To review the full September 5th, 2024 Proposed Stifel Refinancing Summary - click here
Q&A from Homeowners following the August 21st Work Session Meeting (Answers Provided by Stifel):
What is the proposed cost of the insurance premium?
Estimated at $1.1M; the insurance premium is a function of the premium and the sizing of the senior (insured) bond issuance. Insurance is only used if there is a net benefit to the financing (the overall lower cost of the debt service reflecting the insured credit rating more than covers the cost of using insurance). Without insurance, rates today would be ~1.00-1.50% higher thus reducing the total amount that could be refinanced by a greater amount than the cost of insurance.
Can you break out the Cost of Issuance?
Consultant Fees - $300K (Legal, Accounting, District Management, Market Study, Cash Flow Forecast)
Municipal Advisor - $180K
Underwriter - $980K (1% on insured, non-rated bonds and 3% on subordinate bonds)
Can you confirm if there is a correlation between the cost of insurance and the build out of the neighborhood? If so, are there certain percentage build out hurdles where insurance providers can offer more affordable premiums?
There are various factors that impact the cost of insurance – overall market conditions, the relative interest spread between non-rated and AA-rated bonds, the size of transaction, status of development, and future growth potential. The bond insurance companies will charge a higher premium if they view there is more credit risk. For this financing, the cost of insurance is more dependent on the amount of growth we are assuming in the insurance plan. If we structure the issuance to include more future growth, the insurance premium could potentially increase. If there is less reliance on growth (ie., we do not assume any future development in our senior sizing and have a smaller senior bond), the premium could decline.
Is it considered a good practice (not a common practice) to refinance Bonds when they become callable as long as the NPV provides a positive savings above 3%?
There are many reasons why issuers elect to refinance bonds at their call date. Some issuers elect to refinance even if there is no NPV savings because it achieves different goals. It is all very specific to the issuer, but generally once the bonds are callable, if savings can be generated, issuers usually elect to refinance.
Can you calculate how much interest rates would have to increase for the metro district to break even under the current proposal if the metro district waited until 12/1/24 when the prepayment is reduced to 2%, and until 12/1/2025 when the prepayment is reduced to 1%, and until 12/1/2026 when the prepayment is completely burned off?
Yes, for the senior bonds, based on the $31,945,000 outstanding at a blended rate of 5.71%, we would have savings if we escrowed funds between a closing through the call date. It costs about $39,000 per month to keep the bonds outstanding versus saving $319,450 in premium. Anywhere above 8 months would result in a negative outcome for the district (ie., if you closed bonds in February of 2025, it would be more beneficial for the District to pay the call premium vs. waiting). For the Subordinate bonds, with ~$4.988M of par plus accrued interest outstanding as of the end of 2023, the cost is about $16,000 per month to keep the bonds outstanding versus annual call premium of $32,600, so if we are within two months of the call date, it would make sense to wait for the call protection. Anything beyond two months, it would be more beneficial to pay the current call premium. So in this case, if the financing were to occur in October of this year, it would be beneficial to escrow funds for both series of outstanding bonds until their respective call dates.
Josh mentioned the idea of escrowing the current bonds until the prepayment penalty is reduced. I understand the idea but is this something Piper Sandler or Stifel can consider and evaluate if that strategy would make sense?
Yes - This is what we are evidencing above in the current cashflows. For the senior bonds, with less than 8 months remaining on the call protection, we would recommend escrowing funds and for the subordinate bonds, with less than 2 months remaining on the call protection, we would recommend escrowing the funds.
During the zoom meeting I asked if our debt maturity was going to be pushed out by roughly 10 years and Shelby responded stating the increased maturity of the bonds would be pushed out 1 year from 2057 to 2058. It seems the senior debt maturity is pushed out 10 years, the subordinate B debt is pushed out 10 years, the C series maturity is reduced by 5 years (since the outstanding debt was reduced by about $20M) and overall, the combined outstanding debt is extended 1 year – is this accurate?
The extension of one year was based on the estimated payoff dates. In the existing debt, we estimate the C bonds will be fully repaid in 2057. They do have a stated maturity date of 2052, however, the estimated repayment date is 2057 based on current development expectations. We have re-ran numbers to assume a 30 year bond that would pay in full in 2054. In this instance, we would be extending the senior and subordinate debt by 6 years, but repaying the C bonds earlier, so we are estimating all debt would be extinguished 3 years earlier than the existing bonds outstanding.
Can Piper Sandler provide the current and refinanced outstanding principal balance per year similar to how the balance is reported in the Subordinated Debt Service page? This would be helpful to better understand the allocation of debt across each tranche over the projection periods.
This is provided as an attachment.
What other firms has the metro board selected to provide terms sheets for our bond refinancing?
The board has engaged Piper Sandler as the underwriter, as they are the most experienced team and have done the most bond issuances across the state for the prior 3 years. The board engaged Stifel as the municipal advisor given their extensive work in the space and full trading desk capabilities.