Palm Beach County School District

Transcription

1 Palm Beach County School District Synthetic Refunding Opportunities July 6, 2005 presented by Public Financial Management 300 South Orange Avenue Suite 1170 Orlando, FL

2 Table of Contents I. Refunding Opportunities/Savings II. III. IV. Synthetic Fixed Rate Debt and Swaption Mechanics Market Conditions and Risk Considerations Recommendation and Implementation 2

3 Refunding Opportunities/Savings

4 Summary of Refunding Opportunities Citigroup has monitored the following refunding candidates. Market conditions are such that the District can obtain upfront savings by selling to Citigroup the option to enter into swap(s) to partially refund the following outstanding COPs on their respective call dates: Certificates of Participation, Series 2001A Par amount of refunded COPs: $73,010,000 Callable 101% (Advance Refundable) Certificates of Participation, Series 2001B Par amount of refunded COPs: $160,465,000 Callable 101% (Not Advance Refundable) Certificates of Participation, Series 2002C Par amount of refunded COPs: $105,300,000 Callable 100% (Advance Refundable) Certificates of Participation, Series 2002D Par amount of refunded COPs: $115,710,000 Callable 100% (Advance Refundable) 4

5 Refunding Opportunities Comparison of Advance Refunding and BMA Swaption Negative arbitrage reduces savings derived from a traditional advance refunding Certificates of Participation, Series 2001A Adv Ref BMA* Upfront NPV Savings: 804,921 3,300,000 % of Refunded Par: 1.10% 4.52% Negative Arbitrage: (2,324,552) - Certificates of Participation, Series 2001B Adv Ref BMA* Upfront NPV Savings: N/A 6,300,000 % of Refunded Par: N/A 3.93% Negative Arbitrage: N/A - Certificates of Participation, Series 2002C Adv Ref BMA* Upfront NPV Savings: 565,272 4,600,000 % of Refunded Par: 0.54% 4.37% Negative Arbitrage: (3,674,382) - Certificates of Participation, Series 2002D Adv Ref BMA* Upfront NPV Savings: 956,745 5,300,000 % of Refunded Par: 0.83% 4.58% Negative Arbitrage: (3,981,630) - *Savings are estimated and will vary over time based on market factors and changes in ongoing costs. 5

6 Summary of Upfront Payment & Savings* The District can obtain upfront savings in the amounts listed below associated with a synthetic fixed rate refunding. LIBOR based swaption (tax risk) can enhance savings significantly Certificates of Participation, Series 2001A BMA LIBOR Upfront NPV Savings: 3,300,000 6,600,000 % of Refunded Par: 4.52% 9.04% Certificates of Participation, Series 2001B BMA LIBOR Upfront NPV Savings: 6,300,000 11,300,000 % of Refunded Par: 3.93% 7.04% Certificates of Participation, Series 2002C BMA LIBOR Upfront NPV Savings: 4,600,000 8,800,000 % of Refunded Par: 4.37% 8.36% Certificates of Participation, Series 2002D BMA LIBOR Upfront NPV Savings: 5,300,000 9,800,000 % of Refunded Par: 4.58% 8.47% *Savings are estimated and will vary over time based on market factors and changes in ongoing costs. 6

7 Synthetic Fixed Rate Debt and Swaption Mechanics

8 Interest Rate Swaps in General Fixed Payments (Fixed interest rate X notional principal amount) Counterparty Counterparty A A Counterparty Counterparty B B Floating Payments (Variable interest rate X notional principal amount) An interest rate swap is a contract between two parties (referred to as counterparties ) to exchange interest rate payments at specified dates in the future. The interest rate payments for a given counterparty equal the product of an interest rate (swap rate) and a notional (principal) amount. Usually, the swap rate for one counterparty is a fixed rate, while the swap rate for the other counterparty is a variable rate. The principal amount by which the swap rates are multiplied is notional. That is, principal payments are not swapped, paid or exchanged; the notional principal amount is only a placeholder used for calculating swap payments. 8

9 Floating-To-Fixed Swap ( Synthetic Fixed ) A floating-to-fixed interest rate swap allows the District to effectively convert its variable (floating) rate debt to a synthetic fixed rate The District becomes a fixed rate payor, receiving a floating rate payment from a counterparty and paying a predetermined fixed rate To the extent the variable rate received by the District offsets the variable rate paid by the District to bondholders, the District s debt cost equals the fixed swap rate plus any ancillary fees The District would issue Variable Rate COPs (VRDOs or ARCs) and swap to a fixed rate The counterparty pays the District BMA or 67% LIBOR and the District pays the counterparty a fixed interest rate Principal is not exchanged and payments are typically netted semiannually District District Fixed Swap Rate Variable Swap Rate Swap Swap Counterparty Counterparty Variable Bond Rate Bondholders Bondholders Ancillary Ancillary Fees: Fees: Remarketing Remarketing Fees Fees Liquidity Liquidity Fees Fees 9

10 Floating-To-Fixed Interest Rate Swaption The fixed payor rate, variable swap rates, fees and swaption premium are negotiated at the commitment date. Swaption strike rate can be set equal to market rate or existing COPs coupon (off-market) A swaption gives the swaption purchaser (the counterparty) an option (i.e., the right but not the obligation) to compel the District to enter into a pre-negotiated swap agreement at some future date. For this swaption sale, the counterparty pays the District a premium at the commitment or exercise date. Today Call Date (or up to 90 days prior) Commitment Date: Sell Swaption setting terms of prospective forward swap. Receive Swaption premium. Pay commitment fees for swap, bond insurance and other fees. Forward Delivery (Exercise) Date: Begin exchange of net swap payments (Variable) or terminate swap (Fixed) Issue Variable or Fixed Rate COPs Redeem prior COPs with proceeds 10

11 Market Conditions and Risk Considerations

12 The Market for Swaps and Derivatives The Over-the-Counter (OTC) market for swaps, derivatives and hedging products exceeded $183.5 trillion as of December 31, 2004 The use of swaps and derivatives for financial risk management is becoming widespread in both the public and private sectors 12

13 Structure Can Generate Substantial Savings The District should compare the all-in cost of traditional non-call fixed-rate debt to synthetic fixed-rate debt (including credit support) In certain cases it may be cheaper to create synthetic fixed-rate debt Term Non-Call Insured Bonds BMA Swap 67%*LIBOR Swap* 3 Y 2.76% 3.30% 3.01% 5 Y 3.04% 3.40% 3.07% 10 Y 3.53% 3.68% 3.22% 20 Y 4.00% 4.01% 3.39% 30 Y 4.20% 4.09% 3.41% Rates as of 6/28/04; sw ap rates include 25 bps liquidity *Issuer assumes tax/basis risk 4.30% 4.10% 3.90% 3.70% 3.50% AAA Insured Bonds BMA Swap 67% LIBOR Swap The relationship between tax-exempt (BMA/67% of LIBOR) swap and bond rates drives the types of opportunities available to issuers % 3.10% 2.90% 2.70% 2.50% Year 5-Year 10-Year 20-Year 30-Year Tax-exempt bond rates are currently rich (lower than) versus BMA swap rates in years making synthetic fixed less attractive for BMA swaps 13

14 Floating to Fixed Swap Benefits & Risks Benefits Locks in fixed rate for term of financing Can be cheaper alternative to cash fixed-rate bond market Ability to terminate swap for gain if interest rates rise Ability to assume (transfer) tax risk Customized structures Risks Credit exposure to swap counterparty Potential cost if swap is terminated early Letter of Credit/Liquidity renewal risk/increased credit support costs Basis risk between VRDO cost and variable-rate swap index Tax risk (LIBOR swaps) Accounting treatment Remarketing risk 14

15 Basis and Tax Risk The floating index selected on the swap will affect the expected savings associated with a given synthetic refunding transaction A BMA-based swap produces lower expected PV savings but with higher certainty A % of LIBOR swap produces higher expected PV savings but with lower certainty Actual, realized savings could be more or less than expected depending upon how well the swap variable-rate index tracks the variable rate on the District s COPs This potential mismatch between the variable rate on the swap and COPs is referred to as basis risk Basis risk can result from technical factors in the tax-exempt money market, e.g. temporary supply/demand imbalance that distorts the normal taxexempt/taxable yield relationship Basis risk resulting in a permanent change in the tax-exempt/taxable yield relationship is referred to as tax risk 15

16 Historical Basis Risk The chart below shows basis risk as measured by the actual difference in basis points between 67% of 1-month LIBOR and the BMA index Basis risk is realized when 67% of LIBOR falls below BMA (assuming cost of issuer funds at BMA flat ). BMA Index vs 67% of 1-month LIBOR Weekly Data, January 1990 to Present BMA Index 67.00% of 1-m LIBOR Averages Since 1990: BMA = 3.06% 67% of LIBOR = 3.01%

17 Recommendation and Implementation

18 Outstanding Debt/Swap Position All of the District s debt is currently fixed rate (either traditional or synthetic) 2 swaps are fixed payor (1 BMA and 1 LIBOR) 1 swap is a basis swap against a traditional fixed rate financing Basis Risk Tax Risk Series Outstanding Par Interest Mode Series 1995A 12,595,000 Fixed Series 1996A 2,930,000 Fixed Series 1997A 44,555,000 Fixed Series 2001A 82,740,000 Fixed Series 2001B 168,015,000 Fixed Series 2002A 74,910,000 Fixed Series 2002B 115,350,000 Synthetic Fixed X X Series 2002C 134,930,000 Fixed Series 2002 QZAB 950,000 Fixed Series 2002E 93,350,000 Fixed Series 2002D 167,195,000 Fixed w/ basis swap X X Series 2003A 58,705,000 Fixed Series 2003B 124,295,000 Synthetic Fixed X Series 2004A 103,575,000 Fixed Series 2004 QZAB 2,923,326 Fixed Series 2005A 124,630,000 Fixed Series 2005B 38,505,000 Fixed Synthetic Fixed - LIBOR 9% Synthetic Fixed - BMA 9% Synthetic Variable - Basis Swap 7% Fixed 75% 18

19 Recommendation Based on the results of our analysis, recommends that the District consider a synthetic fixed rate forward refunding (swaption) of the Series 2001B and Series 2002D COPs with Citigroup Under current market conditions, this financing would generate expected net present value savings of: 2001B 2002D $6.3M or 3.93% of refunded par (BMA) $11.3M or 7.04% of refunded par (LIBOR) $5.3M or 4.58% of refunded par (BMA) $9.8M or 8.47% of refunded par (LIBOR) The 2001B COPs are not advance refundable, as such, recommends a synthetic refunding of the 2001B COPs through a BMA swaption In addition, recommends a synthetic refunding of the 2002D COPs, using a BMA swaption (note: the 2002D COPs already have a basis swap so the net result will be a 67% of LIBOR swap plus the fixed spread) Estimated combined savings - $ 11.6 million 19

20 Recommendation Projected Swap Position Current Projected Synthetic Fixed - LIBOR 9% Synthetic Fixed - BMA 9% Synthetic Variable - Basis Swap 7% Synthetic Fixed - BMA 13% Synthetic Variable - Basis Swap 7% Fixed 75% Synthetic Fixed - LIBOR 16% Fixed 64% 25% of the District s COPs currently incorporate a swap. 9% of the District s COPs currently have tax risk. Completing the swaption will increase the total amount of swapped debt to 36% while the tax risk remains the same. Further, recommends that the District evaluate the desire to increase the upfront payment received, by assuming more tax risk, and consider a different combination of BMA and LIBOR swaptions based on that conclusion. 20

21 Implementation Steps At this point in time: Approve the transaction in concept Finalize bond insurance and rating review Address rating concerns regarding non-recurring revenues Obtain delegated Board authorization subject to minimum savings thresholds Finalize swap documents (Staff, Bond Counsel, Citigroup, Swap Counsel and ) Monitor bond market conditions for opportunity to price the swap When market conditions are right: Execute swap Receive upfront payment Near the call date of the refunded COPs: Select a Underwriter Choose the form of variable rate refunding COPs Develop documents and official statement Sell variable rate refunding COPs and refund the COPs and Citigroup are prepared to assist the District in the timely implementation of this transaction. 21