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Springsted Incorporated 380 Jackson Street, Suite 300 Saint Paul, MN 55101-2887 Tel: [PHONE REDACTED] Fax: [PHONE REDACTED] www.springsted.com April 2, 2010 Mr. Brentt Ramharter Finance Director/Treasurer City of Missoula 435 Ryman Street Missoula, MT 59802-4297 Subject: Refunding of General Fund Bonds, Series 2001 Dear Mr. Ramharter: The purpose of this letter is to provide our recommendations for the City of Missoula to refund its Series 2001 General Fund Obligation Bonds. We will provide our thoughts on the method of sale, the appointment of an underwriter, the issuance of crossover advance refunding bonds and the advantage to the City of undertaking this refunding transaction. We appreciate the opportunity to again assist the City of Missoula with its financing needs. Proposed Transaction and Goal We periodically update and send to the City refunding analyses of their outstanding bond issues to gauge potential interest cost savings opportunities. We have presented the City with our preliminary refunding feasibility analysis showing the issuance of $1,020,000 Limited Tax General Obligation Refunding Bonds, Series 2010 in order to refinance the City’s General Fund Obligation Bonds, Series 2001. The appropriate bond structuring approach is a crossover advance refunding, whereby only those principal maturities subject to optional redemption are refunded. Our analysis used our estimate of current interest rates and shows a favorable savings profile. The Series 2001 Bonds have ten years remaining in their original term and are subject to optional redemption on July 1, 2011. The outstanding principal balance of the Series 2001 Bonds is $1,110,000. Method of Sale Refunding transactions, and in particular advance refundings, are market sensitive since their success is dependent on both the new borrowing interest rate and also with the yields on the investments in the escrow. We therefore recommend an expedited process of negotiating the sale of the bonds with a reputable underwriting firm with experience in the Montana market. This will assure the execution of the issuance in the shortest time frame possible as the recent general trend in interest rates has been upward. Page 1 ---PAGE BREAK--- City of Missoula, Montana April 2, 2010 Selection of Underwriter We have discussed the engagement of an underwriter with you and the method of selecting an underwriter. Again, due to the desire to enter the market expeditiously, we have recommended the appointment of an investment banking firm with which the City has had previous, positive experience. We have proposed using D.A. Davidson and, at your direction have made contact with their representative. Davidson has agreed to participate in the transaction and we have mutually negotiated an underwriting compensation of $13 per bond. Crossover Refunding The Series 2001 Bonds are not callable until July 1, 2011. Therefore a refinancing of those bonds at this time must be issued with one of the optional advance refunding techniques, whereby the proceeds of the refunding issue are placed into an escrow account at a trustee bank and held until the future call date. At that time the funds will come out of escrow and redeem the outstanding bonds. We have recommended a crossover advance refunding because of its efficiency in savings generation. In a crossover refunding, the proceeds of the refunding bonds (new issue) are placed in an escrow account with a major bank and invested in government securities. These securities and their earnings are structured to pay interest on the new bonds until the optional prepayment date (call date) of the Series 2001 Bonds (old issue), at which time the escrow account will crossover and prepay all of the remaining principal of the Series 2001 Bonds. The City will continue to pay the originally scheduled debt service on the Series 2001 Bonds until the call date of July 1, 2011. After the call date, the City will cross over and begin making debt service payments on the Series 2010 Bonds, taking advantage of the lower interest rates. Based on current interest rate estimates, the refunding is projected to result in the City realizing cash flow savings that will average approximately $6,600 annually. This results in future value savings of approximately $61,800, with a net present value benefit to the City of approximately $54,000. These estimates are net of all costs of issuance associated with the refunding issue. We have attached to this letter an updated refunding feasibility analysis. The adequacy and arbitrage yield of the escrow securities require the confirmation of an independent accounting firm. In consultation with the underwriter and bond counsel we are recommending using the firm of Barthe Wahrman to perform this function. The City will also need to select a trustee bank to act as escrow agent for the transaction. Springsted will manage the selection and purchase of the escrow securities on behalf of the City. It is our expectation that the escrow will be comprised of direct U.S. Treasury State and Local Government Series (SLGS) notes. Timing and Process We are targeting a pricing date for the Bonds during the third week in April. D.A. Davidson has advised that the best execution for the sale will be for it to take place during the middle part of the week. This presents a logistical issue since the City Council meets on Mondays. We recommend that the City Council adopt a “parameters” resolution at its April 12 meeting at which time it will set the maximum par amount of the refunding bonds of $1,200,000, the maximum interest rate of a 4.0% true interest cost (TIC) and a minimum savings target for the transaction of $40,000. This permits flexibility in the pricing of the bonds and allows the underwriter to enter the market at the optimum time. Subsequent to the pricing, the Council will be presented with a confirming and ratifying resolution memorializing the final terms of the issue. Page 2 ---PAGE BREAK--- City of Missoula, Montana April 2, 2010 We recommend having the Bonds rated by Standard and Poor’s. The City’s General Fund bonds which sold in 2006 have an A- rating by S&P. Davidson agrees that a rating will be cost effective and essential to the success of the refunding. We are in the process of preparing an offering document for the Bonds and have presented drafts of that document to both you and bond counsel. We believe we will be prepared to send that to the rating agency and have it available to Davidson so we can keep our target pricing date. Summary This refunding represents an opportunity to reduce future interest rate costs, but is subject to daily interest rate changes. The proposed calendar seeks to move forward as expeditiously as is appropriate. If savings levels fall below the City’s established parameters we will continue to monitor the situation for a future opportunity. Springsted is pleased to again be of service to the City of Missoula. Respectfully submitted, SPRINGSTED Incorporated DRJ akb Page 3 ---PAGE BREAK--- Page 4 $1,020,000 City of Missoula, Montana General Fund Obligation Refunding Bonds, Series 2010 Crossover Refunding of Series 2001A Preliminary Feasibility Summary Dated 05/01/2010 I Delivered 05/01/2010 Sources Of Funds Par Amount of $1,020,000.00 Total $1,020,000.00 Uses Of Funds Deposit to Crossover Escrow 976,553.96 Costs of 28,000.00 Total Underwriter's Discount 13,260.00 Rounding 2,186.04 Total $1,020,000.00 ISSUES REFUNDED AND CALL INFORMATION Prior Issue Call 100.000% Prior Issue Call 7/01/2011 SAVINGS INFORMATION Net Future Value $61,826.04 Net Present Value $53,980.73 Net PV Benefit / $1,046,166.12 PV Refunded Debt 5.160% BOND STATISTICS Average 6.319 Years Average 2.5302948% Net Interest Cost 2.7360357% True Interest Cost 2.7368198% Series 2010 Ref 2001A I Series 1996 I 4/ 2/2010 I 11:24 AM ---PAGE BREAK--- Debt Service Comparison for 2001A 0 0 0 0 0,000 0,000 0,000 0,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Page 5 $20,00 $40,00 $60,00 $80,00 $10 $12 $14 $16 Old Net D/S Net New D/S ---PAGE BREAK--- $1,020,000 City of Missoula, Montana General Fund Obligation Refunding Bonds, Series 2010 Crossover Refunding of Series 2001A Debt Service Comparison Date Total P+I Escrow Existing D/S Net New D/S Old Net D/S Savings 07/01/2010 - - 102,808.75 102,808.75 102,808.75 - 07/01/2011 26,197.50 (981,197.50) 1,087,130.00 132,130.00 132,130.00 - 07/01/2012 127,455.00 - - 127,455.00 133,330.00 5,875.00 07/01/2013 126,510.00 - - 126,510.00 134,207.50 7,697.50 07/01/2014 130,302.50 - - 130,302.50 134,797.50 4,495.00 07/01/2015 128,707.50 - - 128,707.50 135,095.00 6,387.50 07/01/2016 126,672.50 - - 126,672.50 135,095.00 8,422.50 07/01/2017 129,142.50 - - 129,142.50 134,792.50 5,650.00 07/01/2018 126,152.50 - - 126,152.50 134,182.50 8,030.00 07/01/2019 132,875.00 - - 132,875.00 138,260.00 5,385.00 07/01/2020 129,062.50 - - 129,062.50 136,760.00 7,697.50 Total $1,183,077.50 (981,197.50) $1,189,938.75 $1,391,818.75 $1,451,458.75 $59,640.00 PV Analysis Summary (Net to Net) Net FV Cashflow 59,640.00 Gross PV Debt Service 51,794.69 Net PV Cashflow Savings @ 2.510%(Bond 51,794.69 Contingency or Rounding 2,186.04 Net Future Value $61,826.04 Net Present Value $53,980.73 Net PV Benefit / $232,789.01 PV Refunded 23.189% Net PV Benefit / $1,046,166.12 PV Refunded Debt 5.160% Net PV Benefit / $955,000 Refunded 5.652% Net PV Benefit / $1,020,000 Refunding 5.292% Refunding Bond Information Refunding Dated 5/01/2010 Refunding Delivery 5/01/2010 Series 2010 Ref 2001A I Series 1996 I 4/ 2/2010 I 11:24 AM Page 6 ---PAGE BREAK--- Page 7 $1,600,000 City of Missoula, Montana General Fund Obligation Bonds, Series 2001A Sensitivity Summary of Total Issue Savings Interval Total $ Savings Total % Savings -0.500% 75,477.77 7.903% -0.400% 70,556.64 7.388% -0.300% 65,678.65 6.877% -0.200% 60,843.43 6.371% -0.100% 56,050.58 5.869% - 51,299.73 5.372% 0.100% 46,590.50 4.879% 0.200% 41,922.52 4.390% 0.300% 37,295.42 3.905% 0.400% 32,708.84 3.425% 0.500% 28,162.42 2.949% - $566,586.49 - Series 2001A I SINGLE PURPOSE I 4/ 2/2010 I 11:24 AM ---PAGE BREAK--- Page 8 $1,600,000 City of Missoula, Montana General Fund Obligation Bonds, Series 2001A Debt Service To Call And To Maturity Date Refunded Bonds D/S To Call Principal Coupon Interest Refunded D/S 07/01/2010 - - - 4.650% - - 07/01/2011 955,000.00 955,000.00 - 4.750% - - 01/01/2012 - - - - 24,165.00 24,165.00 07/01/2012 - - 85,000.00 4.850% 24,165.00 109,165.00 01/01/2013 - - - - 22,103.75 22,103.75 07/01/2013 - - 90,000.00 4.900% 22,103.75 112,103.75 01/01/2014 - - - - 19,898.75 19,898.75 07/01/2014 - - 95,000.00 4.950% 19,898.75 114,898.75 01/01/2015 - - - - 17,547.50 17,547.50 07/01/2015 - - 100,000.00 5.000% 17,547.50 117,547.50 01/01/2016 - - - - 15,047.50 15,047.50 07/01/2016 - - 105,000.00 5.050% 15,047.50 120,047.50 01/01/2017 - - - - 12,396.25 12,396.25 07/01/2017 - - 110,000.00 5.100% 12,396.25 122,396.25 01/01/2018 - - - - 9,591.25 9,591.25 07/01/2018 - - 115,000.00 5.150% 9,591.25 124,591.25 01/01/2019 - - - - 6,630.00 6,630.00 07/01/2019 - - 125,000.00 5.200% 6,630.00 131,630.00 01/01/2020 - - - - 3,380.00 3,380.00 07/01/2020 - - 130,000.00 5.200% 3,380.00 133,380.00 Total $955,000.00 $955,000.00 $955,000.00 - $261,520.00 $1,216,520.00 Yield Statistics Base date for Avg. Life & Avg. Coupon 5/01/2010 Average 6.517 Years Average 4.2016870% Weighted Average Maturity (Par 6.517 Years Refunding Bond Information Refunding Dated 5/01/2010 Refunding Delivery 5/01/2010 Series 2001A I SINGLE PURPOSE I 4/ 2/2010 I 11:24 AM ---PAGE BREAK--- Page 9 $1,600,000 City of Missoula, Montana General Fund Obligation Bonds, Series 2001A Total Refunded Debt Service Date Principal Coupon Interest Total P+I 07/01/2012 85,000.00 4.850% 48,330.00 133,330.00 07/01/2013 90,000.00 4.900% 44,207.50 134,207.50 07/01/2014 95,000.00 4.950% 39,797.50 134,797.50 07/01/2015 100,000.00 5.000% 35,095.00 135,095.00 07/01/2016 105,000.00 5.050% 30,095.00 135,095.00 07/01/2017 110,000.00 5.100% 24,792.50 134,792.50 07/01/2018 115,000.00 5.150% 19,182.50 134,182.50 07/01/2019 125,000.00 5.200% 13,260.00 138,260.00 07/01/2020 130,000.00 5.200% 6,760.00 136,760.00 Total $955,000.00 - $261,520.00 $1,216,520.00 Yield Statistics Base date for Avg. Life & Avg. Coupon 5/01/2010 Average 6.517 Years Average 4.2016870% Weighted Average Maturity (Par 6.517 Years Refunding Bond Information Refunding Dated 5/01/2010 Refunding Delivery 5/01/2010 Series 2001A I SINGLE PURPOSE I 4/ 2/2010 I 11:24 AM ---PAGE BREAK--- Page 10 $1,600,000 City of Missoula, Montana General Fund Obligation Bonds, Series 2001A Prior Original Debt Service Date Principal Coupon Interest Total P+I 07/01/2010 75,000.00 4.650% 27,808.75 102,808.75 01/01/2011 - - 26,065.00 26,065.00 07/01/2011 80,000.00 4.750% 26,065.00 106,065.00 01/01/2012 - - 24,165.00 24,165.00 07/01/2012 85,000.00 4.850% 24,165.00 109,165.00 01/01/2013 - - 22,103.75 22,103.75 07/01/2013 90,000.00 4.900% 22,103.75 112,103.75 01/01/2014 - - 19,898.75 19,898.75 07/01/2014 95,000.00 4.950% 19,898.75 114,898.75 01/01/2015 - - 17,547.50 17,547.50 07/01/2015 100,000.00 5.000% 17,547.50 117,547.50 01/01/2016 - - 15,047.50 15,047.50 07/01/2016 105,000.00 5.050% 15,047.50 120,047.50 01/01/2017 - - 12,396.25 12,396.25 07/01/2017 110,000.00 5.100% 12,396.25 122,396.25 01/01/2018 - - 9,591.25 9,591.25 07/01/2018 115,000.00 5.150% 9,591.25 124,591.25 01/01/2019 - - 6,630.00 6,630.00 07/01/2019 125,000.00 5.200% 6,630.00 131,630.00 01/01/2020 - - 3,380.00 3,380.00 07/01/2020 130,000.00 5.200% 3,380.00 133,380.00 Total $1,110,000.00 - $341,458.75 $1,451,458.75 Yield Statistics Base date for Avg. Life & Avg. Coupon 5/01/2010 Average 5.703 Years Average 5.1014152% Weighted Average Maturity (Par 5.703 Years Refunding Bond Information Refunding Dated 5/01/2010 Refunding Delivery 5/01/2010 Series 2001A I SINGLE PURPOSE I 4/ 2/2010 I 11:24 AM ---PAGE BREAK--- Page 11 $1,020,000 City of Missoula, Montana General Fund Obligation Refunding Bonds, Series 2010 Crossover Refunding of Series 2001A Pricing Summary Maturity Type of Bond Coupon Yield Maturity Value Price Dollar Price 07/01/2012 Serial Coupon 0.900% 0.900% 105,000.00 100.000% 105,000.00 07/01/2013 Serial Coupon 1.150% 1.150% 105,000.00 100.000% 105,000.00 07/01/2014 Serial Coupon 1.450% 1.450% 110,000.00 100.000% 110,000.00 07/01/2015 Serial Coupon 1.850% 1.850% 110,000.00 100.000% 110,000.00 07/01/2016 Serial Coupon 2.300% 2.300% 110,000.00 100.000% 110,000.00 07/01/2017 Serial Coupon 2.600% 2.600% 115,000.00 100.000% 115,000.00 07/01/2018 Serial Coupon 2.850% 2.850% 115,000.00 100.000% 115,000.00 07/01/2019 Serial Coupon 3.050% 3.050% 125,000.00 100.000% 125,000.00 07/01/2020 Serial Coupon 3.250% 3.250% 125,000.00 100.000% 125,000.00 Total - - - $1,020,000.00 - $1,020,000.00 Bid Information Par Amount of $1,020,000.00 Gross $1,020,000.00 Total Underwriter's Discount $(13,260.00) Bid 1,006,740.00 Total Purchase $1,006,740.00 Bond Year $6,445.00 Average 6.319 Years Average 2.5302948% Net Interest Cost 2.7360357% True Interest Cost 2.7368198% Series 2010 Ref 2001A I Series 1996 I 4/ 2/2010 I 11:24 AM ---PAGE BREAK--- Page 12 $1,020,000 City of Missoula, Montana General Fund Obligation Refunding Bonds, Series 2010 Crossover Refunding of Series 2001A Debt Service Schedule Date Principal Coupon Interest Total P+I 07/01/2010 - - - - 07/01/2011 - - 26,197.50 26,197.50 07/01/2012 105,000.00 0.900% 22,455.00 127,455.00 07/01/2013 105,000.00 1.150% 21,510.00 126,510.00 07/01/2014 110,000.00 1.450% 20,302.50 130,302.50 07/01/2015 110,000.00 1.850% 18,707.50 128,707.50 07/01/2016 110,000.00 2.300% 16,672.50 126,672.50 07/01/2017 115,000.00 2.600% 14,142.50 129,142.50 07/01/2018 115,000.00 2.850% 11,152.50 126,152.50 07/01/2019 125,000.00 3.050% 7,875.00 132,875.00 07/01/2020 125,000.00 3.250% 4,062.50 129,062.50 Total $1,020,000.00 - $163,077.50 $1,183,077.50 Yield Statistics Bond Year $6,445.00 Average 6.319 Years Average 2.5302948% Net Interest Cost 2.7360357% True Interest Cost 2.7368198% Bond Yield for Arbitrage 2.5101207% All Inclusive Cost 3.2285046% IRS Form 8038 Net Interest 2.5302948% Weighted Average 6.319 Years Series 2010 Ref 2001A I Series 1996 I 4/ 2/2010 I 11:24 AM ---PAGE BREAK--- Page 13 $1,020,000 City of Missoula, Montana General Fund Obligation Refunding Bonds, Series 2010 Crossover Refunding of Series 2001A Crossover Escrow Fund Cashflow Date Principal Rate Interest Receipts Disbursements Cash Balance 05/01/2010 - - - 0.96 - 0.96 01/01/2011 12,303.00 0.290% 2,666.83 14,969.83 14,970.00 0.79 07/01/2011 964,250.00 0.410% 1,976.71 966,226.71 966,227.50 - Total $976,553.00 - $4,643.54 $981,197.50 $981,197.50 - Investment Parameters Investment Model [PV, GIC, or Securities Default investment yield Bond Yield Cash 0.96 Cost of Investments Purchased with Bond 976,553.00 Total Cost of $976,553.96 Target Cost of Investments at bond $953,236.21 Actual positive or (negative) (23,317.75) Yield to 0.4097061% Yield for Arbitrage 2.5101207% State and Local Government Series (SLGS) rates 3/30/2010 Series 2010 Ref 2001A I Series 1996 I 4/ 2/2010 I 11:24 AM