Subject: CONVENTION
CENTER REFUNDING PROJECT
1. Adoption of a resolution of the City of San José Financing Authority:
a. Authorizing the issuance of City of San José Financing Authority, Tax-Exempt Lease Revenue Bonds, Series 2001F (“2001F Bonds”) and Taxable Lease Revenue Bonds, Series 2001G (“2001G Bonds”) (Convention Center Refunding Project) (collectively, “2001 Refunding Bonds”) in the not-to-exceed aggregate principal amount of $205,000,000 to be sold at a competitive sale.
b. Approving in substantially final form and authorizing the execution of certain financing documents, including the Trust Agreement, the Site and Facility Lease, Project Lease, and other related documents and directing certain related actions in connection with the financing for the 2001 Refunding Bonds.
c. Approving in substantially final form the Official Notice Inviting Bids and the Preliminary Official Statement in connection with the competitive sale of the 2001 Refunding Bonds, and other related actions.
d. Authorizing the City Manager to negotiate and execute an Agreement with Public Resources Advisory Group for financial advisory services in an amount not to exceed $125,000.
2. Adoption of a resolution of the City Council approving in substantially final form and authorizing the execution of the Project Lease, the Site and Facility Lease, the Second Amended and Restated Reimbursement Agreement, and other related documents, and directing certain related actions in connection with the financing for the 2001 Refunding Bonds.
3. Adoption of a resolution of the Redevelopment Agency approving in substantially final form and authorizing the execution of the Second Amended and Restated Reimbursement Agreement.
BACKGROUND
On
June 13, 2001 a presentation will be made to the Finance and Infrastructure
Committee on the Plan of Finance for the 2001 Refunding Bonds.
This
section of the report is divided into several subsections to address the items
in staff’s recommendation to proceed with the issuance of the bonds. These subsections include discussions of the
plan of finance, bond financing documents, financing team participants and the
financing schedule.
Refunding
Structure
The financing team recommends that the refunding bonds be structured as City of San José Financing Authority, Tax-Exempt Lease Revenue Bonds, Series 2001F (“2001F Bonds”) and Taxable Lease Revenue Bonds, Series 2001G (“2001G Bonds”) (Convention Center Refunding Project) (collectively, “2001 Refunding Bonds”) using a General Fund lease secured by the Convention Center. As described below, the Redevelopment Agency will be obligated to reimburse the City for lease payments made with respect to the 2001 Refunding Bonds, just as it is currently reimbursing the City for similar payments made with respect to the 1993 Bonds. The 1993 Bonds are expected to be completely defeased upon the issuance of the 2001 Refunding Bonds.
The 1993 Bonds received favorable tax law treatment based on the original issuance date of the 1986 Certificates and certain Federal tax transition rules. Such favorable treatment provides the City certain flexibility in connection with structuring any future expansion of the Convention Center. To preserve these benefits, the City will be required to limit the size of the tax-exempt 2001F Bonds to the $187,150,000 refunded amount of the 1993 Bonds and issue the 2001G Bonds on a taxable basis to pay the costs of issuance and redemption premium. Since the taxable 2001G Bonds will be paid off within about one year, the related costs of issuing taxable debt will be minimal while preserving optimal flexibility to the City.
An advance refunding occurs when refunding bonds are issued more than 90 days prior to the call date for the bonds to be refunded. Federal tax law permits only one advance refunding of a tax-exempt bond issue. The City exercised its one advance refunding option for the 1986 Certificates when it issued the 1993 Bonds. Therefore, the City’s earliest opportunity to issue refunding bonds is within 90 days of the call date on the 1993 Bonds of September 1, 2001. The City is required to provide the Trustee notice of its intent to exercise the optional redemption of the 1993 Bonds at least 30 days ahead of the call date. To maximize savings without incurring interest rate risk, the financing must close no later than August 1, 2001.
The debt service reserve requirement of the 1993 Bonds is secured by a surety policy provided by Financial Security Assurance Inc. insurance company (“FSA”). The original agreement negotiated by the City with FSA allows for transfer of the existing policy to new refunding bonds in exchange for a $10,000 payment. Typically, refundings result in the termination of surety policies requiring issuers to purchase new replacement policies. A conservative estimate of the cost of a new surety policy is approximately $500,000. Therefore, the ability to transfer the existing FSA policy saves the City approximately $500,000.
The 2001 Refunding Bonds will be issued with the same payment dates as the 1993 Bonds and the same final maturity date of September 1, 2022. The taxable 2001G Bonds will be sold as non-callable bonds due to the short thirteen month final maturity. The tax-exempt 2001F Bonds are likely to be sold as non-callable bonds for the first ten years and subject to optional redemption by the City after the non-callable bond period.
Expected Debt
Service Savings
Under current market conditions, the issuance of the 2001 Refunding Bonds will provide significant savings in future debt service expenses. There are currently $187,150,000 of 1993 Bonds outstanding. The proceeds from the sale of $187,150,000 of tax-exempt 2001F Bonds, together with the proceeds from the sale of approximately $10,280,000 of taxable 2001G Bonds is expected to be sufficient to redeem all outstanding 1993 Bonds, pay a two percent premium on the 1993 Bonds to be redeemed on September 1, 2001, fund the cost to transfer the debt service reserve fund surety policy, and pay the costs of issuing the 2001 Refunding Bonds.
The weighted average interest rate on the 1993 Bonds is 6.328%. Based on current interest rates, the average interest rate expected on the 2001 Refunding Bonds is 5.2%. The current difference in interest costs between the 1993 Bonds and the 2001 Refunding Bonds will produce approximately $16.1 million in present value debt service savings. Such present value savings equal approximately 8.60% of the outstanding par amount of 1993 Bonds. Based on current market conditions, debt service savings are estimated to be approximately $1.25 million per year.
The estimated sources and uses of funds for the refunding are shown below:
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City of San José Financing Authority |
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Tax-Exempt
Lease Revenue Bonds, Series 2001F |
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Taxable
Lease Revenue Bonds, Series 2001G |
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(Convention
Center Refunding Project) |
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Estimated Source & Use of Funds* |
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Source of Funds |
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Tax-Exempt Bond Proceeds (2001F) |
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$187,150,000 |
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Taxable Bond Proceeds (2001G) |
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10,290,000 |
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Accrued Interest |
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650,191 |
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Total Source of Funds |
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$198,090,191 |
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Use of Funds |
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1993 Bonds Refunding Escrow |
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$196,080,697 |
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Underwriter's Discount |
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987,200 |
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Debt Service Reserve Fund Surety |
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10,000 |
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Cost of Issuance |
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362,103 |
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Deposit to Lease Payment Fund |
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650,191 |
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Total Use of Funds |
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$198,090,191 |
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*Preliminary,
Subject to Change |
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Bond Financing Documents
There are a number of bond
financing documents that require approval to proceed with the bonds. All of the documents described below will be
available for review in the City Clerk’s Office on or about Tuesday, June 12,
2001.
Trust Agreement This agreement is by and
between the City of San José Financing Authority as the issuer and U.S. Bank
Trust NA, as Trustee. This agreement
pledges the lease payments received from the City for the repayment of the
bonds, sets forth terms of the bonds, and contains the responsibilities and
duties of the Trustee and the rights of the bondholders.
Project Lease This
agreement is by and between the City of San José Financing Authority, as
lessor, and the City of San José, as lessee.
This document sets forth the respective terms and conditions of the
lease-back of the Convention Center from the Authority to the City, which
provides the source of funds to repay the bonds.
Site and Facility Lease This agreement is by and between the City of San José, as lessor,
and the City of San José Financing Authority, as lessee. This agreement sets forth the respective
terms and conditions of the lease of the Convention Center from the City to the
Authority.
Official Notice Inviting Bids This document describes the
competitive bidding process, the bidding
parameters governing the submission of bids by potential underwriters for the
bonds and the basis for awarding the bonds to an underwriter. Bids for the bonds will be accepted over the
internet and by facsimile. The Official Notice Inviting Bids is provided to
potential bidders with the Official Statement.
Preliminary Official Statement The Preliminary Official
Statement, or prospectus, has been prepared for the City by the financial
advisor. The Preliminary Official
Statement will be distributed to bidders and investors primarily in electronic
form. The Preliminary Official
Statement generally discloses material information on the bond issue, including
the purposes of the bond issue, how the bonds will be repaid, credit
enhancement for the bonds (if applicable), ratings, and a description of the
projects to be financed. Investors may
use this information to evaluate the credit quality of the bonds.
A copy of the draft
Preliminary Official Statement, in substantially final form, will be
distributed to the City Council under separate cover on or about June 12,
2001. Staff has carefully reviewed the
information contained in the draft Preliminary Official Statement and believes
it to be accurate and complete in all material respects. If any councilmember has any personal
knowledge that any of the material information in the Preliminary Official
Statement is false or misleading, they must raise these issues prior to
approval of the distribution of the document. City and Agency staff, bond counsel, and the financial advisor
will be available at the Council meeting on June 19, 2001 to address any
questions, issues and/or concerns.
Second Amended and Restated Reimbursement Agreement This agreement is between the City and the Redevelopment Agency
and carries forward to the 2001 Refunding Bonds the Redevelopment Agency’s
obligation to reimburse the City for lease payments made under the Project Lease. This agreement is essentially the same
agreement that the City and the Redevelopment Agency entered into with respect
to the 1986 Certificates and the 1993 Bonds.
Financing Team Participants
Financial Advisor
As part of the actions for approval of the bond issuance, staff is requesting authorization for the City Manager to negotiate and execute an agreement with Public Resources Advisory Group to provide financial advisory services in an amount not to exceed $125,000. Compensation is contingent on the successful sale of the bonds.
Bond Counsel
The City Attorney has
selected Jones Hall, A Professional Law Corporation, to provide bond counsel
services, in an amount not to exceed $100,000.
Compensation is contingent on the successful sale of the Bonds.
Financing Schedule
The financing team is progressing towards a July 25,
2001 bond closing. Below is a summary
of the key dates that are targeted until the closing of the bonds:
June 19 Approval of bond documents including the Preliminary Official Statement
June 28 Distribute
Preliminary Official Statement to Market
July
10 Competitive
Bond Sale
July 25 Bond Closing
Not applicable.
This report was prepared by the Finance Department
in coordination with the Redevelopment Agency, the City Attorney’s Office and
the financing team participants.
No appropriation of funds is required at this
time. Compensation for all the
consultants (financial advisor, bond counsel and underwriters) and the costs of
the financing are contingent on the successful sale and close of the bonds and
will be paid from bond proceeds.
DAVID BAUM
Director, Agency
Finance & Administration
SCOTT P. JOHNSON
Director, Finance Department