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HomeMy WebLinkAboutAgenda Report - February 7, 2007 E-15AGENDA ITEM edol C CITY OF LODI COUNCIL COMMUNICATION 7M AGEN&A TITLE: Repeal and re-enact the Resolution to authorize the City Manager to execute a termination of the 2003 Swap Agreements at the time market conditions are deemed favorable at a cost not to exceed $150,000 MEETING DATE: February 7, 2007 PREPM130 BY: Deputy City Manager RECONIMENDED ACTIO 1: Repeal and re-enact the Resolution to authorize the City Manager to execute a termination of the 2003 Swap Agreements at the time market conditions are deemed favorable at a cost not to exceed $150,000. BACKGROUND INFORMATION: By Council action on December 6, 2006, the City Manager is authorized to terminate the 2003 Swap agreements at a cost not to exceed $0. Staff was hopeful that the swaps could be terminated at that cost, and pursued the termination on that basis. However, the market conditions that engendered a $0 net cost never materialized and it appears unlikely that conditions will change in the near future. The attached analysis shows that these swaps will not perform well for the City in the foreseeable future. It is difficult to project future costs for the swaps with very much confidence. A historical view of the interest rates to which the swaps are linked, are indicative of the likelihood that the rates will result in future costs that will exceed the cost of terminating the swaps. Market conditions as of last week were indicative of net cost to terminate the swaps of approximately $100,000. There is some risk in terminating the swap related to interest rate variability; however, if the swaps are "called", the exposure to the City is a lump sum payment due immediately. Interest rate variability can be managed over time, but the lump sum payment poses a significant risk. Staff has used the services of Lamont Financial Services to evaluate and analyze the City's exposure with regard to the swaps. Lamont's cost for this service is approximately $2,500. Citigroup will charge a transaction fee to terminate the swaps. Additional Background as presented at December 6, 2006 Council Meeting In 2003, the City entered into two swap agreements with Citigroup for the City's 2002 Electric System Revenue Series "C" $21,225,000 and Revenue Series "D" $22,740,000 Certificates of Participation. APPROVED: / Blair King, City Manager The swaps are briefly described as follows: A) Effective April 17, 2003, The City of Lodi entered into a $42,000,000 Fixed -to -Floating swap with Citigroup Financial Products Inc. The City pays BMA plus 100 basis points in return for a fixed receipt of 4% starting July 15, 2003 with payments semi-annually thereafter until the termination date of January 15, 2009. B) Effective July 15, 2003, The City of Lodi entered into a $42,000,000 Basis swap with Citigroup Financial Products Inc. The City pays BMA in return for a 74.25% 1 -Month LIBOR starting January 15, 2004 with payments semi-annually thereafter until the termination date of September 29, 2014. The City needs to terminate the swaps to manage risk exposure. On June 6, 2006 the City of Lodi was downgraded by Fitch to a BBB minus that had an impact on the existing interest rate swap agreements. The decline in the City's rating triggered a collateral posting requirement of $450,000. We are not expecting a downgrade, but if the City declines an additional credit notch (to unrated), termination of the swaps is required that could cause a financial penalty to the City contingent on market conditions. Staff is proposing an early termination of the swap agreement when market conditions indicate a neutral or positive (cash) result to the City. The City has a third Interest Rate Swap (a $46.8 million step-up coupon swap) that is not recommended for termination. This swap is not subject to the collateral posting requirement of the other two swaps and the current interest rate results in a considerable negative market value to the City in the range of $5 million. FISCAL IMPACT: If the City's Electric Utility rating declines, the 2003 bond swaps must be terminated requiring a lump sum payment. Alternatively, the swaps could be terminated when market conditions could produce a "profit". The City would then need to manage interest rate variability on outstanding principle and interest over time. FUNDING: The termination cost is properly classified as debt service of the Electric Utility and requires an additional appropriation of $150,000 from Fund Balance. es�Krueger,eputy City Manager RESOLUTION NO. 2007-21 A RESOLUTION OF THE LODI CITY COUNCIL RE:*>EALING AND RE-ENACTING RESOLUTION NO. 2006-219 APPROVING THE TERMINATION OF INTEREST RATE SWAP TRANSACTIONS WITH CITIGROUP FINANCIAL PRODUCTS WHEREAS, the City of Lodi and Citigroup Financial Products Inc. (formerly known as Salomon Brothers Holding Company, Inc.) are parties to a Master Agreement and a Credit Support Annex, which constitute the terms of a transaction known as Transaction Reference: N16474 (33090) and another transaction known as Transaction Reference: N22221, by which both parties shall transact an exchange of interest payments; and WHEREAS, both parties desire to terminate their obligations under both of these transactions as specified in the Termination Agreement (attachment A). NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Lodi roes hereby authorize the City Manager or Deputy City Manager to execute the Termination Agreement on its behalf at a time and under circumstances which will result in a net cost not to exceed $150,000. Dated: February 7, 2007 I hereby certify that Resolution No. 2007-21 was passed and adopted by the City Council of the City of Lodi in a regular meeting held February 7, 2007, by the following vote: AYES: COUNCIL MEMBERS — Hansen, Hitchcock, Katzakian, Mounce, and Mayor Johnson NOES: COUNCIL MEMBERS — None ABSENT: COUNCIL MEMBERS — None ABSTAIN: COUNCIL MEMBERS — None RANDI JOHL City Clerk 2007-21 EXHIBIT Al TERMINATION AGREEMENT Termination Agreement (this "Termination Agreement") dated as of December _, 2006 by and between CITIGROUP FINANCIAL PRODUCTS INC. (formerly known as Salomon Brothers Holding Company Inc) ("Party A") and CITY OF LODI ("Party B"). WHEREAS, Party A and Party B are parties to a Master Agreement dated as of September 29, 1999 (the "Master Agreement"), a Schedule to the Master Agreement {the "Schedule") and a Credit Support Annex (the "Credit Support Annex" and, collectively with the Master Agreement and Schedule, the "Agreement"); WHEREAS, in accordance with the terms of the Agreement, Party A and Party B have heretofore entered into (i) on September 29, 1999, pursuant to the Agreement, a Transaction (Ref: N 16474 and 33090), which Transaction was subsequently amended on February 23, 2001 and April 16, 2003 (as so amended, the "1999 Transaction") and (ii) on February 23, 2001, pursuant to the Agreement, a Transaction (Ref: N22221) (the "2001 Transaction" and, together with the 1999 Transaction, the "Transactions"); WHEREAS, the parties wish to terminate their obligations under the Transactions; NOVO-, THEREFORE, in consideration of the foregoing and other valuable consideration, it is hereby agreed as follows: Payment and Termination. (a) The Transactions are hereby terminated as of December _, 2006 ithe "Termination Date") and neither Party A nor Party B shall have any obligations thereunder following the Termination Date. In full consideration of this Termination Agreement and in complete satisfaction of all obligations of all of the parties in respect of the termination of the Transactions. Party [A/BJ agrees to pay to Party [AIB] the amount of $ (the "Termination Payment") (which amount is comprised of $ with respect to the 1999 Transaction and $ with respect to the 2001 Transaction and which, in each case, includes amounts accrued and unpaid as of the Termination Date) on the Termination Date. (b) The Termination Payment shall be paid by Party [AB] to Parry [AB] in immediawly available funds on the Termination Date to the following account: City cf Lodi, Farmers and Merchants Bank Account # 10001301 2. Representations. Each party hereto represents to each other party hereto that: (a) it is duly organized and validly existing under the laws of the jurisdiction of its organization or incorporation; (b) it has the power and authority to execute and deliver this Termination Agreement; (c) the person executing this Termination Agreement on its behalf is duly authorized to do so; NYK 1069376-1.071371.0010 (d) its execution, delivery and performance of this Termination Agreement do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (e) it has obtained all governmental and other consents, if any, that it is required to obtain in connection with its execution and delivery of this Termination Agreement, all such consents are in full force and effect and all conditions of any such consents have been complied wish; (f) its obligations under this Termination Agreement constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application, regardless of whether enforcement is sought in a proceeding in equity or in law); and (g) it has made its own independent decision to enter into this Termination Agreement based upon its own judgment and upon advice from such advisors as it has deemed necessary and no other party is acting as a fiduciary for or as an advisor to it in respect of this Termination Agreement. 3. Governing Law. This Termination Agreement will be governed by and construed in accordance with the laws of the State of New York, without reference to choice of law doctrine. 4. Counterparts. This Termination Agreement may be executed in counterparts, each of which shall be deemed an original_ NYK 1069376-1.071371,0010 IN WITNESS WHEREOF, the parties have executed this Termination Agreement as of the date first above written. CITIGROUP FINANCIAL PRODUCTS INC. CITY OF LODI NY K 1069376+k-,'1371,0040 FACSIMILE COVER SHEET CITY CLERK'S OFFICE 221 WEST PINE STREET - P.O. BOX 3006 LODI, CALIFORNIA 95241-1910 PHONE (209) 333-6702 FAX (209) 333-6807 cityclrk@lodi.gov or jperrin@loddi.gov DrATE: February 8, 2007 F(M: Jennifer M. Perrin, CMC Deputy City Clerk TO: Steven Sohn, Citigroup (212) 723-8642 CON NTS: As requested, attached is the resolution pertaining to the Swap Agreements. TMS TRANSMITTAL CONTAINS 5 PAGE(S), INCLUDING THIS COVER SHEET. ro►SWraXjen.doc FACSIMILE COVER SHEET CITY CLERK'S OFFICE 221 WEST PINE STREET - P.O. BOX 3006 LODI, CALIFORNIA 95241-1910 PHONE (209) 333-6702 FAX (209) 333-6807 cit, cy lrk@lodi.gov or jperrin@lo.gov DATE: February 8, 2007 M(i1Ai1: Jennifer M. Perrin, CMC Deputy City Clerk Tom: Mirza Kafedzic (213) 486-8917 COMMENTS: As requested, attached is the resolution pertaining to the Swap Agreements. TWS TRANSMITTAL CONTAINS 5 PAGE(S), INCLUDING THIS COVER SHEET. fcvms%aafaxjen.doc