CITY OF VANCOUVER
ADMINISTRATIVE REPORT
Date: |
October 10, 2003 | ||
Author: |
Ken Bayne | ||
Phone No.: |
873-7223 | ||
RTS No.: |
03697 | ||
CC File No.: |
1611 | ||
Meeting Date: |
October 23, 2003 | ||
TO: |
Standing Committee on City Services & Budgets | ||
FROM: |
General Manager of Corporate Services/Director of Finance | ||
SUBJECT: |
2003 Debenture Program | ||
RECOMMENDATION
A. THAT, under the authority provided in Section 242 of the Vancouver Charter, Council approve the following borrowing authorities in advance of the 2004 Capital Budget:
- Sewers $10,000,000
- Waterworks $10,000,000
B. THAT Council approve the issuance of up to $100 million City of Vancouver debentures to finance the approved capital expenditure program.
C. THAT the Director of Finance be empowered to act and instruct the City's Fiscal Agent to proceed with the issue, after consultation with the Mayor, the Chair of the City Services and Budgets Committee, and the City Manager, or a majority of them, and to set the rate, price, and other terms on which the debentures will be marketed.
It should be noted that once the Director of Finance instructs the fiscal agent to issue the debenture, Council will be required to pass the appropriate borrowing by-law prepared by the Director of Legal Services as part of the standard documentation package for the debenture issue.
D. THAT Council authorize the Director of Finance to extend the City's Fiscal Agency Agreement with RBC Dominion Securities Inc. ("RBC DS"), in essentially the same form as the previous agreement with a term to end upon successful completion of the debenture issue contemplated in Recommendation B.
COUNCIL POLICY
Council gets its authority to issue debentures from two sources. Under provisions of the Vancouver Charter, Council has the authority to approve borrowing authority for water and sewer purposes. For all other purposes, Council's authority to approve borrowing authority and to issue debentures follows from approval of the electors to specific borrowing questions normally associated with the City's capital planning process.
The requirement to borrow funds to finance capital expenditures is established by Council at the time of the approval of the annual Capital Budgets.
As a pre-condition to an external debenture issue, City Council authorizes the Director of Finance to set the rate, price and other terms and conditions on which the debenture issue will be marketed, including the power to instruct the City's Fiscal Agent to proceed with the issue. In doing so, Council commits itself to follow through with the debenture issue and to pass the appropriate borrowing by-law after the debentures are sold.
PURPOSE
The purpose of this report is to seek Council authority to market an external debenture issue of up to $100 million in order to raise the funds required to undertake the capital expenditure program and to extend the City's Fiscal Agency Agreement with RBC Dominion Securities Inc. (RBC DS) for the purposes of the contemplated debenture issue.
BACKGROUND
The City has an on-going program of borrowing by debentures to finance capital expenditures. This program is tied to the City's capital expenditure planning process. Under normal circumstances, debt is paid off over a ten year period so that the cost of the capital works is spread out over that period of time. The City is required to make full provision in its annual budget for the principal and interests costs associated with its borrowing program.
The City completed its last debenture issue in April 2002 with $100 million in serial debentures sold in the Canadian market. At the time, this was the largest municipal serial debenture issue in Canadian history. The financing plan associated with the 2003 - 2005 Capital Plan contemplated a debenture issue during 2003. The timing for an issue is influenced by both the cash flow considerations (ie. when the funds are required to finance capital expenditures) and the trends for market acceptance of an issue and prevailing interest rates.
The City utilizes a "fiscal agent" to provide advice on the City's debenture issues and to lead a syndicate of investment brokers who market the securities throughout the world. The City's agreement with our current fiscal agent, RBC-Dominion Securities (RBC DS), expired at the end of 2002.
DISCUSSION
1. Debenture Issue
Staff have been monitoring cash balances in the Capital Fund and anticipate that before the end of 2003, the Fund will have expended the proceeds of the previous debenture issue and will be financing expenditures from interim sources. The capital cash-flow projections indicate that up to $160 million will be required to finance capital expenditures before the end of 2004. A debenture issue in the range of $100 million would be appropriate at this time to carry the Capital Fund for the next 12 to 14 months. A further debenture issue would be tentatively scheduled for the fall of 2004.
Staff have also been tracking interest rates and market conditions. Both short term and long term interest rates continue at their lowest levels in many years as a result of weak economic conditions in the US and Canada. Analysts are suggesting that rates at or below current levels will be experienced over the next few months, with increases anticipated once economic activity in the US becomes more positive. As a result, it is important that the City be positioned to proceed to market a debenture issue to take advantage of current market conditions, including having the necessary approvals in place.
In marketing a debenture issue, the borrower needs to have complete flexibility to decide on the timing of the sale, the structure of the issue, the market into which the issue will be offered (public, private, domestic, Europe) and the interest rate and price of the issue, right up to the point of sale. The time frames for obtaining Council approval do not support this degree of flexibility. It has been Council practice to give the authority to initiate an issue of debentures to the Director of Finance and a group consisting of the Mayor, the Chair of the City Services and Budgets Committee and the City Manager. Essentially, this group is empowered to make the final decisions leading to the issuance of the debentures. Once this group approves the sale, Council is committed to pass the necessary by-law as part of the debenture documentation package. This arrangement has worked very well in the past and is recommended for the 2003 issue.
The City has an excellent credit rating, with the three major agencies in North America setting the City's bond rating at triple A. This credit rating not only makes City debentures an attractive investment in domestic markets but opens the door to issues in other markets as well.
It is anticipated that the debenture issue will be for a maximum of $100 million Canadian, the final decision being based on the timing of the issue and market conditions.
It is anticipated that the borrowing will be comprised of the following authorities associated with recent Capital Plans:
2000 - 2002 and 2003 - 2005 Plans | ||||||
|
Category |
Existing Authority |
Additional Authority |
Proposed
| |||
Sewers |
$22,060,000 |
$10,000,000 |
$32,060,000 | |||
Waterworks |
20,342,900 |
10,000,000 |
30,342,900 | |||
Public Works & Public Safety |
28,394,900 |
28,394,900 | ||||
Park & Recreation |
9,202,200 |
9,202,200 | ||||
Totals |
$80,000,000 |
$20,000,000 |
$100,000,000 | |||
The existing borrowing authority for Sewer and Water projects has been approved by Council as part of recent Capital Budgets. Approval of new borrowing authority for sewer and water capital expenditures in advance of the 2004 Capital Budget is also sought. The balance of the issue is derived from borrowing authorities approved by the electorate for Public Works and Public Safety Facilities and for Parks and Recreation. Specific Council approval for program and project expenditures has been provided in Capital Budgets associated with the 2000 - 2002 Capital Plan and the 2003 - 2005 Capital Plan.
2. Extension of the Fiscal Agency Agreement
As a periodic participant in the capital markets, it is impossible for the City of Vancouver to be sensitive and up to date on the borrowing conditions or to have access to the extensive infrastructure necessary to market a debenture issue. The City therefore relies on a "fiscal agent" to assist with our borrowing program. The "fiscal agent" provides expert advice on a variety of issues related to issuance of debentures, including market conditions, the timing, size and structure of debenture issues; orderly marketing procedures to avoid conflicts with similar competing borrowers; favourable exposure of the name of the borrower to the capital markets. This service is particularly critical when the City is preparing to launch a debenture issue because significant savings in interest costs are possible if a borrower can position itself to take advantage of favourable market conditions. When the City is ready to launch an issue, the fiscal agent is responsible for managing the sale of the issue through a syndicate of brokers.
The City's fiscal agency agreement with RBC Dominion Securities Inc.(RBC DS) expired on December 31, 2002. RBC DS has assisted the City with the placement of a number of successful debenture issues, including the preparation of related financing documents. Despite the expiry of the agreement, RBC DS has continued to work under the general terms of the agreement, reflecting the long-term relationship with the City.
The fiscal agency agreement is not a highly formal contract and can be cancelled by the City at any time and for any reason. However, it does set out the general terms and conditions and the mutual understanding between the City and its fiscal agent. In essence, the City agrees that, in return for providing a range of advice on underwriting, trading and economics and research on a continuing basis, RBC DS receives exclusive responsibility for managing the marketing of City of Vancouver debentures in cases where the City accesses external markets. Typically this responsibility involves managing and leading a syndicate of underwriters involving other members of the financial community. The only compensation received by RBC DS under the agreement is when the City actually issues a debenture, in which case a commission based on generally accepted industry practice and mutual agreement applies. The actual terms and conditions of each issue are determined by negotiation at the time of issue, and the City retains complete discretion not to proceed if any aspect of the issue is unacceptable.
RBC DS is one of the most highly qualified underwriters in Canada and in offshore Canadian dollar markets. It is recommended that the recently expired agreement be extended through the debenture issue contemplated in this report.
CONCLUSION
The 2003 - 2005 Capital Plan contemplate the issuance of approximately $160 million in debt within the next 16 months (early 2005). In order to take advantage of attractive market conditions, it is recommended that the Director of Finance be authorized to initiate the issuance of up to $100 million in debentures to finance the capital expenditure program. In addition, it is recommended that Council approve the extension of the City's fiscal agency agreement with RBC - Dominion Securities Inc. for a period ending with successful issuance of the debenture contemplated in 2003.
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