Santa Paula: Council Approves $47 Million Bond Sale

By Sheryl Hamlin

Suppose you own a home financed by a 30-year mortgage. Subsequent to the origination of the mortgage, interest rates drop significantly. Assuming you are still a creditworthy buyer, there are several options to take advantage of this drop in interest rates: 1) refinance the balance of the principal, reducing payments and saving money to pay down other debt, 2) maintain the same monthly payment borrowing more than the remaining principal thus giving yourself an infusion of cash, and 3) reduce the monthly payments slightly giving yourself a smaller cash payout from the savings on the interest. Which would you do?

The City Council of Santa Paula discussed such a scenario on Wednesday, November 20, 2019 with respect to the refinancing of the 2010 Santa Paula Water Bonds. The solution chosen approximates the middle path, where payments are reduced in order to meet the bond ratio requirements, but a small amount of cash is extracted.

Source: Hilltop Securities

 

In the chart above the $43,550,000 represents the par value of the outstanding 2010 bonds plus accrued interest, while the $35,900,000 represents the new issue. After net-present-value is computed for both, there is a projected savings of about $9 million. The bar chart to the right shows the proposed payments (bars) compared to existing (blue).

The extra cash is called “new money” and is shown in the chart below by a blue extension of each orange bar. The potential projects are a result of a previous energy efficiency audit. Read that audit here: Energy Efficiency Audit

New Money: $3 million, Hilltop

 

Council Discussion

There were two parts to this refunding: the sale of the bonds and a city debt policy. The discussion about the bond sale centered around timelines which change cash flows. Council Member Crosswhite brought up the point, which was confirmed by Mr. Curls from Hilltop, that if interest rates change during the sales process, the $3 million free cash could be returned to the water fund rather than spent.

Council Member Sobel asked about the wastewater bonds. Mr. Curls said that these would need to be evaluated because they are relatively new.

Both motions were approved by Council and by the Utility Authority unanimously.

There was no discussion about potential savings with the “new money” spending.

To watch the video, click here.

For more information on author: sherylhamlin dot com


Get Citizensjournal.us Headlines free  SUBSCRIPTION. Keep us publishing – DONATE

 

One Response to Santa Paula: Council Approves $47 Million Bond Sale

  1. Sheryl Hamlin February 17, 2020 at 4:07 pm

    Here is what actually happened…
    The city exercised a “call” provision in the bonds, which means they paid off the existing investors with cash from the sale of new bonds. They reissued new bonds at very similar coupon rates to the old bonds which were snapped up by investors. Why? Because they old interest rates are much higher than possible now (range of 3-5%, as the link showed in the list of transactions) so investors who need to maintain that interest rate on their portfolios for cash flow purposes will pay the premium to keep it. Here is the shakedown: the investors paid a premium for the new issue of several percent, so instead of paying par at 100% they paid 103% or 105% which means the city took in more cash than the face value of the bonds. The city will still be paying the same coupon payment but now has a wad of cash as the press release states. The city can put this cash away in the sinking fund to reduce its required payments to the sinking fund (conservative approach) or they can spend the monies on “projects” as Mayor Araiza said to the Chamber right after the sale. The problem, of course, is that these were water bonds so water bond sales must be used for water projects, unless of course the water fund “loans” some other fund the cash for the projects. The consultant’s presentation at council was also misleading because it used the “yield to maturity” as the new yield, but this is a term for investors, whose yield to maturity is now very low because they paid the premium.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *