HomeMy WebLinkAboutAgenda Report - December 6, 2006 E-10AG*HDA ITEM Emio
CITY OF LODI
COUNCIL COMMUNICATION
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AGIENOA TITLE: Authorize the City Manager to execute a termination of the 2003 Swap
Agreer0ents at the time market conditions are deemed most favorable
MEETIM BATE: Decerriber 6, 2006
PREPARED BY: City M*nager
RECOOMMOND ACTION: Authorize the City Manager to execute a termination of
the 2003 Swap Agreements at the time market
conditions are deemed most favorable.
BACKGROUND INFORMATION: 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.
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 VAh
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 terminale the swaps to manage risk exposure. On June 6, 2006 the City of
Lodi was downgraded by bitch 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. 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.
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. The fee is subject to negotiation.
Staff proposes to use Lamont Financial to negotiate and recommend the fee on the City's
behalf. In addition to fixed cost of approximately $2,500, Lamont will charge a fee contingent
upon the City making a profit upon the transaction. If conditions are favorable, the City may see
a net "profit" ranging from $10,000 to $80,000.
APPROVED: - �
Blairr , City Manager
The risk of terminating the swap is interest rate variability. However, if the swaps are "caked",
the exposure to the City is a lump sum payment due immediately. Interest rate variability can be
managed over time. The IuFnp sum payment poses a significant risk.
The City has a third Interest Rate Swap (a $46.8 million step-up coupon swap) that is not
recommended for terminatn. 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 $E million.
FISCAL-IMPIACT: If the Qty'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.
Blair King, Ci ager
RESOLUTION NO. 2006-219
A RESOLUTION OF THE LODI CITY
COUNCIL APPROVfNG THE TERMINATION
O� INTEREST RATE SWAP TRANSACTIONS
WITH CITIGROUP FINANCIAL PRODUCTS
WHEREAS, tt* City of Lodi and Citigroup Financial Products Inc. (formerly
known as Salomon Bathers 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 specifiid in the Termination Agreement (attachment A).
NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Lodi
does hereby authorize the City Manager or Deputy City Manager to execute the
Termination Agreemet t on its behalf at a time and under circumstances which will result
in a net cost not to exceed $ri}.
Dated: December A, 2006
I hereby certify that Resolution No. 2006-219 was passed and adopted by the
City Council of the City of Lodi in a regular meeting held December 6, 2006, by the
ftolowing vote:
AYES: COUNCIL MEMBERS — Beckman, Hansen, Johnson, Mounce,
and Mayor Hitchcock
NOES: COUNCIL MEMBERS - None
ABSENT: COUNCIL MEMBERS — None
ABSTAIN: COUNCIL MEMBERS — None
ANDI HL
City Cie
2006-219
EXHIBIT Al
TERMINATION AGREEMENT
Termination Agrgement (this "Termination Agreement") dated as of December '2006
by and between CITIGIOUP FINANCIAL PRODUCTS INC. (formerly known as Salomon
Bro4hers Holding Compahy Inc) ("Patty A") and CITY OF LODI ("Party 1r).
WHEREAS, Party A and Party B are parties to a Master Agreement did as of
September 29, 1999 (tht "Master Agreement'), a Schedule to the Master Agreement (the
"Sc#edule") and a Credit Support Annex (the "Credit Support Annex" and, collectively with the
Maier Agreement and Schedule, the "Agreement");
WHEREAS, in accordance with the terms of the Agreement, Party A and Party B have
heretofore entered into (ii) on September 29, 1999, pursuant to the Agreement, a Transaction
(Ref N16474 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;
NOW, THEREFORE, in consideration of the foregoing and other valuable consideration,
it is hereby agreed as follows:
Payment -ad Termination.
(a) The Trar#actions are hereby terminated as of December _, 2006 (the
"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 [AIR] agrees to pay to Party [A/B] 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 cage,
includes amounts accrued and unpaid as of the Termination Date) on the Termination Date.
(b) The Termination Payment shall be paid by Party [A/B] to Party [A/B] in immediately
available funds on the Termination Date to the following account:
City of Lodi, Fanners and Merchants Bank Account # 14001301
2. ReRLesenigions. 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;
MYK tW376-1.071371.0010
(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 with;
(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. Counter s. This Termination Agreement may be executed in counterparts,
each of which shall be dderned an original.
NYK €0693761.071371.0010
IN WITNESS )AWREOF, the parties have executed this Termination Agreement as of
the date first above writton.
CITIGROUP FINANCIAL PRODUCTS INC.
By:
CITY OF LODI
By:
NW 1069376.1:0513710010