To: Honorable Mayor and Members of Town Council
From: Michael J. Hyman, Town Attorney
Title
The Villages at Castle Rock Metropolitan District No. 6 Proposed 2021 Refinancing of Limited Tax General Obligation Capital Appreciation Bond, Series 2007, and Certain Subordinate Obligations
Body
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Executive Summary
The Villages at Castle Rock Metropolitan District No. 6 (the “District”) wishes to refinance certain of its existing debt to lower the applicable interest rate and shorten the debt repayment term, through the issuance of senior and subordinate limited tax general obligation refunding bonds.
The mechanism by which the District wishes to accomplish the proposed refinancing is through a tender and offer of certain of the outstanding bonds and the concurrent issuance of new senior and subordinate limited tax general obligation refunding bonds.
Given the nature of a bond tender transaction, the precise details and negotiations are on-going, but the District has amended its 2021 budget in anticipating a bond issuance not to exceed $65.5M to accomplish the proposed refinancing. The District is approximately 90% built-out.
The District has submitted documentation to the Town Manager, Town Attorney and Director of Finance showing that the proposed refinancing will result in a lower interest rate and a shortened debt repayment term, and that the District can repay the proposed refunding debt.
Under the Castle Rock Municipal Code (the “Town Code”), the proposed transaction is presented for review and comment by the Town Council but no formal approval is required or authorized.
Background:
Organization and Service Plan. The District was organized in 1984, following the Town’s approval of the original Service Plan. The District currently operates pursuant to its Second Amended and Restated Service Plan, which the Town Council approved on April 27, 2004 (the “Service Plan”). The Service Plan provides that if the District intends to issue general obligation debt above the amount contemplated in the Service Plan, the District shall submit to the Town Manager and Town Attorney a revised financial plan based on verifiable build-out projections, which shows that the District can pay the required debt service payments on the proposed indebtedness.
Section 11.02.110 of the Town Code. Section 11.02.110 of the Town Code provides that metropolitan districts must submit a proposed financing for the issuance or refinancing of debt, including certain information and documents related to the proposed debt, such as the interest rate, financing costs, the type of revenues pledged, the amount of the mill levy pledged, and the offering statement (the “Proposed Debt Documents”) to the Town for review and comment before issuing or refinancing the proposed debt, and that the submission must include a certification by the District that the proposed refinancing is authorized by and in compliance with the Service Plan.
The District’s Outstanding Debt. The District has two series of bonds outstanding: (i) $47.1 million of senior lien Series 2007 Bonds (the “2007 Senior Lien Bonds”), which are zero coupon bonds accreting at 8.20% and callable on December 1, 2027, at 100%; and (ii) $1.592 million of Series 2007 Subordinate Lien Bonds (the “2007 Sub Bonds” and, together with the 2007 Senior Lien Bonds, the “2007 Bonds”) accruing interest at 12%. The combined weighted average cost of capital is approximately 8.53%. Based on the foregoing outstanding amounts and interest rates, the District projects that it will not be able to repay the 2007 Bonds until 2063.
Proposed 2021 Tender and Refinancing. The structure of the proposed 2021 tender and refinancing is that the District would refinance its 2007 Senior Lien Bonds with a tax-exempt tender/exchange, providing the opportunity to replace its higher costing 2007 Senior Lien Bonds (e.g., 8.20%) with lower cost Current Interest Bonds (CIBs) (e.g., 4.0 - 4.5%). The tender is funded by a current refunding (i.e., the District issues tax-exempt refunding bonds), and the 2007 Senior Lien Bonds that are tendered and purchased at a premium from bondholders would be extinguished (note: any 2007 Senior Lien Bonds that are not tendered/purchased would remain outstanding). The economics of the tender are uncertain and are driven by the ability to “buy in” the 2007 Senior Lien Bonds from existing bondholders at a premium to their current value and finance the tender/exchange with lower-cost tax-exempt CIBs. Depending on the success of the tender/exchange of the 2007 Senior Lien Bonds, the intent is for the District to also be able to refinance the 2007 Sub Bonds for additional interest cost savings. If the proposed 2021 tender and refinancing is successful, the District projects that it could repay its debt several years earlier than currently projected.
District Submission of Proposed Debt Documents. On May 10 and 12, 2021, the District submitted various Proposed Debt Documents to the Town Attorney and Town Manager, including draft Indentures, a Preliminary Limited Offering Memorandum, and a revised financial plan based on verifiable build-out projections (supported by a draft market study), which show that the proposed refinancing will result in a lower interest rate and a shortened debt repayment term, and that the District can repay the proposed refunding debt.
Staff Recommendation:
Based on the Proposed Debt Documents that the District submitted to Town Staff, Town Staff finds that the proposed refinancing complies with the Service Plan and Section 11.02.110 of the Town Code. Accordingly, Town Staff does not object to the proposed refinancing. Town Staff further recommends that the District be allowed to move forward with the proposed refinancing without comment from the Town Council.
Attachments
Attachment A: District Certificate of Compliance
Attachment B: Town Acknowledgment of Compliance