1) reduce or eliminate the County’s swap exposure at breakeven or positive savings;
2) reduce and diversify variable rate risks;
3) provide a solution for liquidity facilities expiring in early 2013; and
4) capture available refunding savings.
Simultaneous with the restructuring plan, the County also issued its annual new money GO bonds bid competitively and Taxable Limited Obligation Refunding Bonds sold on a negotiated basis.
FirstSouthwest first conducted an RFP process for underwriters and credit providers requesting structuring ideas and credit solutions. FirstSouthwest evaluated, summarized, reviewed with the County and ultimately developed a multi-faceted recommendation that would most effectively meet the County’s objectives at the lowest cost. Our recommendation included 1) terminating $155,400,000 notional amount of fixed rate swaps that were currently hedging certain outstanding COPS and GO WINDOWS bonds, 2) refunding a like amount of variable rate GO bonds to fixed rate, 3) restructuring one of the County’s 2013 fiscal year GO maturities to carve out capacity to make the swap termination payment and 4) converting existing Variable Rate Demand COPS to a direct purchase mode and floating rate note index to reduce and diversify variable rate risks. Principal amortization was restructured on certain series to achieve overall level cashflow savings and the transaction produced overall positive net present value savings. In addition to this restructuring, FirstSouthwest also recommended traditional refunding of certain fixed rate GO Bonds that resulted in net present value savings of $7.6 million or 8% of refunded bonds.
During the implementation process, FirstSouthwest coordinated all activities including scheduling of documentation review meetings, advised on structure, worked with counsel and the County to ensure all appropriate approvals were met, reviewed and shadowed underwriter numbers, prepared all rating agency materials, coordinated meeting logistics and assisted with follow-up items, commented on and negotiated terms and conditions of the documents, served as bidding agent on the escrow and coordinated closing items. The diversification strategy included using a mix of variable rate products, staggering the terms of variable rate debt and using a mix of credit providers.
Over the years, FirstSouthwest has served Mecklenburg County as both financial advisor and swap advisor. In October 2011, FirstSouthwest served as financial advisor on the following transactions:
§ $49,000,000 General Obligation Bonds, Series 2011A
§ $51,000,000 Taxable General Obligation Bonds, Series 2011B (Qualified School Construction Bond (QSCB))
§ $164,015,000 General Obligation Refunding Bonds, Series 2011C
§ Partial Termination of seven interest rate swaps totaling $136,750,000 with three separate counterparties
§ Bidding agent on the QSCB sinking fund
§ $12,000,000 Special Obligation Bonds, Series 2011
The creative elements of these transactions were primarily a function of the many moving pieces, coordination of separate senior managers and tax treatment and complexity of the underlying swap hedges on the County’s variable rate bonds.
The swaps themselves were originally assigned to a number of transactions some of which had been refunded over time. This resulted in some of the swaps losing the ability to use tax-exempt bond proceeds to fund any swap termination payments and the County had to use cash to fund those termination payments. We worked closely with the County to minimize the cashflow impact in FY 2011. We also worked closely with bond counsel and our swap desk to ensure that the remaining portion of the swaps would retain their ability to use tax-exempt proceeds to fund termination payments in the future.
On the day of the general obligation bond pricing, FirstSouthwest seamlessly coordinated the separate senior managers that had been assigned to the new money and refunding portions of the transactions as well as the partial terminations of seven separate swaps. The timing of the bond pricing and swap terminations was an integral component of the County achieving its desired savings level. FirstSouthwest also bid out an open market escrow, but ultimately recommended the use of State and Local Government Securities.
Another element of creativity was in the structuring of the QSCB as a bullet payment and a developing sinking fund investment schedule that would maximize interest earnings. The sinking fund was bid the week after pricing.
A separate part of the financing plan was the issuance of Special Obligation Bonds to finance the County’s solid waste projects. This was a brand new credit and only a handful of similar projects had been completed in North Carolina. FirstSouthwest worked closely with the County and bond counsel to draft documents that would provide the County adequate flexibility and protection to ultimately achieve a credit rating that was one notch below the County’s AAA GO ratings.
FirstSouthwest continues to serve as swap advisor to Mecklenburg County on an ongoing basis. Mecklenburg has a variety of swaps that remain outstanding and FirstSouthwest provides a quarterly swap report to the County that details swap performance, payments and updated fair market values. This report is produced jointly with the Charlotte’s financial advisory team as underlying bond information is also incorporated into the report.
FirstSouthwest has also worked closely with Mecklenburg County on credit and rating issues, liquidity facility renewal and general advisory services both during and between bond sales. We are also in the process of monitoring Mecklenburg’s outstanding swap transactions for opportunities to terminate the existing swap and refund the underlying variable rate bonds with fixed rate.
In our role as financial advisor, FirstSouthwest's underwriting and trading desk routinely provides recommendations regarding the following matters based on their active market involvement and extensive institutional investor relationships:
§ Call options and premiums
§ Placement of Term Bonds and pricing
§ Serial Bonds and Pricing
§ Capital Appreciation Bonds and pricing
§ Cost effectiveness of insurance
§ Credit aspects
§ Underwriters’ takedown and spread
§ Syndicate rules
§ Allocation of bonds
In short, these capabilities provide an enormous advantage to the County and differentiate FirstSouthwest from “independent” advisory firms, which do not have actual market involvement and capabilities. Although the County may only require some of these services to be provided by FirstSouthwest, the expertise of all the professionals in these auxiliary areas is shared with the public finance bankers and utilized when specific questions arise.