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