The East Bethel City Council voted unanimously May 15 to take advantage of an unexpected opportunity to refinance the city’s 2010 utility bonds for an anticipated savings of $3 million.
The bonds, which include $11,465,000 in Recovery Zone Economic Development Bonds (RZEDB), with a 45 percent federal subsidy, and $6,135,000 in Build America Bonds (BAB), with a 35 percent federal subsidy, are eligible to be refinanced because one of four potential eligibility-qualifying events has occurred as a result of the federal sequestration.
The bonds became eligible for refinancing because the federal government has reduced the RZEDB or BAB direct payment percentage on the bonds by 8.7 percent for the remainder of the 2013 fiscal year. This means the city will receive about $21,000 less than projected in federal subsidy for its August 2013 bond payments. One of the four extraordinary redemption scenarios in the city’s existing 2010 bond documents is “if the federal government reduces the RZEDB or BAB direct payment percentage with retroactive applicability to bonds issued prior to the date of such federal credit reduction,” according to a city memo.
Stacie Kvilvang, senior financial adviser for Ehlers and Associates, told the council that the refinancing process will start June 19 with a competitive sale of $18,275,000 in general obligation refunding bonds at an anticipated interest rate of between 1 and 3.5 percent, or an anticipated average of 2.8 percent. The sale will close on July 10. The rates on the existing 2010 bonds range between 3 and 7.5 percent.
In addition, principal payments on the refinanced debt will be pushed out for five years so that development will have time to catch up and hopefully generate more money in utility fees to make the larger principal and interest payments starting in 2018.
According to Kvilvang, the future value savings of this refinancing is over $3 million and on a present-value basis, it is about $1.8 million. The refinancing will save the city more than $300,000 per year during the first five years.
Although the principal payments are being pushed out five years, the debt payoff will not be pushed farther into the future, Kvilvang said.
According to a memo by Dorsey and Whitney, the city of East Bethel’s bond counsel, there is some risk that a BAB or RZEDB bondholder might protest the call of their bonds and even sue to prohibit the redemption. There is no precedent for this situation, but Dorsey and Whitney is aware of at least three other issuers nationally that are moving to redeem their BABs and has heard no reports of adverse action from holders in those cases.
According to the memo, “We believe that the refunding bonds will continue to be valid and tax-exempt” in that situation.
“With the situation we’re in, to me it’s almost a no-brainer,” said Councilmember Robert DeRoche of the refinancing opportunity.
The council approved a resolution authorizing the refinancing unanimously on a roll call vote.