ADMINISTRATIVE REPORT

Date: September 10, 1999
Author/Local: Ken Bayne / 7223
RTS No:979
CC File No: 1611

Council: September 14, 1999

TO: Vancouver City Council

FROM: General Manager of Corporate Services / Director of Finance

SUBJECT: 1999 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 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 City has agreed 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.

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.

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 in order to raise the funds required to undertake certain capital works.

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, debenture borrowing 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’s last external debenture issue was a $100 million issue sold in the Canadian market in October 1997. In July 1999, Council approved the issue of debentures totalling $60 million which were sold internally to the City’s Sinking Fund. At the time, the Director of Finance advised Council that it was anticipated a further debenture issue would be required in 1999, likely aimed at the external market.

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 the trends for market acceptance of an issue and prevailing interest rates. The City utilizes RBC-Dominion Securities as its fiscal agent to provide advice on how to structure the debenture issue to make it attractive in the market and as to when to enter the market to ensure a successful issue.

DISCUSSION

Staff have been monitoring cash balances and anticipate that, by year end, the Capital Fund will have expended the proceeds of the previous borrowing and will be financing expenditures from interim sources. The cashflow projections indicate that a debenture issue in the range of $80 million would be appropriate to carry the Capital Fund to the fall of 2000 when the City would again be looking to issue debt.

Staff have also been tracking interest rates and market conditions. Interest rates are at very low levels. The markets have been somewhat volatile over the past few months. Most analysts are suggesting that interest rates may increase in the new year, but there is not a consensus on the timing and degree of change.

The advice being given by most analysts, including our fiscal agent is that, if the City is to go to the market this fall, that borrowing should take place in the near future. With that in mind, staff have begun preparations for an issue prior to the end of October. If market conditions are not right during this period, the next opportunity would likely be in late January or February, 2000, once the markets have settled down after the new year, in which case staff would return to Council to confirm our authority to proceed.

In marketing a debenture issue, the borrower should 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, Euro) 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. In the past, Council has vested the authority to conduct the sale with the Director of Finance and a small 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 sale 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 again recommended for the 1999 issue.

The City has an excellent credit rating, with the three main agencies setting the City’s bond rating at triple A. This excellent credit rating not only makes City debentures an attractive investment in domestic markets but opens the door to issues in other markets as well. On five previous occasions, including 1996, the City issued debentures in the Euro-Canadian market at a lower cost than would be available in the Canadian market. Although both present market conditions and the size of the issue indicate that the Euro market is not a realistic option for the upcoming issue, that option should remain open should the situation change. If the 1999 debenture issue is sold in Europe, it may be necessary for City officials to travel to London, England to close the sale and execute the required documentation.

The 1999 debenture issue will be for up to $80 million Canadian, comprised of the following borrowing authorities associated with the 1997-1999 Capital Plan:

Category		Proposed Borrowing
Sewers		11,417,000
Streets		30,162,900
Waterworks		22,050,100
Fire Protection		6,670,000
Park Board		9,700,000
Totals		80,000,000

The proposed issue involves $33,467,100 in borrowing authority approved by Council for Sewer and Water projects and $46,532,900 approved by the electorate for general purposes. The issue would leave $9,850,000 in unfinanced authority related to the 1997-1999 Capital Plan.

CONCLUSION

From time to time the City needs to borrow capital funds by issuing debentures in the capital markets. The City's borrowing requirements and current market conditions suggest that it would be appropriate to proceed to market a City debenture issue in the near future.

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(c) 1998 City of Vancouver