ADMINISTRATIVE REPORT
Date: November 24, 1995
TO: Vancouver City Council
FROM: Director of Finance
SUBJECT: 1996 Debenture Issue
RECOMMENDATION
A. THAT the City proceed to market a City of Vancouver debenture
issue of up to $100 million.
B. THAT additional borrowing authority be approved for
sewers ($10,565,000) and water ($12,002,000) in advance of
the 1996 capital budget.
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 City Manager, and the Chair
of the City Services and Budgets Committee, 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 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 a debenture issue.
D. THAT, if the debenture issue is sold in Europe, the
appropriate officials as determined by the City Manager be
authorized to travel to London, England to prepare and sign
the necessary legal agreements.
GENERAL MANAGER'S COMMENTS
The General Manager of Corporate Services RECOMMENDS approval of A,
B, C and D.
COUNCIL POLICY
The requirement to borrow funds to finance capital expenditures is
normally 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 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 in order to raise the funds required to
undertake certain capital works.
BACKGROUND
In order to finance the City's capital programs, there is a requirement
to borrow up to $100 million in 1996. In 1995, Council approved
borrowing in the amount of $80 million. However, due to market
conditions, it was deemed appropriate to only borrow $50 million, and
for a five year term instead of the normal ten year term. This action
was taken due to instability in the financial markets, leading up to the
Quebec referendum.
It has remained the view of the financial community that interest rates
have been artificially high during most of 1995, and that the
expectation is for lower rates for the balance of the year and into
1996. We have concurred with that view, which was the reason for only
financing a portion of the 1995 requirements, and deferring the balance
to a later date.
Our current view of the market is that interest rates are approaching
their lowest point, and that there will be upward pressure on interest
rates, as the US economy begins to show signs of inflationary pressure.
It is our current view that it would be opportune to borrow our 1996
requirements in the near future, noting that we rely on our fiscal
agents to provide guidance on the best times to enter the market.
DISCUSSION
In marketing a debenture issue, the borrower should have complete
flexibility to decide on timing, the market (public, private, domestic,
Euro), the interest rate and price spread, right up to the point of
sale. The City's time frames for obtaining Council approval do not
support this degree of flexibility unless City Council empowers the
Director of Finance to conduct the sale in that manner. In the past,
Council has vested this authority with the Director of Finance and a
small group consisting of the Mayor, the City Manager, and the Chair of
the City Services and Budgets Committee. Essentially, this group is
empowered to make the final
marketing decisions leading to the sale of the debentures, and Council
is then 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 again recommended for the 1996 issue.
The City's excellent credit rating allows its debentures to be sold in
capital markets other than the domestic market. In 1976, 1984, 1985 and
1991, the City issued its debentures in the Euro-Canadian market at a
lower cost. Present conditions indicate that the Euro market is not a
viable option but that option remains open should the situation change.
It should be noted that if the 1996 debenture issue is sold in Europe,
it may be necessary for staff to travel to London, England to close the
sale and execute the required documentation.
The 1996 debenture issue will be for up to $100 million Canadian,
comprised of the following borrowing authorities:
CATEGORY 1987-90 1994-96 PROPOSED
CAPITAL PLAN CAPITAL PLAN BORROWING
Sewers 23,520,000 23,520,000
Streets 22,400,000 22,400,000
Waterworks 38,225,700 38,225,700
Infrastructure 7,204,300 7,204,300
Fire Protection 1,200,000 1,200,000
Emergency
Operations 2,360,000 2,360,000
Park Board 5,090,000 5,090,000
Totals $7,204,300 $92,795,700 $100,000,000
CONCLUSION
From time to time the City needs to borrow capital funds by issuing
debentures in the capital markets. The City's borrowing calendar and
market conditions suggest that it would be appropriate to proceed to
market a City debenture issue in the near future. This action is
recommended.
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