(s) can only approve sale if City Council
parameters are met
Section 1207 of
the Government
Code allows
refunding bonds
via a Parameter
Sale
- 20. CITYOFALAMOHEIGHTS
Member FINRA / SIPC
© 2016 Hilltop Securities Inc.
All Rights Reserved
Parameter Bond Sale
20
Market Timing – Bond issue is in ‘Day-to-Day’ mode, meaning bonds can be
priced at any time and in an interest rate environment that is advantageous
rather than being locked into pricing on the date of a Council meeting.
Reason for Parameter Bond Sale = FLEXIBILITY
Suggested parameters for City Council consideration:
Maximum Interest Rate – 3.50%
Minimum Savings Threshold for Refunding – 3.00% NPV of Refunded Bonds
Aggregate Principal Amount of Issue - $3,250,000
Final Maturity Date – August 15, 2027
Expiration of Delegated Authority – September 14, 2016
Delegation Authority - The Mayor, the City Manager, and/or the Director of
Finance