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ADMINISTRATIVE REPORT

Date: September 15, 1997

CC File No: 1501

TO:Vancouver City Council

FROM:Director of Finance

SUBJECT:1997 Debenture Issue

RECOMMENDATION

A.THAT the City proceed to market a City of Vancouver debenture issue of up to $80 million.

B.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.

C.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 and C.

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 debt 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 $80 million in 1997. This borrowing is part of the City’s on-going program of borrowing by debentures to finance capital expenditures. The debenture borrowing is usually paid off over a ten year period, and thus, the cost of the capital works is spread out over that period of time.

Staff have been monitoring cash balances and long term interest rates with a view to determining the best time to borrow funds. The timing for an issue is influenced by both the cash flow considerations (ie. when the funds are required to finance the expenditures) as well as our view on the trends for interest rates.

The City has not issued debentures since January, 1996, and the proceeds of that issue have been fully expended, and current expenditures are being financed through interim sources. Thus, it is appropriate that further borrowing happen sometime before the year end.

With respect to interest rates, the current rates are at very low levels. There have been fluctuations over the past three months, but those fluctuations have been in a fairly narrow range. Most forecasters are suggesting that interest rates may creep up over the next year, but there is not a consensus on the timing and degree of change.

It is our current view that it would be opportune to borrow our 1997 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 1997 issue.

The City has an excellent credit rating, with the three main agencies setting the City’s bond rating at triple A. Moody’s Investor Services recently gave the City a marginal upgrade when they changed the City’s "trend" from "Negative" to "Stable". This excellent credit rating allows City debentures to be sold in capital markets other than the domestic market. On five previous occasions, including 1996, the City issued its debentures in the Euro-Canadian market at a lower cost than would be available in the Canadian market. 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 1997 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 1997 debenture issue will be for up to $80 million Canadian, comprised of the following borrowing authorities:

CATEGORY	1994-96 CAPITAL PLAN	1997-99 CAPITAL PLAN	PROPOSED BORROWING
Sewers Streets Waterworks Infrastructure Fire Protection Park Board Totals	2,730,000 14,260,100 2,100,000 2,500,000 2,090,000 11,670,000 $35,350,100	18,000,000 19,649,900 7,000,000 $44,649,900	20,730,000 14,260,100 21,749,900 2,500,000 2,090,000 18,670,000 $80,000,000

The $2.5 million of Infrastructure borrowing noted above is from the authority obtained in the 1987-90 Capital Plan, and is been used to finance a portion of the City’s share of the Emergency Operations and Communication Centre.

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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(c) 1997 City of Vancouver