HomeMy WebLinkAboutAgenda Report - February 21, 2001 H-05 / H-06CITY OF LODI COUNCIL COMMUNICATION
AGENDA TITLE: Adopt Resolution Authorizing Execution of an Amendment to an Existing Interest Rate Swap
Agreement between the City and Salomon Smith Barney
MEETING DATE: February 21, 2001
PREPARED BY: Electric Utility Director
RECOMMENDED ACTION: That the City Council authorize execution of an amendment to an existing
Interest Rate Swap Agreement between the City and Salomon Smith Barney.
BACKGROUND INFORMATION: In November 1999, the City entered into an Interest Rate Swap Agreement
with Salomon Smith Barney. The transaction has been performing better
than originally expected and the current interest rate environment has
created an additional opportunity to further benefit the City.
An existing feature of the agreement allows the City to terminate the agreement and receive a cash payment.
Salomon Smith Barney has made a proposal to the City whereby the agreement would be terminated for a period of
approximately three (3) years.
At the end of the three (3) year termination period, the agreement would continue as originally anticipated. In
exchange for agreeing to terminate, the City would receive a cash payment. The exact amount of the payment will
depend on the market conditions on the date of execution. Recent market levels indicate a value of $1,200,000 to
$1,400,000. City staff is requesting authority to execute this transaction on the basis that the amount to be received
greatly exceeds our initial expectations related to the original transaction.
FUNDING: None
i
Alan N. Vailow, Electric tility Director
PREPARED BY:
ANV/ke
City Attorney
APPROVED:
H. Dixo lynn - CAy Manager
R
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CITY OF LODI COUNCIL COMMUNICATION
AGENDA TITLE: Adopt a Resolution Authorizing Execution of a New Interest Rate Swap Agreement between
the City and Salomon Smith Barney
MEETING DATE: February 21, 2001
PREPARED BY: Electric Utility Director
RECOMMENDED ACTION: That the City Council authorize execution of a new Interest Rate Swap
Agreement between the City and Salomon Smith Barney.
BACKGROUND INFORMATION: The City currently has in place an agreement with Salomon Smith Barney
whereby the City receives a periodic cash payment based on the difference
between a set fixed interest rate and a variable index rate (BMA). Currently
the interest rate environment is low by historic standards and the existing
transaction is performing very well.
In order to protect the City from future interest rate increases, which would tend to lower the value of the existing
transaction, Salomon Smith Barney has proposed a new transaction, which works opposite of the existing transaction
if interest rates were to rise over time.
The proposed transaction is structurally similar to the existing transaction. In the current proposal, the transaction is
based on the difference between London Interbank Overnight Rate (LIBOR) and BMA_ As interest rates rise, this
creates a cash reduction to the City in the existing transaction.
With the new agreement, as interest rates rise, the difference between LIBOR and BMA increases creating increasing
cash flows to the City. The intent of the new agreement is to offset cashfiow reductions, which would occur in our
existing transaction if interest rates rise in the future.
The City's Financial Advisor has been involved with the analysis of this transaction along with City staff. It is the staffs
opinion that this transaction meets the City's long-term financial risk management objectives to limit the City's financial
risk exposure.
It is requested that the City Manager and Electric Utility Director be authorized to enter into this transaction with
Salomon Smith Barney.
FUNDING: None
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Alan N. Vallow, Electric Utility Director
ANV/ke
cc: City Attorney
APPROVED: zL,- oor
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Confidential
Table of Contents
1 SUMMARY OF EXISTING SWAP
2 BASIS SWAP DISCUSSION
3 SWAP REVERSAUTERMINATION ANALYSIS
4 SWAP REVERSAL WITH FORWARD BASIS SWAP
City of Lodi
SALOMON SMITH BARNEY
A memberof citigrouOr
Confidential
SUMMARY OF EXISTING SWAP
City of Lodi
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Reducing Exposure to Rising Variable Rates: Basis Swaps
Under a basis swap, Lodi receives a short-term taxable rate
and pays an initially lower short-term tax-exempt rate
71.0%1 x 3 mo. LIBOR
• Basis swap provides Lodi with the following:
Immediate annual cash flow of $224,000 per $42.0
million notional amount 5
Increase in cash receipts when short term rates rise,
assuming the historical BMA/LIBOR relationship
Risk: Reduction in marginal tax rates will cause BMA to
increase relative to LIBOR, thereby reducing or eliminating
Lodi's positive cash flow
City of Lodi
Fixed to Basis Net
LIBOR BMA 2 Floating Swap
Cashflow3 Cashflow° Cashflow5
2.39% 1.48% 1,523 99 1,622
3.39% 2.11% 1,262 141 1,403
4.39% 2.73% 1,001 182 1,183
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6.39% 3.97% 480 265 745
7.39% 4.59% 219 307 526
8.39% 5.21% -42 348 306
Dollar amounts in '000s per $42 million par / notional
For illustration purposes only
' Current ratio for a basis swap with a 13 year average life, final maturity of 9/29/14
z Assumes BMA=62.1% of LIBOR, the five year ratio average. Adjusted for daycount convention the five year average is BMA = 61.3% of LIBOR.
Lodi receives fixed receiver rate of 5.11%, pays BMA
Lodi receives 71.0% of 3 month LIBOR (adjusted for Actual / 360) and pays BMA (BMA=62.1 % of 3 mo. LIBOR, the 5 year ratio average)
5 Includes adjustment for LIBOR Actual/360 day count convention, and BMA= 62.1% LIBOR, the 5 year ratio average.
For illustration purposes only; actual results will depend on future market conditions
2
SALOMON SMITH BARNCY
A member of atigroup'T
Confidential
Why Do Basis Swaps Provide Savings Today?
• Theoretically, investors should demand that tax-exempt yields at least equal the taxable yields
after tax.
• If the marginal tax rate is 40%, tax exempt yields should at least equal 60% of taxable yields
• This relationship essentially holds in the more efficient short end of the tax-exempt yield curve
• Long term rates reflect less liquid, more varied credits as well as compensation to investors for
tax risk. This results in a much higher tax exempt/taxable yield ratio
7.0% -1 TAX-EXEMPT VS. TAXABLE SWAP RATES
3.0%
3
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Year
—Tax -Exempt (BMA) —Taxable (LIBOR)
City of Lodi
Tax risk is one
reason for a steeper
tax exempt yield
curve
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3.5%
3.0%
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1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Year
—Tax -Exempt (BMA) —Taxable (LIBOR)
City of Lodi
Tax risk is one
reason for a steeper
tax exempt yield
curve
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Breakeven Points
• Combining a basis swap with variable rate
debt increases the breakeven rate
Federal
5.20%
Annual Net
significantly LIBOR
Funds
BMA2
Cash Flow
4.25%
4.00%
2.60%
1,228,043
4.75%
4.50%
2.93%
1,113, 273
5.25%
5.00%
3.25%
998,503
5.75%
5.50%
3.58%
883.734
6.25%
6.00%
3.90%
768,964
6.75%
6.50%
4.23%
654,194
7.25%
7.00%
4.55%
539,425
7.75%
7.50%
4.88%
424,655
8.25%
8.00%
5.20%
309,885
8.75%
8.50%
5.53%
195,116
9.25%
9.00%
5.85%
80,346
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9.75%
9.50%
6.18%
(34, 424)
10.25%
10.00%
6.50%
(149,193)
1 Currently Fed Funds is at 5.50%.
2 Assumes BMA trades at 65% of Federal Funds.
9 Assumes LIBOR = BMA 162.1%, the five year average (BMA current reset is 3.18%, current
quarterly average is 3.74%, current
LIBOR equals 5.39%). On the Fixed -to -Floating swap Lodi receives fixed receiver rate of 5.11%,
pays BMA; on the basis swap Lodi
receives 71.0% of 3 month LIBOR (adjusted for actual 1360 daycount convention), pays BMA.
$42.0 million notional on both swaps.
For illustration purposes only, actual results will depend on future market conditions.
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SALoMoN SMITH WHEY
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Amember of atigroup?
Confidential
The Breakeven BMA Vs. LIBOR Ratio
• The basis swap provides income so long as the BMA/LIBOR Ratio is less than the breakeven of 72.0%,
(which is the fixed swap ratio (71.0%) adjusted for LIBOR's Actual/360 daycount convention)
• Since 1993, the BMA Index divided by the three month LIBOR Index has averaged 62.5%
• Since 1982, the ratio has averaged 62.8%1
85%
80%
75%
70%
65%
60%
55%
50%
45%
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
BMA /3 mo. LIBOR --Breakeven Ratio
I Annual average of BMA / three month LIBOR (the BMA index was created in 1989; periods before 1989 are based on the J.J. Kenny index,
a similar index of seven day tax-exempt floaters)
City of Lodi
SALOMON SM ITH BARNEY
6 Amemberof atigraVr
Confidential
Tax Risk
• Tax risk is the potential for higher funding costs due to a
change in the taxation of interest income
• Lower income tax rates would reduce the tax advantage
of tax-exempt securities over taxable securities
y Result: higher tax-exempt rates relative to taxable
rates, lower basis swap receipts or higher basis
swap payments
Worst case scenario: elimination of taxation of
interest income as in certain Flat -Tax proposals,
resulting in the BMA Index approximately equaling
LIBOR
• Higher income tax rates would have the opposite effect:
lower BMA/LIBOR ratio, greater basis swap income
• Actual exposure depends on
s Timing of tax reform
Degree of change in tax rates
s- General interest rate level
n Structure of financial instrument
7
100%
75%
50%
25%
City of Lodi
TOP INCOME TAX RATES
0
1944 1948 1952 1967 1971 1987 1992 2000
Historical Marginal Tax Rates —Breakeven Tax Rate-
` Equal to 1 minus Break Even Swap Ratio (72.0%)= 28.0%
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Breakeven Marginal Tax Rates with Bush's Tax Plan'
• Our analysis indicates that based on President Bush's proposed tax rates, the break-even tax rate drops to
below 19% in 2007, the year the President reaches his targeted goal (33% tax rate)
Example: Four years after the swap is executed, marginal tax
rates fall to 22.6% and remain at that level until year 2014.
On a PV basis, the swap cash flows would equal zero'
0% i IT T
2002 2003 2004 2005 2006 2007 2008 2009 2010
Year change in tax rate occurs
Year Marginal Tax Rate
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011 -2014
City of Lodi
39.6%
30%
39.6% 39.6%
25%
m
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39.6°%
15%
C
26.8%.
.0%
10%
38.0%
5%
0% i IT T
2002 2003 2004 2005 2006 2007 2008 2009 2010
Year change in tax rate occurs
Year Marginal Tax Rate
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011 -2014
City of Lodi
39.6%
39.6%
39.6% 39.6%
39.6%
39.6%
39.6%
39.6%
39.6°%
26.8%.
.0%
38.0% 38.0%
38.0%
38.0%
38.0°%
38.0%
38.0%
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26.8%
25.5%
37.0°r6r 37.0%
37.0°%
37.0%
37.0°%
37.0%
37.0°%
W. �aa--karty
26.8%
25.5°%
24.1 °/JJ')36.0%1
36.0%
36.0%
36.0%
36.0°%
36.0°%
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26.8%
25.5%
24.1% 22.6%p
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35.0%
35.0%
35.0%
35.0%
26.8%
25.5%
24.1% 22.6%
20.8%:,34
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34.0%
34.0°%
34.0°%
26.8%
25.5%
24.1% 22.6%
20.8%
18.8%X33;07
33.0%
33.0%
26.8% 25.5% 24.1% 22.6% 20.8% 18.8% 16.3% 33.0% 33.0%
26.8% 25.5% 24.1% 22.6% 20.8% 18.8% 16.3% 13.0% 33.0%
26.8% 25.5% 24.1% 22.6% 20.8% 18.8% 16.3% 13.0% 8.3%
26.8% 25.5% 24.1% 22.6% 20.8% 18.8% 16.3% 13.0% 8.3%
Lodi receives receives 71.0% of 3 month LIBOR (adjusted for Actual 1360) (currently 5.39°%) and pays SMA (BMA= LIBOR ' (1 -marginal tax
ralo), present valued at 5.11 %.
For illustration purposes only, actual results will depend on future market conditions
9 SALomoN SM iu-i BmNEY
A merolbvrol av9roup?'
Confidential
Decision Points - Basis Swap
• Provides interest cost savings under current
market conditions
• Partial hedge against higher interest rates
relative to fixed -to -floating swaps
• Hedges mark -to -market volatility of fixed -to -
floating swaps
• Benefits from any increase in the marginal tax
rates
• Benefits from changes in tax/securities rules
that increase demand or reduce supply of tax-
exempt floaters (e.g. de minimus, AMT)
10
City of Lodi
• Added exposure to any decrease in marginal
tax rates
• Exposure to changes in tax/securities rules (e.g.
de minimus, AMT) that reduce demand or
increase supply of tax-exempt floaters
• Consult auditors regarding accounting treatment
• Potential cost or benefit from early termination
SALOMON SM IM BARNEY
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Swap Reversal Analysis
• By reversing or terminating the swap now, Lodi can lock in 6.37%
gains
5.28%
Full Termination $ 1,535,000
Reversal through 3/03 $ 1,229,000 4.18%
Reversal through 3/04 $ 1,550,000
3.09%
• However, by reversing or terminating the swap now, Lodi
could potentially be giving up swap income ("carry")
2.00%
3/27/00
City of Lodi
I Values do not include accrued interest
2 Annualized Cashflow produced by Fixed -to -Floating swap assuming listed BMA
3 Obtained from Lodi
4 Calculated on February 14, 2001. Reversaffermination analysis has been prepared for informational purposes only.
The (Loss)/Gain figures provided are ESTIMATES, and subject to prevailing market conditions. No representation is
i l made that the (Payments)/Receipts described herein would be the result of the reversal/termination of the Swap Transaction.
For illustration only, actual results will depend on future variable rates.
5/27/00 7/27/00 9/27100 11/27100 1/27/01
—10 Year Receiver Rates --BMA
3/29/2000 to Date
Average BMA = 4.14%
Current BMA Reset= 3.18%
5 Yr. Average= 3.58%
10 Yr. Average= 3.41%
SALOMON SMITH BARNEY
A memberof atWxip?
Confidential
4 SWAP REVERSAL WITH FORWARD BASIS SWAP
City of Lodi
SALOMONSMITHBmNEY
Amemberota igroapi
Confidential
Combining a Reversal with a Basis Swap: Forward Basis Swap
City of Lodi
• Under a forward basis swap, Lodi would start receiving a
short-term taxable rate in March 2004, and would start
paying a short-term tax-exempt rate in March 2004
Annualized Cashflows
72.5%1 x 3 mo. LIBOR
LIBOR BMA 2
Current Basis Forward Percentage
Basis
sws a Increase
P Swan4
• •
2.39% 1.48%
99 115 13.33%
_
BMA Index
3.39% 2.11 %
141 162 13.33%
4.39% 2.73%
182 210 13.33%
The forward basis swap gives Lodi a higher percentage of
5'39 �3 35/022.4:. 258 411333%
LIBOR versus a current starting basis swap, due to:
..°'�
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6.39°i° 3.97%
265 306 13.33%
n The steepness of the tax-exempt swap yield
7.39% 4.59%
307 354 13.33%
curve
8.39% 5.21%
348 402 13.33%
D The flatness of the Taxable swap yield curve
'OOOs
Dollar amounts in per $42
million par /notional, cashflows in 2004
For illustration purposes only
Lodi gives up any cashflows from the basis swap for the
first three years
' Current ratio for a forward basis swap with a 10 year average life starting in three years, final maturity of 9/29/14
z Assumes BMA=62.1% of LIBOR, the five year ratio average. Adjusted for daycount convention the five year average is BMA = 61.3% of LIBOR.
Lodi receives 71.0% of 3 month LIBOR (adjusted for Actual / 360) and pays BMA ($MA=62.1% of 3 mo. LIBOR, the 5 year ratio average)
Lodi receives 72.5% of 3 month LIBOR (adjusted for Actual / 360) and pays BMA (BMA=62.1 % of 3 mo, LIBOR, the 5 year ratio average)
s Includes adjustment for LIBOR Actual/360 day count convention, and BMA= 62.1 % LIBOR, the 5 year ratio average.
For illustration purposes only; actual results will depend on future market conditions
12
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Confidential
Cash Flow Analysis - Marginal Tax Ratio Summary
$42 MILLION BASIS SWAP PROGRAM
Cash -Flow Impact (2004) of Changing Marginal Tax Rates
($000's)
Current Forward
Tax Rate
Marginal LIBOR BMA 2 Basis Swap Basis Swap
Cashflow3 Cashflow4
50% 5.39% 2.70% 498 532
45% 5.39% 2.96% 385 419
35%
5.39%
3.50%
158
193
30%
5.39%
3.77%
45
79
25%
5.39%
4.04%
-68
-34
20%
5.39%
4.31%
-181
-147
Current 3 month LIBOR
Assumes BMA is equal to LIBOR' It -Marginal Tax Rate)
3 Assumes a $42 million basis swap (cashflows in 2004), where Lodi will pay BMA and receive 71.0% of 3 month LIBOR; LIBOR adjusted for
Actual / 360 day count
4 Assumes a $42 million forward basis swap starting in March 2004, where Lode will pay BMA and receive 72.5% of 3 month LIBOR; LIBOR
adjusted for Actual / 360 day count
14 For illustration purposes only, actual results will depend on future market conditions
City of Lodi
SALOMON SMITH BARNEY
Amemberof ati"WT
Confidential
Breakeven Marginal Tax Rates with Bush's Tax Plan'
City of Lodi
• Our analysis indicates that based on President Bush's proposed tax rates, phased in as per the Gramm -
Miller bill, then the break-even tax rate drops to below
24% in 2006, the year the President reaches his
targeted goal (33% tax rate)
Year
Marginal Tax Rate
2001
39.6% 39.6% 39.6% 39.6% 39.6% 39.6%
39.6%
39.6%
39.6%
'38.0°0
2002
38.0% 38.0% 38.0% 38.0%
38.0%
38.0%
38.0%
°
30% Breakeven Marginal Tax Rate assuming
.y,,..� _
Bush/Gramm-Miller Tax Cut
2003
37.0% 37.0% 37.0% 37.0%
37.0%
37.0%
37.0%
°
25 /0
2004
26.5% 36.0%jj 36.0% 36.0%
36.0%
36.0%
36.0%
w
2005
26.5% 25.2% X35:0% 35.0%
35.0%
35.0%
35.0%
N 20%
M
2006
26.5% 25.2% 23.9%C96
33.0%
33.0%
33.0%
ro 15%
2007
26.5% 25.2% 23.9% 22.5%
33.0%
33.0%
33.0%
c
2008
26.5% 25.2% 23.9% 22.5%
20.6%
33.0%
33.0%
10°!0
2009
26.5% 25.2% 23.9% 22.5%
20.6%
18.2%
33.0%
°
5 /°
2010
26.5% 25.2% 23.9% 22.5%
20.6%
18.2%
14.7%
2011 -2014
26.5% 25.2% 23.9% 22.5%
20.6%
18.2%
14.7%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010
Year change in tax rate occurs
In March 2004, Lodi receives receives 72.5% of 3 month LIBOR (adjusted for Actual / 360) (currently 5.39%) and pays BMA (BMA= LIBOR ' (1 -
marginal tax rate), present valued at 5.11 %.
For illustration purposes only, actual results will depend on future market conditions
IN
SALOMONSMITH BMNEY
Amember of atigraWl'
Confidential
The prices and levels contained herein are indicative only and do not represent bids or offers. These indications are
provided solely for your consideration and information, are subject to change at any time without notice and are not
intended as a solicitation with respect to the purchase or sale of any instrument. This is not a complete analysis of
every material fact representing any product. Statements of fact have been obtained from sources considered
reliable but no representation is made as to their completeness or accuracy. Any estimates included herein
constitute our judgment as of the date hereof and are subject to change without notice. Salomon Smith Barney
Inc.and/or its affiliates (the "Firm") may make a market in these instruments for its customers and for its own
account. Accordingly, the Firm may have a position in any such instrument at any time.
is
City of Lodi
SALOMON SMITH BARNEY
Amember of atigroupi
Salomon Brothers Holding Company Inc. Ohl&S Draft
Seven World Trade Center Telephone: 212-615-8606 2/20/01
New York, \Y 10048 Facsimile: 212-615-8397
February ,2001
Mr. H. Dixon Flynn
City iV(anager
City of Lodi
221 West Pine Street
Lodi, CA 95241
Counterparty Ref:
AIMENDiMENT NUIMBER ONE TO TR--\. SACTION
The purpose of this letter agreement (the "Amendment") is to set forth certain amendments to the
Transaction (the "Original Transaction") entered into between City of Lodi ("Counterparty") and
Salomon Brothers Holding Company Inc ("Salomon' pursuant to the ISDA Master Agreement
(the "Master Agreement'), the Schedule to the ISDA iMaster Agreement (the "Schedule"), the ISDA
Credit Support Annex to the Schedule to the ISDA i'vfaster Agreement (the "Credit Support
Annex") and the Confirmation (the "Original Confirmation"), each dated as of September 29, 1999
and each between Salomon Brothers Holding Company Inc and the City of Lodi.
1. The definitions and provisions contained in the 1991 ISDN Definitions; as amended by the
1998 Supplement to the 1991 ISDA Definitions and the 1992 ISDA iMunicipal Counterparty
Definitions (each, as published by the International Swaps and Derivatives Association, Inc.) (the
"Definitions') are incorporated into this Amendment.
2. This Amendment supplements, forms a part of, and is subject to, the ISDA iVfaser
Agreement as amended and supplemented by the Schedule, the Credit Support Annex and the
Original Confirmation. All provisions contained in the Master Agreement, as so amended and
supplemented, govern this Amendment except as expressly provided herein. In the event of any
inconsistency between this Amendment and the Definitions or the iMaster Agreement, this
Amendment will govern.
3. THIS AMENDMENT WILL BE GOVEILNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REFERENCE TO CHOICE OF LAW DOCTRINE, PROVIDED THAT THIS PROVISION
WILL BE SUPERSEDED BY ANTY CHOICE OF LAW PROVISION CONTAINED IN THE
iAASTER AGREEMENT.
Salomon Brothers Holding Company Inc.
Seven World Trade Center Telephone: 212-615-8606
New York, NY 10048 Facsimile: 212-615-8597
February , 2001
4. The following terms of the Original Transaction as set forth in the Original Confirmation
are hereby modified to read as follows:
Fixed Rate Payer Pcriod End Dates: Each day that is three Business Days preceding
each January 15 and July 15 commencing on the
day that is three Business Days preceding July
15, 2000 through and including the day that is
three Business Days preceding September 29,
2014 other than Quly 15, 2001, January 1, 2002,
July 15, 2002, January 15, 2003, July 15, 2003 and
January 15, 2004]
Fixed Rate Payer Payment Dates: Each day that is three Business Days preceding
each January 15 and July 15 commencing on the
day that is three Business Days preceding July
15, 2000 through and including the day that is
three Business Days preceding September 29,
2014 other than Duly 15, 2001, January 1, 2002,
July 15, 2002, January 15, 2003, July 15, 2003 and
January 15, 2004]
Floating Rate Payer Period End Dates: Each day that is three Business Days preceding
each January 15 and July 15 commencing on the
day that is three Business Days preceding July
15, 2000 through and including the day that is
three Business Days preceding September 29,
2014 other than [July 15, 2001, January 1, 2002,
July 15, 2002, January 15, 2003, July 15, 2003 and
January 15, 2004]
Floating Rate Payer Payment Dates: Each day that is three Business Days preceding
each January 15 and July 15 commencing on the
day that is three Business Days preceding July
15, 2000 through and including the day that is
three Business Days preceding September 29,
2014 other than Quly 15, 2001, January 1, 2002,
July 15, 2002, January 15, 2003, July 15, 2003 and
January 15, 2004]
Mr. 1-1. Dixon Flynn
Page 2
Salomon Brothers Holding Company Inc.
Seven World Trade Center Telephone: 212-615-8606
New York, NY 10048 Facsimile: 212-615-8597
February .2001
5. In consideration of the amendment to the Original Transaction made by Section 4 hereof,
Salomon agrees to pay Counterparty on the date hereof the sum of Dollars
6. Save and except as modified by Section 4 of this Amendment, the Original Transaction, as
confirmed by the Original Confirmation, shall continue in full force and effect as set forth in the
Original Confirmation.
Please confirm that the foregoing correctly sets forth the terms of our agreement with respect to the
amendment of the Original Transaction by executing the copy of this Amendment enclosed for that
purpose and returning it to us.
Very truly yours,
Accepted and confirmed
as of February _,, 2001:
CITY OF LODI
By:
Authorized Signatory
Name:
Mr. H. Dixon Flynn
Page 3
RESOLUTION NO. 2001-52
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LODI
AUTHORIZING AN AMENDMENT TO AN EXISTING TRANSACTION,
A SECOND TRANSACTION AND AMENDMENTS TO TRANSACTIONS
AND NEW TRANSACTIONS, 1N EACH CASE UNDER A MASTER SWAP
AGREEMENT AND DIRECTING CERTAIN ACTIONS RELATING THERETO
WHEREAS, the City of Lodi, a municipal corporation duly organized and existing under
and by virtue of the Constitution and laws of the State of California (tile "City"), owns and
operates a municipal electric utility (the "Electric System") to provide the inhabitants of the City
with electricity; and
WHEREAS, to finance and refinance the costs of certain additions, betterments and
improvements to the City's Electric System, including the acquisition and construction of certain
transmission and distribution facilities for the Electric System, the City has entered into an
Installment Purchase Contract (the "Installment Purchase Contract"), dated as of August 1, 1999
between the City and the Lodi Public Improvement Corporation (the "Corporation"), under
which the City is obligated to make installment payments (the "Payments") to the Corporation
for the purchase of certain improvements to the Electric System as provided in the Installment
Purchase Contract; and
WHEREAS, pursuant to a Trust Agreement (the "Trust Agreement") dated as of
August I, 1999 between the Corporation and BNY Western Trust Company, as Trustee, there
have been executed and delivered Electric System Revenue Certificates of Participation, 1999
Series A Current Interest Certificates and Electric System Revenue Certificates of Participation,
1999 Series B Capital Appreciation Certificates (collectively, the "Certificates"), evidencing and
representing proportionate interests of the owners thereof in the Payments to be made by the
City; and
WHEREAS, the City's obligation to make Payments under the Installment Purchase
Contract is a special obligation payable solely from Net Revenues (as defined in the Installment
Purchase Contract) of the Electric System; and
WHEREAS, in order to provide a mechanism for economically converting the fixed
interest rate applicable to the Certificates to a variable rate for a specified term, the City has
entered into an interest rate swap agreement (the "Original Transaction") with Salomon Brothers
Holding Company Inc (the "Counterparty"); and
WHEREAS, the terms and conditions of the Original Transaction are set forth in the
ISDA Master Agreement, as amended and supplemented by the U.S. Municipal Counterparty
Schedule to the Master Agreement and the ISDA Credit Support Annex to the Schedule to the
ISDA Master Agreement (the "Credit Support Annex"), each dated as of September 29, 1999
and each between the City and the Counterparty (such ISDA Master Agreement, as so amended
and supplemented, being referred to herein as the "Swap Agreement"), and the Confirmation (the
"Original Confirmation"), dated September 29, 1999 between the City and the Counterparty; and
WHEREAS, the City proposes to amend the terms of the Original Transaction by
modifying the timing and amount of payments thereunder for a specified period as set forth in
the Amendment Number One To Transaction (such Amendment Number One to Transaction in
the form submitted to this meeting, as the same may be modified and completed in accordance
with this Resolution, being referred to herein as the "Amendment"); and
WHEREAS, in order to provide a mechanism for reducing the exposure to changes in the
variable interest rate payable by the City under the Original Transaction (and thereby reducing
the interest costs to the City with respect to the Certificates), the City proposes to enter into a
second Transaction under the Swap Agreement (the "Second Transaction"); and
WHEREAS, the specific terms of the Second Transaction shall be contained in a
confirmation (the "Second Transaction Confirmation") to be delivered on the date the final terms
of the Second Transaction are agreed upon by the parties; and
WHEREAS, the City's obligations under the Second Transaction may be secured by
security arrangements described in the Credit Support Annex or by an insurance policy; and
WHEREAS, the City's obligations under the Original Transaction are, and the City's
obligations under the Second Transaction will be, special obligations payable solely from Net
Revenues of the Electric System on a parity with the City's obligations to make the Payments
under the Installment Purchase Contract; and
WHEREAS, all acts, conditions and things required by the laws of the State of California
to exist, to have happened and to have been performed precedent to and in connection with the
consummation of the transactions authorized hereby do exist, have happened and have been
performed in regular and due time, form and manner as required by law, and the City is now duly
authorized and empowered, pursuant to each and every requirement of law, to consummate such
transactions for the purpose, in the manner and upon the terms herein provided;
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY
OF LODI, AS FOLLOWS:
Section 1. The Amendment to the Original Transaction, in the form submitted to this
meeting and on file with the City Clerk, is hereby approved, and the City Manager and the
Finance Director, each acting singly, are hereby authorized to execute the Amendment in
substantially said form with such additions, insertions and changes as are not inconsistent with
this Resolution as the officer executing such document may approve, with such approval to be
conclusively evidenced by the execution and delivery thereof. The payment to be made by the
Counterparty to the City pursuant to the Amendment shall not be less than One Million Dollars
and the Amendment shall not suspend the exchange of payments pursuant to the Original
Transaction for more than five years.
Section 2, The Second Transaction with the Counterparty whereby the City agrees to
pay the Counterparty a variable rate of interest on a notional amount based oil the BMA
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Municipal Index and the Counterparty agrees to pay the City a variable rate of interest on the
same notional amount based on Three Month LIBOR is hereby approved and the City Manager
and the Finance Director, each acting singly, are hereby authorized to enter into the Second
Transaction and accept and execute the Second Transaction Confirmation setting forth the terms
of the Second Transaction; provided, however, that the following limitations shall be applicable
to the Second Transaction Confirmation and Second Transaction: (i) the term of the Second
Transaction shall not exceed the final maturity of the Certificates, (ii) the aggregate notional
amount of the Second Transaction shall not exceed $42,000,000, (iii) the rate payable by the City
at any time under the Second Transaction shall not exceed the then effective BMA Municipal
Index (as published by Municipal Market Data) or any successor index under the Swap
Agreement plus 100 basis points, (iv) the variable rate to be received by the City under the
Second Transaction shall not be less than Fifty Percent (50%) of the Three Month LIBOR rate or
any successor index under the Swap Agreement, (v) all payment obligations of the City under the
Second Transaction Confirmation and the Second Transaction shall be special obligations
payable solely from Net Revenues of the Electric System on a parity with the City's obligations
to make the Payments under the Original Transaction and the Installment Purchase Contract, (vi)
if determined by the officer executing the Second Transaction Confirmation to be in the best
interests of the City, the Second Transaction Confirmation may contain a limit on the rate
payable by the City under the Second Transaction (which determination shall be conclusively
evidenced by the execution of the Second Transaction Confirmation containing such limitation).
Section 3. The securing of the City's obligations under the Second Transaction either
through the use of an insurance policy or the Credit Support Annex is hereby authorized and
approved. The City Manager and the Director of the Electric Utility, each acting singly, are
hereby authorized to determine whether to utilize an insurance policy or the Credit Support
Annex to secure the City's obligations under the Second Transaction, which determination shal I
be made on the basis of which security arrangement is in the best interests of the City and which
determination shall be conclusively evidenced by the execution and delivery of the Credit
Support Annex or the delivery of an insurance policy, as applicable.
Section 4. Subject to the satisfaction of the conditions contained in Section 5922 or
Section 53534 of the California Government Code, or any other applicable statutory authority
authorizing the City to enter into Transactions under the Swap Agreement, the City Manager and
the Director of the Electric Utility, each acting singly, are hereby authorized to execute
amendments to any Transaction, or to enter into a new Transaction satisfying the parameters of
Section 2 of this Resolution or Section 2 of the resolution of this City Counci I authorizing the
Original Transaction, upon the determination by the officer of the City executing such
amendment or the Confirmation setting forth the terms of such Transaction that: (i) such
amendment or Transaction, as applicable, is designed to reduce the amount or duration of
payment, interest rate, spread or similar risk with respect to the Certificates or result in a lower
cost of borrowing in connection with the Certificates when used in combination with the
Certificates; and (ii) the net amount payable by the City under all Transactions under the Swap
Agreement from the effective date of such amendment or Transaction, as applicable, to and
including the next succeeding January 15 or July 15 (whichever first occurs), calculated as
provided in the next sentence is less than the amount payable by the City if such amendment or
Transaction is not entered into by the City. The amount payable by the City and the
Counterparty under a Transaction shall be determined using any fixed rate payable under the
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Transaction and, with respect to any variable payable under the Transactions, using the average
of the applicable variable rate for the three months immediately preceding the month in which
such amendment becomes effective or the date of the Confirmation for such Transaction, as
applicable. The determinations required by the immediately preceding sentence with respect to
any amendment to a Transaction or a new Transaction shall be conclusively evidenced by such
officer's execution of such amendment or the Confirmation relating to such Transaction.
Section 5. The City hereby finds and determines that the Amendment, the Second
Transaction authorized hereby and the program of contracts authorized by Section 4 of this
Resolution are each designed to reduce the amount or duration of interest rate risk and the
amount of interest cost to the City with respect to the Certificates.
Section 6. The City Manager, the Finance Director, the City Attorney and the City
Clerk and all other appropriate officials and employees of the City are hereby authorized and
directed to execute such agreements, documents and certificates, and to take such actions, as may
be necessary or convenient to carry out the City's obligations under and to effect the purposes of
the Amendment, the Second Transaction, the Second Transaction Confirmation, this Resolution
and the transactions herein authorized.
Section 7. Capitalized terms used in this Resolution and not otherwise defined shall
have the meanings given such terms pursuant to the Swap Agreement.
Section 8. This Resolution shall take effect immediately upon its passage.
Date: February 21, 2001
I hereby certify that Resolution 2001-52 was passed and adopted by the City Council of
the City of Lodi in a regular meeting held February 21, 2001 by the following votes:
AYES: Council Members - Hitchcock, Howard, Land, Pennino and
Mayor Nakanishi
NOES: Council Members - None
ABSENT: Council Members - None
Susan J. Vlackston
City Clerk
Approved As to Form:
Randall A. lAys
City Attorney
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