BOARD AGENDA MEMORANDUM
SUBJECT:Title
Adopt a Resolution Authorizing the Issuance of Not-To-Exceed $120 Million Safe Clean Water Program Refunding Revenue Bonds, Authorizing the Execution and Delivery of Not-To-Exceed $165 Million Interim Obligations and Revenue Certificates of Participation, Approving the Execution and Delivery of Certain Documents and Authorizing Certain Acts In Connection Therewith; and Adopt a Resolution Authorizing the Issuance of Not-To-Exceed $200 Million Water System Refunding Revenue Bonds, Authorizing the Execution and Delivery of Not-To-Exceed $408 Million Interim Obligations and Revenue Certificates of Participation, Approving the Execution and Delivery of Certain Documents and Authorizing Certain Acts In Connection Therewith.
End
RECOMMENDATION:Recommendation
A. Adopt the Resolution AUTHORIZING THE ISSUANCE OF NOT-TO-EXCEED $120,000,000 SAFE CLEAN WATER PROGRAM REFUNDING REVENUE BONDS, AUTHORIZING THE EXECUTION AND DELIVERY OF NOT TO EXCEED $165,000,000 INTERIM OBLIGATIONS AND REVENUE CERTIFICATES OF PARTICIPATION, APPROVING THE EXECUTION AND DELIVERY OF CERTAIN DOCUMENTS AND AUTHORIZING CERTAIN ACTS IN CONNECTION THEREWITH;
B. Adopt the Resolution AUTHORIZING THE ISSUANCE OF NOT TO EXCEED $200,000,000 WATER SYSTEM REFUNDING REVENUE BONDS, AUTHORIZING THE EXECUTION AND DELIVERY OF NOT TO EXCEED $408,000,000 INTERIM OBLIGATIONS AND REVENUE CERTIFICATES OF PARTICIPATION, APPROVING THE EXECUTION AND DELIVERY OF CERTAIN DOCUMENTS AND AUTHORIZING CERTAIN ACTS IN CONNECTION THEREWITH; and
C. Authorize and direct the Chief Executive Officer, Assistant Chief Executive Officer-Operations, Chief Financial Officer, Treasury and Debt Officer, District Counsel, and the Clerk of the Board of Directors and such other officers and staff of Valley Water, acting singly, to do any and all things, and to execute and deliver any and all documents, which such officers may deem necessary or advisable in order to consummate the sale and delivery of the Refunding Revenue Bonds, Interim Obligations, and Revenue Certificates of Participation.
Body
SUMMARY:
Approval of staff recommendations will allow the Santa Clara Valley Water District (“Valley Water”) to issue the following debt obligations:
• Issue a principal amount of up to $120 million of Safe, Clean Water Program System Refunding Revenue Bonds, Series 2022A (Tax-Exempt), and up to $165 million of Interim Obligations (IOs) and Revenue Certificates of Participation (COPs), Series 2022B (Tax-Exempt) (the “SCW Obligations”) (Attachment 1); and
• Issue a principal amount of up to $200 million of Water System Refunding Revenue Bonds, Series 2022A (Tax-Exempt) and Series 2022B (Taxable), and up to $408 million of IOs and Revenue COPs, Series 2022C (Tax-Exempt) (the “WU Obligations”) (Attachment 2).
The proceeds of the debt obligations described above (together, the “Obligations”) will be used to: (i) refund the currently outstanding Commercial Paper Certificates, Series A (Tax-Exempt), Series B (Taxable), and the Revolving Line of Credit Series C (Tax-Exempt), issued to finance projects for the Safe, Clean Water Program and Water Utility System (the “outstanding short-term obligations”); (ii) acquire and/or construct, or reimburse the cost of the acquisition or construction of, certain Safe, Clean Water (SCW) Program and Water Utility System (WU) capital improvements; and (iii) pay costs of issuance of the SCW and WU Obligations. A summary of the financing is provided in Attachment 3 - PowerPoint presentation.
Method of Sale
The SCW Obligations are recommended to be sold on a negotiated basis utilizing a team of underwriters including Alamo Capital, Barclays Capital, Inc. (Barclays), and J.P. Morgan Securities LLC (JPM) (collectively, the “Underwriters”). Alamo Capital is a small, local firm established in 1986 located in Walnut Creek, California. With over 25 years of experience specializing in tax-exempt public finance, Alamo Capital is certified with the National Women Business Owners Corporation (NWBOC), Women’s Business Enterprise (WBE), the Small Business Enterprise (SBE) and rated A+ by the Better Business Bureau. JPM and Barclays are recommended to be included in this transaction because both firms offered the lowest overall underwriting fees in response to Valley Water’s request for information for underwriting fees issued by its Municipal Advisor, Public Resources Advisory Group on August 3, 2022. The Underwriters are in compliance with the Valley Water Board of Directors’ Executive Limitation (EL) 4.7.7, both Barclays and JPM have an Environmental, Social, and Governance (ESG) rating of “Medium” by Sustainalytics (Attachment 4) while Alamo Capital is exempt from the ESG rating because it is a local firm with total assets below $10 billion. This is the first time SCW Obligations will be sold to the public debt market, hence a negotiated sale is recommended to ensure the credit structure can be adequately marketed to generate strong demand and low borrowing costs.
The WU Obligations are recommended to be sold on a competitive basis, which is expected to result in the lowest overall cost of financing. Valley Water has issued multiple series of Water Utility debt obligations in recent years and investors are familiar with the WU credit structure such that a competitive sale would be the most cost- effective method of sale. Staff will conduct an active outreach to small, local banks by sending direct emails to these banks to inform them of the pending competitive sale. Staff will be placing the Notice of Sale advertisements in El Observador, Chinese News, Vietnam Daily, San Jose Post, as well as the Bond Buyer, the daily municipal bond newspaper, to ensure a broad and diverse audience of potential bidders are informed of the competitive sale. The Notice of Sale will specify minimum qualifications as follows: (1) the firm must be in compliance with EL 4.7.7 and submit a proof of an ESG rating of medium or better (small local firms are exempt); and (2) the firm is currently qualified in the California State Treasurer’s Office underwriter pool. The list of firms that will receive the direct email solicitations is included in Attachment 5.
The competitive sale and negotiated sale are the two primary methods to sell municipal securities to the public markets. In a competitive sale, the qualified underwriters would submit a firm offer to purchase the municipal securities. An award by the issuer is made to the underwriter that presented a bid with the lowest interest rate cost according to the terms of the Notice of Sale. In a negotiated sale, the issuer negotiates with and sells directly to the underwriter, who will then reoffer the securities to the public market. A negotiated sale is typically recommended for new credits sold to the market to ensure sufficient marketing of the securities by the underwriter to generate demand.
Financing Plan
The financing structure of the Obligations are summarized in the table below:
|
|
SCW Refunding Bonds |
SCW IOs/COPs |
WU Refunding Bonds |
WU IOs/COPs |
|
Not-to-Exceed Amount |
$120M |
$165M |
$200M |
$408M |
|
Purpose |
Refund outstanding short-term obligations |
Interim funding for SCW capital projects |
Refund outstanding short-term obligations |
Interim funding for WU capital projects |
|
Repayment Term |
30 years |
4 years |
30 years |
3.5 years |
|
Debt Service |
Level, on an annual basis |
Capitalized interest for 4 years, expected to be refunded at maturity |
Level, on an annual basis |
Capitalized interest for 3.5 years, expected to be refunded at maturity |
|
Security |
SCW Revenues pursuant to the Safe, Clean Water Master Resolution (No. 21-34) |
Water Utility System Revenues pursuant to the Parity Master Resolution (No. 16-10 and 16-82) |
|
Lien Level |
First Lien |
First Lien |
|
Credit Ratings |
The SCW is currently unrated as it has no long-term debt outstanding; staff anticipates ratings similar to the WU Obligations |
Existing WU Obligations are rated ‘Aa1’ by Moody’s and ‘AA+’ by Fitch; staff anticipates similar ratings will be obtained for the WU Obligations |
Board approval of the Resolutions does not commit Valley Water to a definite course of action with regard to any particular project and does not limit Valley Water in exercising any discretion following California Environmental Quality Act (CEQA) review of the project, including (i) considering other feasible alternatives and mitigation measures to avoid or minimize project impacts, (ii) making modifications deemed necessary to reduce project impacts, or (iii) determining not to proceed with one or more component of a project. Additionally, approval of the recommended actions does not obligate Valley Water to approve the construction of any of the projects.
Estimated Sources and Uses of Bond Proceeds
The estimated sources and uses of funds for the Obligations are set forth below. The principal amounts shown in the tables below are based on current estimates, which are less than the not-to-exceed amounts set forth in the SCW and WU Resolutions. The Resolutions set forth higher not-to-exceed amounts to enable flexibility to adjust the debt issuance amounts in case there is a change in business need and/or market conditions to warrant higher issuance amounts.
|
|
SCW Refunding Bonds |
SCW IOs/COPs |
Total |
|
Sources |
|
|
|
|
Principal Amount |
$ 77,360,000 |
$ 46,585,000 |
$ 123,945,000 |
|
Net Original Issue Premium/(Discount) |
6,118,753 |
3,548,380 |
9,667,133 |
|
TOTAL |
$ 83,478,753 |
$ 50,133,379 |
$ 133,612,133 |
|
|
|
|
|
|
Uses |
|
|
|
|
Repay Short-Term Obligations |
$ 83,158,000 |
$ 2,842,000 |
$ 86,000,000 |
|
New Project Funds |
0 |
38,486,000 |
38,486,000 |
|
Capitalized Interest |
0 |
8,611,505 |
8,611,505 |
|
Costs of Issuance |
218,452 |
131,548 |
350,000 |
|
Underwriters’ Fee |
100,568 |
60,561 |
161,129 |
|
Miscellaneous |
1,733 |
1,766 |
3,499 |
|
TOTAL |
$ 83,478,753 |
$ 50,133,379 |
$ 133,612,133 |
|
|
WU Refunding Bonds |
WU IOs/COPs |
Total |
|
Sources |
|
|
|
|
Principal Amount |
$ 122,900,000 |
$ 200,805,000 |
$323,705,000 |
|
Net Original Issue Premium/(Discount) |
3,933,382 |
13,214,977 |
17,148,359 |
|
TOTAL |
$ 126,833,382 |
$ 214,019,977 |
$ 340,853,359 |
|
|
|
|
|
|
Uses |
|
|
|
|
Repay Short-Term Obligations |
$ 126,238,000 |
$7,957,000 |
$ 134,195,000 |
|
New Project Funds |
0 |
173,093,241 |
173,093,241 |
|
Capitalized Interest |
0 |
32,002,136 |
32,002,136 |
|
Costs of Issuance |
161,359 |
263,641 |
425,000 |
|
Underwriters’ Fee* |
430,150 |
702,818 |
1,132,968 |
|
Miscellaneous |
3,873 |
1,141 |
5,014 |
|
TOTAL |
$ 126,833,382 |
$ 214,019,977 |
$ 340,853,359 |
*WU underwriter’s fee subject to competitive bid of winning qualified firm, currently showing a conservative assumption.
Good Faith Estimated Costs
Pursuant to California Government Code Section 5852.1, the good faith estimates with respect to the SCW Obligations are as follows: (1) the “true interest cost” is currently estimated to be 4.047%; (2) the “finance charge” (which means the sum of all fees and charges paid to third parties) is estimated to be $511,129; (3) the “amount of proceeds” received by Valley Water (which is net of the finance charge) is estimated to be $133,101,004; and (4) the “total payment amount” (which means the sum of all debt service payments to the final maturity) is estimated to be $188,259,444.
The good faith estimates with respect to the WU Obligations are as follows: (1) the “true interest cost” is currently estimated to be 4.401%; (2) the “finance charge” (which means the sum of all fees and charges paid to third parties) is estimated to be $1,557,968; (3) the “amount of proceeds” received by Valley Water (which is net of the finance charge) is estimated to be $339,295,391; and (4) the “total payment amount” (which means the sum of all debt service payments to the final maturity) is estimated to be $443,769,682.
Estimates are based on market conditions as of September 7, 2022, plus 0.50%. Actual results will differ depending on market conditions on the pricing dates for the SCW and WU obligations which are expected to occur in November/December 2022.
Financing Documents
The following financing documents, in substantially final form, are attached for Board review and/or approval: Resolution of the Board, attached to which are the Bond Indenture, Installment Purchase Agreement, Trust Agreement, Purchase Contracts, Notice of Sale, Preliminary Official Statements, Continuing Disclosure Agreements and Assignment Agreements (Attachments 6-12). The financing documents have been set up to allow the Obligations to be sold by either a competitive sale, negotiated sale, or private placement. The method of sale for the Obligations shall be determined based on market conditions to ensure Valley Water can achieve the lowest overall cost of financing.
Issuance Costs
The estimated total costs of issuance in the amount of $775,000 will be paid from the proceeds of the debt issuances upon or shortly after closing:
|
Description |
Estimate |
|
Rating Fees (Fitch/Moody’s) |
$250,358 |
|
Bond Counsel |
285,000 |
|
Municipal Advisor |
148,526 |
|
Trustee |
30,000 |
|
Printing (Official Statement) |
10,000 |
|
News Outlets |
15,000 |
|
Contingency |
36,116 |
|
Total |
$775,000 |
Additionally, underwriting costs in the estimated amount of approximately $1,132,968 will be paid at closing to the Underwriters as compensation for selling the securities and to reimburse expenses incurred (e.g., underwriter’s counsel, investor presentation, and certain regulatory and securities-related fees)
Financing Corporation Approval
Valley Water is required to cause the Certificates to be executed and delivered through the Santa Clara Valley Water District Public Facilities Financing Corporation. The Financing Corporation is scheduled to consider and approve the resolution authorizing the Obligations and related matters on October 28, 2022.
Financing Schedule
The current financing schedule is summarized below:
|
Description |
SCW Obligations |
WU Obligations |
|
PFFC Meeting |
10/28/2022 |
|
VW Board Meeting |
11/08/2022 |
|
Ratings |
10/21/2022 |
11/09/2022 |
|
Print Prelim. Official Statement |
11/08/2022 |
11/17/2022 |
|
Pricing |
11/16/2022 |
12/05/2022 |
|
Closing |
12/06/2022 |
12/20/2022 |
Valley Water Disclosure Responsibilities
Valley Water’s Board and executive team are responsible for ensuring that no material facts are omitted or misstated in the Preliminary Official Statement in accordance with federal securities laws and disclosure requirements outlined in the Valley Water Debt Management Policy (Attachment 13).
As the primary securities offering document to potential investors, the Preliminary Official Statement must contain all material information relevant to the Obligations and the security thereof. The materiality standard is determined in context of all the facts and circumstances and is based on whether there is a substantial likelihood that a reasonable or prospective investor would consider the information important in deciding whether to invest. Confidentiality and political considerations are not exceptions to the requirement for full disclosure. If the Board, executive team, or any Valley Water staff contributing to and/or reviewing the Preliminary Official Statement has concerns about the accuracy or completeness of the disclosure, those concerns should be raised and discussed with the Valley Water’s Chief Financial Officer and the debt management staff immediately. Additionally, per federal securities law, Valley Water has an obligation to provide material updates, if any, to the Official Statement up to 25 days after the closing date of the Obligations (in addition to continuing disclosure obligations laid out in the Continuing Disclosure Agreement). Attachment 14 provides additional information on municipal disclosure responsibilities and consequences of non-compliance with securities laws.
Community Bank Investments
Valley Water Board has implemented an innovative financing approach which promotes small, local banks participation in Valley Water’s financing business. The Board Executive Limitation (EL) 4.7.7 requires that Valley Water only engage with banks that have an Environmental, Social, and Governance (ESG) rating from at least one professional ESG research company of at least average/medium (or its equivalent). Banks located within the nine Bay Area counties with total assets below $10 billion are exempt from this limitation. As a result of this policy, the following banking arrangements have been established with institutions meeting these criteria:
• $20 million in Revolving Lines of Credit from three small local California banks (Bank of San Francisco, Community Bank of the Bay and First Foundation Bank).
• $45 million in investments in various small, local banks’ various deposits that are secured by either the Federal Depository Insurance Corporation or collateralized by Letters of Credit from the Federal Home Loan Bank of San Francisco.
• Three separate letters of credit issued by Technology Credit Union, based in San Jose, totaling $841,000 to Valley Water to meet the U.S. Army Corp’s financial assurance requirements for the operations of Upper Penitencia, Coyote Ridge, and Rancho Cañada de Pala Preserve watershed projects.
• Valley Water underwriting pool is limited to US investment banks with ESG ratings of medium or better with preference for small, local California banks.
ENVIRONMENTAL JUSTICE IMPACT:
There are no Environmental Justice impacts associated with this item.
FINANCIAL IMPACT:
The estimated total costs of issuance in the amount of $775,000 plus underwriter’s fees of approximately $1,132,968 will be paid from the proceeds of the debt issuance. The Fiscal Year 2022-23 operating budget includes sufficient funds for debt service costs for the Obligations in each respective fund.
CEQA:
The recommended action does not constitute a project under California Environmental Quality Act (CEQA) because it does not have a potential for resulting in direct or reasonably foreseeable indirect physical change in the environment, as outlined in the State CEQA Guidelines, Section 15060(c)(2).
ATTACHMENTS:
Attachment 1: SCW Resolution
Attachment 2: WU Resolution
Attachment 3: PowerPoint
Attachment 4: ESG Ratings
Attachment 5: Direct Email Distribution List
Attachment 6: SCW Preliminary Official Statement
Attachment 7: WU Preliminary Official Statement
Attachment 8: Notice of Sale
Attachment 9: SCW Refunding Revenue Bonds Financing Documents
(a) Refunding Bond Indenture of Trust
(b) Purchase Contracts
(c) Continuing Disclosure Agreements
Attachment 10: WU Refunding Revenue Bonds Financing Documents
(a) Refunding Bond Indenture of Trust
(b) Purchase Contracts
(c) Continuing Disclosure Agreements
Attachment 11: SCW IO/COP Financing Documents
(a) IO Installment Purchase Agreement
(b) IO Trust Agreement
(c) IO Purchase Contracts
(d) IO Assignment Agreement
(e) IO Continuing Disclosure Agreements
(f) COP Installment Purchase Agreement
(g) COP Trust Agreement
(h) COP Purchase Contracts
(i) COP Assignment Agreement
(j) COP Continuing Disclosure Agreements
Attachment 12: WU IO/COP Financing Documents
(a) IO Installment Purchase Agreement
(b) IO Trust Agreement
(c) IO Purchase Contracts
(d) IO Assignment Agreement
(e) IO Continuing Disclosure Agreements
(f) COP Installment Purchase Agreement
(g) COP Trust Agreement
(h) COP Purchase Contracts
(i) COP Assignment Agreement
(j) COP Continuing Disclosure Agreements
Attachment 13: Debt Management Policy
Attachment 14: Federal Securities Laws - Disclosure Responsibilities
UNCLASSIFIED MANAGER:Manager
Darin Taylor, 408-630-3068