The credit crisis nationally is forcing the city of Nashville to be more creative with some refinancing moves. For the first time the city is using a program from the Tennessee Municipal Bond Fund to help it refinance $59 million in debt.
The original bond helped pay for a variety of projects, including some of the construction of the Titans football stadium. But the bank backing those variable rate bonds got caught up with bad investments, and its credit rating tanked. As a result, Metro Finance Director Rich Reibling says the city was facing a substantially higher interest rate and principle payment – an additional $3 million by the end of the year.
Now, Reibling says Nashville will refinance the debt through bonds sold by the Clarksville Public Building Authority.
“The Tennessee Municipal Bond Fund has done this numerous times with a lot of different cities. And typically because of the city’s, Nashville’s bond rating it’s not in our best interest to borrow from them. But in this instance it really is in our best interest to do this. And we looked at all our other options and this was clearly the best option for us.”
Reibling calls the situation a direct result of what’s happening in the credit markets nationally.
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The Metro Council will take up a resolution Tuesday to approve the refinancing agreement:
RESOLUTION NO. RS2008-533 (FORKUM) – This resolution approves a loan agreement between the Metropolitan Government and the Public Building Authority of the City of Clarksville for the purpose of providing funds to refund general obligation bonds previously issued by Metro. In 1996, the council issued general obligation bonds with an original principal amount of $74,880,000 for the East Bank Redevelopment Project, which consisted of site preparation necessary for the construction of LP Field, including the demolition of buildings, street improvements, riverfront improvements, lighting, parking, and architect and engineering costs. On April 20, 2004, the council authorized the issuance of general obligation refunding bonds with a principal amount not to exceed $65 million to essentially refinance a portion of the stadium debt. As part of the 2004 refunding, the council allowed Metro to enter into an interest rate swap agreement, known as a “swaption”, whereby a counterparty bank (in this case SunTrust Bank) obtained an option to “swap” interest rate payments in the future on the call date in exchange for a one-time payment to Metro equivalent to the present value savings from refunding the outstanding bonds at a lower interest rate. This upfront cash payment was then used by Metro for debt service.
Under the swaption agreement, if SunTrust Bank elected to exercise the contract right and “swap” interest rates on the call date, they would pay an interest rate equivalent to the present prevailing interest rate, and Metro would have to either pay the interest at the current rate of the outstanding bonds or call the bonds and pay an early call premium. The swap rate for the counterparty is a fixed rate, but is a variable rate for Metro. SunTrust Bank exercised its option for a variable to fixed interest rate swap for the refunded bonds in 2006, thus requiring Metro to refund the bonds and pay a variable interest rate. Variable rate bonds are similar to a variable interest rate mortgage that fluctuates over the life of the loan. The 2006 resolution (RS2006-1269) also approved a standby bond purchase agreement, commonly known as a liquidity facility, in which DEPFA Bank, PLC agreed to purchase the bonds in the event they are not purchased by other buyers because of the variable rate. In exchange for the liquidity facility, Metro paid an annual fee to DEPFA Bank, PLC. DEPFA was recently downgraded to BBB, which caused the bonds to convert to bank bonds and changed the remaining amortization schedule from 18 years to 7 years. The change in the amortization schedule means that Metro must pay substantially more each year in debt service. The current principal amount of the outstanding 2006 bonds is $58,900,000.
In order to quickly get out from under the bank bonds, the finance director has determined it is in Metro’s best interest to enter into a loan agreement with the Public Building Authority of the City of Clarksville, utilizing the Tennessee Municipal Bond Fund, to refund the 2006 bonds. Pursuant to this agreement, the Clarksville Public Building Authority (the “issuer”) will issue variable rate revenue bonds with a principal amount of $59,140,000 for the purpose of making the loan to Metro, which will be paid by the ad valorem tax revenues of the Metropolitan Government. These funds will be used by Metro to refund the bonds and to pay all costs incident to the issuance and sale of the bonds. These issuance fees are approximately $240,000. Since the bonds to be refunded are general obligation bonds, we are pledging the full faith and credit of the Metropolitan Government in the loan agreement. The indebtedness will be payable from 2009 through a final maturity date of 2026. The repayment schedule will be the same as the amortization schedule in the 2006 bonds, except for the $240,000 issuance fees that will be paid in the first year.
The loan agreement designates The Bank of New York Mellon Trust Company as the trustee for the revenue bonds. Metro will be required to indemnify the issuer, the bank, the trustee, and the remarketing agent, to the extent legally permissible, for claims in connection with the agreement. There are a number of fees described in the loan agreement form that Metro will be obligated to pay if such fees are incurred. These fees include trustee fees and expenses, attorney fees, fees associated with the execution of a substitute letter of credit, and any other reasonable fees or expenses in connection with the bonds, loan or letter of credit. Such fees are estimated to be about one percent of the outstanding principal annually.
The loan agreement provides that the interest rate will be a variable rate to be determined by the remarketing agent, or by the trustee if the rate has not been determined by the remarketing agent. It is very unusual for Metro to have a variable interest rate on its bonds determined by agents or trustees that have no fiduciary (or other) relationship with Metro. These parties referenced in this loan agreement have their relationship with the issuer of the bonds.
While the variable interest rate on the loan cannot exceed the maximum interest rate permitted by law, Metro is expressly waiving the defense of usury. The agreement also provides that Metro will be in default on the loan if a final judgment for the payment of $1 million or more is entered against Metro and is not paid within 45 days from the date the judgment is entered. Metro also agrees to pay attorney fees and expenses incurred by the issuer, the bank, or the trustee for the collection of loan repayments.
This resolution also authorizes the mayor to execute a refunding escrow agreement with Deutsche Bank National Trust Company, Olive Branch, MS, to serve as the escrow agent, if needed. The escrow agent will be responsible for holding the funds and making the principal and interest payments on the bonds being refunded when due. The escrow agent will be compensated for its services, but the compensation amount in the escrow agreement form is blank. The finance director has advised that there most likely will not be a need for the escrow agent, and thus no escrow fee.
Since these bonds are not being issued by the Metropolitan Government, Metro’s bond counsel will not be issuing an opinion. Rather, such opinion is to be issued by the bond counsel for the Tennessee Municipal Bond Fund.
This is the first time the council office is aware of Metro entering into such a loan agreement with a pass-through entity for the purpose of providing funds to refund outstanding bonds. Given Metro’s strong credit rating, Metro has always been able to issue its own debt and find willing buyers of Metro bonds. However, the finance director has advised that this course of action is appropriate given the current condition of the financial markets.
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