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Refinancing Moving On

CUMBERLAND – Two firm bids were received from two banking institutions out of the 46 total requests distributed by Davenport & Company LLC for refinancing of Cumberland County's 2008 VML/VACo loan for the Middle/High School Complex and the 2001 public facility lease revenue bonds for courthouse work, according to an update provided by James E. Sanderson Jr., senior vice president for Davenport.

The report was presented to the Board during Tuesday's regular meeting. After receiving the information, the Board voted unanimously to carry on with the two refinancing options with assistance being provided by Davenport and identified bond counsel in order to meet the tight schedule and secure SunTrust Bank's bids.

According to Sanderson, the RFP to the financial institutions was issued on June 21 and bids were due back on July 5. The bids were received from BB&T and SunTrust Bank. SunTrust, he said, provided a bid for the VML/VACo refinancing and both BB&T and SunTrust provided bids for the 2001 public facility lease revenue bonds.

According to Sanderson, the SunTrust bid for the school refinancing includes a 17-year amortization and 12 years of that would include a fixed rate of 2.96 percent. SunTrust's bid also provides pre-payment at any time without penalty.

There is also some fine print included in SunTrust's bid, Sanderson noted. SunTrust requires yield maintenance language that would allow the interest rate to increase to 3.25 percent only if the marginal corporate tax rate decreases below 35 percent.

According to further discussion on the topic, in the event of a decrease in the corporate tax rate, SunTrust would have the right to adjust the interest rate upwards in order to maintain the same “after tax yield” for the bank.

Supervisor Kevin Ingle, District Three, was the first to ask about the language presented in the SunTrust proposal.

“They want to have the ability, if their corporate taxes are decreased, that they could increase the interest rate to make it even to them,” advised Sanderson when asked. “We'll have in our documents the risk that the corporate tax rate would go down and then one of the things that we've talked to SunTrust about is that they've had that language in there before without a cap but we wanted to make sure that if they were going to do it…that they at least put a number on it so we'd know what that interest rate would be.”

Supervisor Bill Osl, District One, asked if there were any other lenders willing to provide a loan without the provision to Cumberland?

“…You did not receive a bid that did not have this language in it for the refinancing for the 2008 loan,” suggested Sanderson.

The SunTrust bid, he explained to the Supervisors, also includes an “optional put” after year 12, meaning the County would have approximately $6.8 million left of principal subject to interest rate risk, the financial advisory continued.

But it allows SunTrust to re-negotiate an additional fixed rate period with the County or “simply put the bond back to the County,” Sanderson noted.

“At that point, the County would refinance the loan for the remaining five years at prevailing interest rates,” he added.

The total debt service with the SunTrust option is approximately $800,000 less than the County's existing debt service under the VML/VACo loan, Sanderson noted, and the annual debt service with the SunTrust option is approximately $50,000 less per year.

“Your total debt service is going to be lower even though you are paying two million dollars to get out of that swap,” said Sanderson. “You're still able to get out of it and keep your debt service lower than it currently is…and you're taking out the risk of play of interest rates between now and November when VRA (Virginia Resource Authority) could be an option for the County.”

The remaining principal, currently, is $18,385,000 and the remaining debt service is $27,187,000. The annual debt service as of right now is $1.53 million and the current interest rate is 4.76 percent, according to the presentation prepared by Davenport.

School Board Request

Sanderson was also present during the School Board meeting earlier on Monday evening.

He advised the members about the possible refinancing option and how the process could involve the School Board.

According to Sanderson, the Cumberland School Board would be called upon to assist in the refinancing of the 2008 bonds, which were originally secured through the VML/VACo Finance program.

In 2008, the County issued debt to build the Middle/High School Complex and part of that included a “ground lease” by the School Board to Cumberland's Industrial Development Authority (IDA), according to Sanderson.

“That lease is what the lenders looked to for collateral to the County to pay the debt,” advised Sanderson to the School Board. “When the Board of Supervisors considers refinancing this we, again, anticipate that same type of structure.”

Sanderson noted that the School Board would be asked at some time in the future to enter into a “ground lease” or a lease of the school facility with the IDA.

“And, again, that ground lease will be used as collateral to a potential lender,” said Sanderson.

Before being finalized, the School Board is expected to receive all of the documents for review, he repeated.

“The liability to the School Board is zero,” he said. “You are not responsible for the debt. For all intended purposes, it's simply a refinancing of your present debt using the same structure as you had before.”

The refinancing is slated, if approved, to take place in either late July or early August, Sanderson suggested.

This timeframe may require the School Board to call a special meeting in order to take care of the refinancing business.

The difference between this time and last time, according to Sanderson, would be the lender and the interest rate.

“Nothing new will be added to the collateral package…,” he said. “After a favorable consideration from the Board of Supervisors, we would come back to you with more details and the specifics of the loan and the lender…”

When asked, Sanderson described that the package would only include the Middle/High School Complex facility.

“The current structure that the bond structure is in is variable rate bonds,” noted Sanderson.

Why The Need?

The cause for the consideration of the debt restructuring is based on the current structure of the 2008 bonds.

The bonds, according to Sanderson, are variable rate bonds backed by a letter of credit from Bank of America.

“Bank of America was downgraded by Moody's, one of the national rating agencies, the other week,” he said. “That's caused the bonds that are backed by that letter of credit, which the County is connected to, to fluctuate in the markets and it's the potential that that fluctuation could greatly vary compared to what was anticipated when this transaction was entered into back in 2008.”

Part of the refinancing would be to eliminate that risk and to remove the variable rate financing and Bank of America's letter of credit, he added.

As part of the paying off of the VML/VACo loan, the County would pay a “swap” termination payment in the amount of approximately $2,069,660, according to Sanderson.

According to Sanderson's June presentation, the County borrowed $20.2 million through the VML/VACo Finance program in 2008 and there is $18,385,000 currently outstanding.

Cumberland pays approximately $1.5 million annually in debt service and the monthly interest rate is equal to $71,000.

For every one percent that the interest rate increases, the County's monthly debt service could increase by $15,320, according to Sanderson's earlier presentation to the Board of Supervisors about the need to refinance.

The 2001 Refinancing

The 2001 public facility lease revenue bonds refinancing is being considered purely as savings, according to Sanderson's presentation.

“In addition to this low refinancing interest rate, the County would benefit from a payment of approximately $47,000 by terminating the investment agreement tied to the debt service reserve fund…,” according to Sanderson.

The interest rates received in the bids from SunTrust and BB&T were very similar. BB&T's is 2.28 percent fixed for 10 years and SunTrust's is 2.31 percent fixed for 10 years.

The total approximate annual savings to the County, with either bid, would be approximately $30,000, according to the presentation.

SunTrust, by agreeing to both bids received for the two loans, would reduce its commitment fee by $5,000 if both were financed through the bank, according to Sanderson.

“I'd suggest that, even though the interest rates are almost identical, SunTrust would offer some positives to us…,” said Sanderson. “There would be a lot of ease with negotiating with the same bank and they will waive $5,000 worth of fees if you do both loans with them.”

The Schedule

The refinancing of the loans is on a tight schedule, according to Sanderson.

“We're talking about, obviously, getting your approval and, ultimately, we'll need to come back to you for approval of the documentation but at least you can take consideration tonight if you want to move forward with one or both of these,” said Sanderson. “It would then need to go to the School Board…”

According to Sanderson, the refinancing “may be structured” so that the Industrial Development Authority does not have to participate in the 2008 school refinancing.

But, the 2001 refinancing rate received from SunTrust is a “bank qualified rate,” noted Sanderson.

“We are piggy-backing off the fact that that loan was also originally done as a bank qualified loan and it's not quite certain whether we will be able to bypass the IDA or not with respect to that financing,” he explained. “That's something that (Bond) counsel would look at.”

SunTrust's bids are good through August 3.

“Putting together the meetings and putting together the documents is going to be something that's going to be tight to do between now and then,” he offered. “…Our goal is to have everything wrapped up by then.”

Bank of America is also on board, he continued, with regards to arranging the payoff of the old loans.

Davenport's ultimate recommendation to the Board was for the Supervisors to agree to SunTrust's option for refinancing of both the 2008 VML/VACo loan and the 2001 public facility lease revenue bonds.

When Supervisor Parker Wheeler, District Five, asked about Davenport's fees for assisting the County with the refinancing, Sanderson referred to a breakdown and explained the following additions that would be added into the refinancing.

The total expenses for Davenport would be $47,300.

“That includes, as we discussed, a fee of $45,000 plus expenses of the remaining difference…The arrangement that we came to with the manager that if we do both transactions together that's what we would charge but if we were to do them separately we would charge $45,000 to do the 2008 refinancing and we would charge $25,000 to do the 2001 refinancing but because we are doing them together we're going to lower our fee to $45,000.”

The bank fees are $21,500 for the bigger loan and $2,300 for the 2001 loan, he added.

“The swap termination is something that's going to move, it's almost $2.1 million,” he said.

Also included in the numbers is securing bond counsel for the refinancing packages.

Bond counsel has been estimated to cost $50,000, according to the numbers presented.

“The last question I have is on bond counsel. I can name numerous firms that can do this for less than $50,000, substantially less, in Richmond,” offered Osl.

“It's about on average…for paying purposes about $25,000 for each of the deals,” said Christopher Kulp, who's being secured as bond counsel as part of the refinancing. He was representing Hunton & Williams' Richmond office.

According to Hunton & Williams' overview on its website, the firm has over 800 lawyers practicing from 19 offices across the United States, Europe and Asia.

“That's a maximum but I think we can refine it and get it lower once we know what the structure is… You are unwinding a 2008 deal that is very complicated and it will take some time,” Kulp added.

Wheeler said, “My understanding is that Davenport will charge the County about $50,000 and bond counsel will charge another $50,000 to do this. Is that what I'm understanding? A hundred thousand dollars for the two of you.”

“That's correct,” said Sanderson.

At that point Supervisor Lloyd Bank, District Two, addressed the Board. He's also the Supervisor that earlier made the motion to approve the two SunTrust options that were presented.

“I'm somewhat familiar with the process and as it was indicated there's a small handful of firms that can handle bond counsel of a loan of this size-these fees are not inconsistent of what other Counties are paying,” he said.

Banks continued, “…I don't see any reason to hesitate at this point.”