To: Honorable Mayor and Members of Town Council
From: Trish Muller, Director of Finance
Title
Ordinance: Authorizing The Issuance of The Town of Castle Rock Golf Course Enterprise Revenue Refunding and Improvement Bonds, Series 2015 and Providing For Its Emergency Adoption on Second and Final Reading (Second Reading)
Body
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The Ordinance was approved on first reading on September 15, 2015 with a vote of 6 to 0 with no changes.
Executive Summary
As part of the Town’s debt management program, Town staff, in conjunction with the Town’s investment banker, periodically review all existing outstanding debt to ensure we are being as effective and efficient as possible; this means that the Town is obtaining the best prices and investment practices available in the market. The Town currently has the opportunity to refinance the 2005 Golf Enterprise Revenue Refunding and Improvement Bonds, Series 2005, and also issue an additional $800,000 in proceeds to fund golf course improvements.
Given the current market conditions, the Town has the unique opportunity to pursue a private placement of the debt rather than a public offering. A private placement involves a solicitation of the issuance by the Town’s investment banker to a private party, typically an institutional investor or bank. The Town’s investment banker shops the issuance around to interested parties looking for the best investment package for the Town. Current market conditions have created a flight to quality for institutional investors, which in turn makes the Town’s Golf Revenue Bonds an attractive option for these investors.
There are several advantages in a private placement for the Town including a lower interest rate than public offering, lower issuance costs, a reduction in the debt service fund requirements, and a reduction in the debt service coverage ratio from 1.50 to 1.25 times coverage of revenue over average annual debt service requirements.
The additional proceeds from the debt refinancing, or $800,000, would be used for deferred course improvements including, on-course restrooms, concrete cart paths, bunker renovations, practice facility improvements and clubhouse improvements.
By taking advantage of this opportunity, the Town would be able to fund the needed course improvements and realize a present value savings of approximately $310,400 on the existing debt.
The bond refinancing project and the associated bond ordinance for Council’s consideration will only move forward if the net effect rate of interest is equal to or less than 3.30% and the aggregate principal amount of the Bonds will not exceed $5,500,000.
Discussion
The Town has been discussing the possibility of refinancing the callable portion of the Town’s Golf Course Enterprise Revenue Refunding and Improvement Bonds, Series 2005. The Bonds are callable on 12/1/2015 at par. The 2005 Bonds maturing 2015 - 2025 in the outstanding principal amount of $4,490,000 have current interest rates ranging from 4.70% - 5.20%, with an average interest rate of 5.05%. The Town’s investment banker has proposed the option of a private placement given the current market conditions and the demand for this type of issuance in the private market.
Given the current market conditions, the Town has the unique opportunity to pursue a private placement of the debt rather than a public offering. A private placement involves a solicitation of the issuance by the Town’s investment banker to a private party, typically an institutional investor or bank. The Town’s investment banker shops the issuance around to interested parties looking for the best investment package for the Town. Current market conditions have created a flight to quality for institutional investors, which in turn makes the Town’s Golf Revenue Bonds an attractive option for these investors. Private placements are also conducive to holdings in the $5-$10M range with a term of 10-15 years. These factors coupled with the benefits noted below, make a refinancing of the Golf Course Revenue bonds an attractive option for the Town and the private market.
By doing a private placement rather than a public offering, the Town would realize the following benefits:
• Lower cost of issuance (no rating agency fees, lower legal costs and no underwriter’s legal counsel) saving approximately $25K over a public offering.
• Substantial reduction in the continuing disclosure requirements. Debt covenants on a private placement typically include submission of the audited CAFR, but would not require the Town to separately disclose the information with Electronic Municipal Market Access (EMMA) as is the requirement with public offerings. Although similar data presentations are prepared for the CAFR, staff would not have to comply with the additional filing requirement.
• Release of ½ of the debt service reserve, or approximately $546,500. The Golf Fund currently has $1.093M in a restricted fund balance as required by the current bond documents. The private placement would allow us to free up half of the reserve. This reserve was originally loaned to the Golf Course by the General Fund. With the execution of this refinancing, half of the original loan, approximately $546,500, will be paid back to the General Fund and thus available for a one time expenditure use in the General Fund, should Council desire.
• The term of the private placement bonds would be approximately 12 years, substantially equivalent to the life of the suggested improvements on the course.
• Debt coverage ratio would be reduced from 1.50 times to 1.25 times revenue over annual debt service. Meeting the existing debt service coverage ratio in the past has been difficult due to fluctuations in revenue streams, often requiring additional funding from the Community Center Fund or a reduction of management fees paid to the General Fund. Given past revenue trends for the Golf Fund, a debt coverage ratio of 1.25 is much more reasonable and attainable for the Golf Fund’s financial position.
The Town would need to agree to extend the moral obligation for the compliance with the debt service coverage ratio for more than the 2 years currently required in the bond document. Currently the Town has a moral obligation to meet the coverage ratio of 1.5 for 2 consecutive years. Once met under the Town current requirements, the coverage ratio could drop below 1.5. However, in practice the Town has extended the moral obligation past 2 years and has not dropped below the 1.5 times coverage ratio. Extending the moral obligation requirement would not be a new practice for the Town, but rather added assurance from the new bond holder.
In association with the refinancing, the Town in requesting an additional $800k to accomplish important course projects which have been deferred in the past few years (Attachment B). Additional deferral of these projects could result in increased maintenance and repair costs coupled with a potential reduction in levels of service. To stay competitive in the market, staff is recommending the following capital improvements, which would occur in 2016 and 2017:
• $110,000 for two on course restrooms (one on the front nine, one on the back nine) - These restrooms will include modification for lightning and rain shelters.
• $360,000 for concrete cart paths - These paths would complete the majority of the course cart paths with the exception of hole #13 and possibly some non-critical areas on other holes. The extent of the paths will depend on final bid numbers.
• $230,000 for bunker renovations - Such renovation would include the removal of sand, drainage installation and the installation of new sand.
• $35,000 for practice facility improvements - This include the installation of a range ball dispensing machine and building up on driving range. Staff projects a 20-25% increase in range ball revenue, based on market study, with the proposed practice facility improvements.
• $65,000 for clubhouse improvements - These funds would be used for upgrades on the clubhouse including perimeter doors, restroom renovation and patio enclosure.
Given the current interest rate environment and the demand for investments such as the Golf Course Revenue Bonds in a private placement, the Town is able to refinance the Golf Course Revenue Bonds today and save a significant amount of interest costs. Currently we expect that we would be able to refinance the Bonds at an average coupon rate of 3.30% and the aggregate principal amount of the Bonds would not exceed $5,500,000.
The overall effect of this interest cost savings would be to generate a net present value savings in debt service of approximately $310,400 (after all costs of issuing such refunding bonds), or about $28,200 reduction yearly. Preliminary numbers on this refunding are attached to this memorandum (Attachment C). The bond refinancing project and associated bond ordinance for Council’s consideration will only move forward if the net effective rate of interest is equal to or less than 3.30%.
The Town believes that this is an opportune time to refinance the Series 2005 Golf Course Revenue Refunding and Improvement Bonds. As a percentage of outstanding principal the percentage savings is 6.913%, which compared to the 3.0% threshold that the Government Finance Officers Association (“GFOA”) believes is a “good” refunding.
The process for proceeding with this private placement involves working with bond counsel to develop the financing documents for the private placement. Town Council will have to approve the issuance of the private placement bonds by adoption of a bond ordinance, which requires two readings. The staff plans to request an emergency adoption on Second reading, in order to go forward with the private placement and lock in the interest rate, providing for the maximum savings for the Town. Should interest rates on the private placement increase during this time and we are unable to complete the refunding within the interest cost parameters the Town Council sets, we would wait until such savings could be reached. In the event such savings are not reached, the Town would not be liable for any expense associated with the proposed transaction.
Budget Considerations
The re-issuance of the 2005 Golf Course Revenue Refunding and Improvement Bonds will create an approximate annual savings at Present Value of $28,200. Lowering the debt service coverage ratio will also reduce the likelihood of a reduction in management fees charged to the Golf Fund by the General Fund in order to comply with the current debt coverage ratio. The Fourth Quarter Budget Amendment will include the request for the appropriate accounting transactions to accommodate the refunding.
Staff Recommendation
Staff recommends that Town Council approve Ordinance as written.
Recommended Motion
“I move to Approve An Ordinance of The Town of Castle Rock, Colorado, Acting As Such and As The Governing Board of The Town of Castle Rock Golf Course Enterprise, Authorizing the Issuance of Golf Course Enterprise Revenue Refunding and Improvement Bonds, Series 2015 and Providing For Its Emergency Adoption on Second and Final Reading.”
Attachments
Attachment A: Ordinance
Attachment B: Golf Course Capital Improvement Plan 2016-2017
Attachment C: Preliminary Sources and Uses of Funds