HomeMy WebLinkAboutII A. SPRING BOND AND DEBT ISSUANCE UPDATE 3.26.24Member NYSE|FINRA|SIPCMarch 26, 2024City of Virginia Beach, VAGeneral Government Plan of Finance &Debt Structure Considerations
March 26, 2024City of Virginia Beach, VA 1Background / OverviewDavenport & Company LLC (“Davenport”) serves as Financial Advisor to the City of Virginia Beach (the “City”).In December 2023 Davenport presented a series of capital funding scenarios to illustrate potential debt capacity and affordability impacts of funding the City’s Tax-Supported Capital Improvement Programs. The City is moving forward with the public issuance of bonds in support of several of these Tax-Supported Capital Programs to fund previously approved capital projects. The issuances contemplated herein will maintain compliance with Adopted Financial Policy Guidelines and the associated debt service payments have been incorporated into the Proposed FY 2025 Budget.The bonds will be issued via two separate Tax-Supported borrowing programs:1.Charter (“General Obligation”) Bonds; and2.Public Facility Revenue Bonds.The City enjoys “Aaa” credit ratings from all three rating agencies.
0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%1980198219841986198819901992199419961998200020022004200620082010201220142016201820202022202420-Bond Index (Since 1980)March 26, 2024City of Virginia Beach, VA 2Interest Rate Environment | Tax-ExemptThe 20-year interest rates above show the Bond Buyer’s “20-Bond Index” which consists of 20 tax-exempt bonds with an average rating of ‘Aa2’/‘AA’ (Moody’s / S&P) that mature in 20 years. The 20-Bond Index serves as a general indicator of prevailing interest rates for tax-exempt borrowers. Updated as of 03/15/2024.Interest rates for highly-rated, tax-exempt borrowers, remain at historically favorable levels.1.5%2.0%2.5%3.0%3.5%4.0%4.5%May-20Jul-20Sep-20Nov-20Jan-21Mar-21May-21Jul-21Sep-21Nov-21Jan-22Mar-22May-22Jul-22Sep-22Nov-22Jan-23Mar-23May-23Jul-23Sep-23Nov-23Jan-24Mar-2420-Bond Index (Since May 2020)
March 26, 2024City of Virginia Beach, VA 3Charter (“General Obligation”) BondsThe upcoming General Obligation Bond issuance will provide financing to both reimburse previous expenditures and fund future capital expenditures for General and School needs.The funding for the Flood Protection Program aligns with the capital planning from December 2023 and provides funds for estimated expenditures through FY 2025. The General, School, and Flood portions will all be financed over 20 years. 2024 General Obligation BondsEstimated Uses of Funds148,000,000$ General CIP Projects10,000,000 School CIP Projects158,000,000 Subtotal - General and Schools118,000,000 Flood CIP Projects276,000,000$ Total General Obligation Financing
March 26, 2024City of Virginia Beach, VA 4Public Facility Revenue BondsThe upcoming Public Facility Revenue Bond issuance will provide financing for both the Tourism Investment Program (“TIP”) and Schools Projects.The majority of the TIP funds are earmarked for the Atlantic Park Project. School CIP Projects consist of Energy Performance Contracts which were originally appropriated as Public Facility Revenue Bonds. The TIP and School portions will be financed over 20 years. 2024 Public Facility Revenue BondsEstimated Uses of Funds156,000,000$ TIP CIP Projects10,000,000 School CIP Projects166,000,000$ Total Public Facility Revenue Financing
March 26, 2024City of Virginia Beach, VA 5Refunding OpportunitiesDavenport routinely reviews and monitors the City’s existing debt profile for refinancing opportunities. Interest rates are at historically favorable levels. Davenport has identified the potential opportunity to refinance several series of outstanding General Obligation and Public Facility Revenue Bonds for debt service savings purposes. The City would have the potential opportunity to refund the outstanding debt in order to:1.Reduce the interest rate on the bonds to achieve debt service savings.2.Without extending the final maturity of the bonds.The industry standard benchmark for a successful refinancing is 3.0% Net Present Value Savings as a percentage of the par amount of the bonds refunded. The General Obligation refunding candidates equate to approximately $54.4 million outstanding –3.0% Net Present Value savings is approximately $1.6 million (or roughly $160k annually for 10 years).The Public Facility Revenue refunding candidates equate to approximately $29.6 million outstanding – 3.0% Net Present Value Savings is approximately $900k (or roughly $90k annually for 10 years).The refundings are subject to current market conditions on the day of the sale(s) and will only be issued if savings thresholds are met.
March 26, 2024City of Virginia Beach, VA 6Next StepsDate Event/TaskTuesday, March 26(Today)Davenport presents Plan of Finance to City Council.Tuesday, April 16City Council Meeting:•City Council considers approval of General Obligation and Public Facility Revenue Bonds.•(Note: The Virginia Beach Development Authority’s approval is also a requirement for the Public Facility Revenue Bonds)Weeks of April 15 and 22 Meetings with the National Credit Rating Agencies in Virginia Beach.May 14 and May 15General Obligation and Public Facility Revenue Bond sales via competitive bidding in the Public Credit Markets. Interest rates locked in. June 4 and June 5 General Obligation and Public Facility Revenue Bond closings. Funds advanced to the City.
20 vs. 30-Year DebtFinancial ConsiderationsMarch 26, 2024City of Virginia Beach, VA 7
Davenport was requested to summarize the pros and cons of issuing debt over a 30-year term vs. 20-year term for Tax-Supported capital projects. The City’s longstanding historical practice has been to issue debt over 20 years with a level principal repayment structure.Issuing debt over 30 years for one, or a series of, “Generational Projects” could provide a strategic tool to reduce the budgetary impact when undertaking historic capital objectives but would need to be vetted/analyzed to ensure compliance with City policies and best practices for “Aaa” rated local governments. Davenport would advise against issuing 30-year debt for the entirety of the City’s Tax-Supported CIP. March 26, 2024City of Virginia Beach, VA 8Debt Structure Considerations20-Year Financing•Accelerated retirement of principal / increased future debt capacity.•Lower interest rate.•Less interest paid over the life of the loan.•Higher annual payment / reduced budgetary flexibility. •For “Generational Projects”, the usefullife of asset may not be commensurate with repayment term.30-Year Financing•Lower annual payment / increased budgetary flexibility. •Potential to spread the cost of “Generational Projects” across the useful life of such projects.•Delayed retirement of principal / reduced future debt capacity. •Higher interest rate. •More interest paid over the life of the loan.Credit PositiveCredit Challenge
March 26, 2024City of Virginia Beach, VA 9Debt Structure Considerations (cont.)For discussion purposes, Davenport has provided a current market estimate to compare 20-year vs 30-year debt structures on a sample $100 million borrowing.True Interest Cost (“TIC”) is the effective fixed interest rate for the life of the borrowing. Note: The current market estimates to the right are based on market conditions as of 03/20/2024. Results are preliminary, subject to change.Structure20-Year Level Principal30-Year Level Principal30-Year Level Debt ServiceTrue Interest Cost 3.22% 3.61% 3.77%Total Debt Service 132,488,250$ 154,222,850$ 168,546,700$ Year Debt Service Payment Debt Service Payment Debt Service Payment1 8,729,250 7,289,100 5,616,750 2 8,506,500 7,134,600 5,617,500 3 8,283,750 6,980,100 5,619,500 4 8,061,000 6,825,600 5,617,500 5 7,838,250 6,671,100 5,616,500 6 7,615,500 6,516,600 5,616,250 7 7,392,750 6,362,100 5,616,500 8 7,170,000 6,207,600 5,617,000 9 6,947,250 6,053,100 5,617,500 10 6,719,500 5,898,600 5,617,750 11 6,497,000 5,744,100 5,617,500 12 6,274,500 5,589,600 5,616,500 13 6,052,000 5,435,100 5,619,500 14 5,829,500 5,280,600 5,621,000 15 5,607,000 5,121,100 5,620,750 16 5,384,500 4,966,850 5,618,500 17 5,162,000 4,812,600 5,619,000 18 4,984,000 4,689,200 5,619,200 19 4,806,000 4,565,800 5,619,200 20 4,628,000 4,442,400 5,618,800 21 - 4,319,000 5,617,800 22 - 4,195,600 5,616,000 23 - 4,072,200 5,618,200 24 - 3,948,800 5,619,000 25 - 3,825,400 5,618,200 26 - 3,702,000 5,620,600 27 - 3,578,600 5,620,800 28 - 3,455,200 5,618,600 29 - 3,331,800 5,618,800 30 - 3,208,400 5,616,000
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