On 07/12/2021 the Finance Committee considered and voted on a request for the Finance Director to sell $14.5 million of general obligation promissory notes, $8.36 million water system revenue refunding bonds, and $9.04 sewerage system revenue refunding bonds.
Prior to voting on it they listened to a presentation by Brad Viegut from Robert W. Baird and Co regarding the proposal.
Brad said that if the committee and the Council authorized this, Baird and city staff would take steps to bring this issuance to market. That would include preparing an official statement/disclosure document. He said they already completed the Moody’s rating call. He didn’t have the reports regarding that with him that day but would provide that to the full Council for the 07/21/2021 Common Council meeting. He did however know what the bond ratings were. Appleton was assigned Aa1 for its general obligation and Aa2 for the two enterprise issues. He noted that there was no change in ratings, and said it put the Appleton in elite company because Aa1 is the second highest rating that Moody’s issues. He said that they would price the issues on 07/21/2021 so what he was presenting to the Finance Committee was just an estimate based on current market conditions. He said the three issues would close on August 11.
Page three of the presentation was a summary of the general obligation issue. This would be for $14.5 million to fund projects that are included in the city’s 2021 Capital Improvement Plan. This would be structured for a 10 year maturity, i.e. a 10 year repayment. He noted that the rapid repayment of debt was one of the credit strengths that Moody’s cited. He said th first interest would be budgeted for April of 2022, and then interest would be semi-annual each October and April until the final payment. The estimated interest rate for the issue was 1.58%. He added that he was being somewhat conservative on the estimates of interest rates, by estimating them high, but he expected the actual rates to come in lower that what they used for planning purposes.
The detailed repayment schedule was shown on page 4. The boxed in area which read “2021 Notes” showed principal, interest, a bid premium that would be applied, and then, total principal and interest. He commented that they never look at city debt in isolation. The city’s existing obligations were reflected on the left-hand side of the page. They also modelled some hypothetical future financings not shown on that page, but that was why the total principal and interested showed as high in 2023 before dropping for a few years and then building back up. He said they were working on finalizing what the future financing plans might look like and they wanted to allow room with this issue to structure around those plans. That will be discussed more at a future meeting, but he just wanted to point out the rationale for the repayment schedule as detailed on page 4.
Page 5 summarized the water system refinancing. The estimated issue size was $8,360,000. This issue would fund $7 million of water projects and then refund or refinance debt that was issued back in 2011. He said the refinancing would be for savings and would not extend the repayments or push debt out. They would just be exchanging higher interest rate debt with lower interest rate debt. They were combining these two purposes into one financing for cost efficiency by doing them as one bond issue instead of two separate issuances. That would reduce the issuance expense. The repayment on the new money component would happen over 20 years. The refunding component would be paid off a little quicker than that. The estimated interest rate for the water system bonds was 2.29%. He said the difference in interest rates compared to the general obligation was driven by 2 things. First, the pledge of this issuance is the revenue generating capacity of the enterprise as opposed to a tax pledge, and second, this would be a 20 year repayment whereas the general obligation was a 10 year repayment. The longer repayment does increase the interest rate slightly.
Page 6 detailed the 20 year new money component of the water system financing.
Page 7 detailed the refunding component. Under the 2011 bonds, the boxed in yellow principal payments were eligible to be called at the city’s option. The right-hand two thirds of the page reflected the impact of calling those. The principal and interest of the 2011 issue would be replaced with the portion of the financing detailed on the right hand side of the page. The 1.58% interest rate on this component of the financing would be replacing debt that the city is currently paying 4% on and that difference in interest rates would drive budgetary savings of approximately $25,000 annually over the 10 year repayment period. On a present value basis that’s almost $225,000 of savings to the water system.
Page 8 was a summary of the sewer system debt issue or $9,040,000. That also would have two components–$7 million in new projects, and a refunding of debt issued in 2011 for the sewer system. Overall, it would have a 20 year repayment similar to the water system, but, again, the refunding component would be repaid over a quicker timeframe. The estimated interest rate for the sewerage system bond was 2.25%.
Page 9 detailed the 20 year repayment on the project financing and page 10 outlined the benefit of the refunding. They would be replacing debt with a 4% interest rate with debt with an estimated interest rate of only 1.56%. That would drive savings of about $20,000-$25,000 annually or $290,000 in present value.
He concluded that there were a lot of components of these refinancings, but they really came down to three borrowings—one for general obligation debt and two for revenue debut for the water and sewerage system.
He then offered to go into more detail or answer any questions, but the committee did not have any questions.
Alderperson William Siebers joked that Brad either did a very good job giving the presentation or else the committee simply didn’t know what he just said.
The committee voted unanimously to recommend that the promissory notes and bonds be issued.
View full meeting details here: https://cityofappleton.legistar.com/MeetingDetail.aspx?ID=870495&GUID=EE6BB9D8-F33E-4E43-951B-D3601C9755A8&Options=info|&Search=
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