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HomeMy Public PortalAboutAB 04-163 attch - Response to Questions from City Council by Seattle Northwest (208) 344-8577 FAX: (208) 345-2956 M E M O R A N D U M TO: Lindley Kirkpatrick, City of McCall Amanda Townsend, City of McCall CC: Bill Jerrel, DEQ DATE: October 18, 2004 FROM: Eric Heringer RE: Response to Questions from City Council, Idaho Bond Bank Refinancing Lindley – Here are the responses to the questions you forwarded to me from Council regarding the Idaho Bond Bank refinancing of the City’s DEQ loan. Q: What are the total costs of the refinance? I know that you said that the costs are included in the new loan amount. It appears from the summary you provided that the total cost is $24,618.72. Is that Correct? A: All financing costs will be paid from the proceeds of the Idaho Bond Bank’s Bond sale and are incorporated in the interest rate on the new loan. The savings analysis we provided reflects this and no issuance costs would be paid directly by the City at closing. The $24,618.72 was the amount of Costs of Issuance that was “allocated” to the City of McCall when we ran the analysis. I included this page of the savings analysis to illustrate the benefit of lower costs with a pooled financing vs. refinancing on your own. The specific costs that are allocated to each City will depend on how many individual Cities participate in the Bond Bank’s financing. The analysis I provided assumed that we would have 14 Cities involved in the Bond Bank pool, however, since we met, the number of Cities participating in the Bond Bank financing has been reduced to 7. The bond attorneys determined that some Cities could not refinance their loans through the bond bank because they had not received Judicial Confirmation on their original DEQ loans. Therefore, it is likely that the actual costs that get “allocated” to each participant will be higher. However, it is important to remember that no costs will be paid directly by the City but rather are reflected in the interest rate on the new loan and that the refinancing will not proceed unless the NET savings target of the City can be achieved. We are currently working with the Liza Carberry (Investment Manager for the State Treasurers’ Office and Executive Director of the Idaho Bond Bank) and the Bond Bank financing team to minimize the costs of issuance that the financing will require. Q: The summary that you provided states that the Net PV Savings are $55,442.61. What does that number include? It must be more than the $913/yr for 17 years. A: The Net cash flow savings is projected at $913 total. That is the difference between the total payments (principal & interest) on the current loan and total payments (principal and interest) on the new loan. The payment schedule on the new loan incorporates all financing costs so this is the Net savings. It is basically a break-even scenario when comparing total payments on the current loan against total payments (including costs) on the new loan. The Net Present Value (PV) Savings of $55,442.61 calculates the economic benefit to the City from holding onto its funds for a longer period of time before having to make the loan payments. The current DEQ loan repayment schedule has Principal and Interest payments on November 1 and May 1. The payment schedule on the new loan would have interest payments on March 1 and September 1 of each year. Principal payments would occur on September 1 of each year. By scheduling the repayment of principal at the end of each Fiscal Year (rather than at the beginning and middle), the City holds onto its funds longer and therefore should realize the benefit of the interest earnings on the funds during that time. The “discount” rate or “earnings” rate applied in the Present Value calculation is 3.56% which is the borrowing rate expected for the entire Bond Bank financing. The benefit to the City of not having to fund its debt service reserve requirement on the DEQ loan is NOT included in this savings analysis. Q: What is the total amount of the existing loan to be repaid? A: $2,828,282.60 principal outstanding as of 12/1/2004. Q: What is the total amount that will be borrowed under the new loan? A: By law it cannot exceed the principal outstanding on the refinanced loan ($2,828,282.60). In the analysis we provided, the new loan amount was projected at $2,775,000. The new loan amount is less because we plan to sell the bonds in a way that produces a premium (investors pay more up-front to own the bonds). The premium is how we generate the funds necessary to pay the costs of issuance. What the investor receives for paying the up-front premium is a higher interest payment than it would if it did not pay the premium. The new loan amount repayment schedule in the savings analysis reflects this higher interest rate which is how the costs are factored into the savings analysis. I hope this information helps. Please let me know if you would like to have me available by phone this evening to answer any questions or clarify any of this information. Eric Heringer Vice President Seattle-Northwest Securities Cc: Bill Jerrell, Division of Environmental Quality