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HomeMy WebLinkAbout4 Water System Improvement Agenda Item # 4Public Utility District Staff Report To: Board of Directors From: Mary Chapman, Administrative Services Manager Date: August 11, 2006 SUBJECT: Consideration of the selection of an underwriter related to the issuance of the 2006 Water System Improvement Certificates of Participation 1. WHY THIS ITEM IS BEFORE THE BOARD Staff has been working with David Casnocha of Stradling Yocca Carlson & Rauth who has been acting as bond counsel and Sandra McDonald of McDonald Partners who has been acting as the District's financial advisor to assist the District in preparing for the 2006 Water System Improvements certificates of participation financing. The next step in the process is hiring an underwriter. This requires Board approval. 2. HISTORY At the July 19, 2006 board meeting, the Board authorized staff to send out requests for proposals to underwriting firms. The closing date for submittals was August 7, 2006. The District send out nine RFPs and received six proposals. Copies of the six proposals are attached for your review. 3. NEW INFORMATION Sandra McDonald has carefully reviewed the six proposals and has prepared a recommendation for the Board to consider. Sandra has recommended that the Board hire Stone & Youngberg. In her recommendation, she has listed the reasons why she feels that they are the preferred underwriters for this financing. 4. RECOMMENDATION Staff recommends that the Board hire Stone & Youngberg to serve as underwriters for the 2006 Water System Improvements certificates of participation financing. MCDONALD PARTNERS TO: THE TDPUD BOARD OF DIRECTORS FROM: SANDRA MCDONALD,MCDONALD PARTNERS SUBJECT: SERIES 2006 UNDERWRITER SELECTION DATE: 8/11/06 Recommendation It is recommended that the District appoint Stone &Youngberg to serve as sole senior manager for the District's Series 2006 COP transaction. After a competitive selection process,Stone&Youngberg was determined to provide the strongest combination of(a)experience in underwriting comparable transactions in California,(b)knowledge of the Water Enterprise's current financial condition and the District's service area,(c)understanding of the District's goals for the transaction, and(d)low underwriting fees. This combination is expected to produce the highest possible rating and lowest all-in cost of borrowing for the Series 2006 financing. Background The District solicited proposals from 9 firms that are actively underwriting water revenue bonds in California and nationally. Six firms submitted proposals. The respondents included: Bear Stearns RBC Capital Markets Citigroup Stone&Youngberg Merrill Lynch UBS Investment Bank The respondents were asked to provide their thoughts on the refunding of the Series 1996 COPS and whether the District could expect to encounter any obstacles with our proposed financing plan. The respondents were also asked to provide information on their experience rating and marketing similar transactions,the experience of the individuals that would be working with the District and their proposed underwriting fees. Evaluation All of the respondents were deemed to be qualified to underwrite the District's proposed financing. In addition,all of the firms determined that the current market provides a good opportunity to refund the Series 1996 COPS. Although several firms recommended that the District refund all of the Series 1996 COPs to improve the District's borrowing covenants, Stone&Youngberg was one of only two firms that expressly noted that a complete refunding would allow the District to add Facilities Fees to your debt service coverage calculation. None of the firms anticipated any major obstacles to their ability to underwrite the proposed financing. Several noted the District's recent rate increases as an important step in the preparing the District for the 222 High Eagle Road,Alamo,CA 94507 925-743-8498 925-743-8425 (fax) rating process. Stone&Youngberg was one of three firms that included a relatively thorough credit analysis of the water enterprise. Having underwritten a bond transaction for the Town of Truckee, Stone &Youngberg demonstrated a superior knowledge of the unique demographic and economic characteristics of the District's service area. This knowledge is helpful not only in the rating process,but also in the marketing of the bonds. While UBS and Citigroup both claim to have senior managed more water revenue bonds(by par amount) in California depending on the time period,Stone&Youngberg has senior managed the largest number of water revenue bonds (68)over the last five years. Stone&Youngberg also ranks number one in terms of transactions sold(798)in the State of California over the last five years. While the firm's total par amount sold is lower than UBS and Citigroup,Stone&Youngberg's average transaction size is approximately$20 million. Having been involved with a greater number of California water transactions of comparable size to the District's proposed transaction, Stone&Youngberg is well suited to manage the District's Series 2006 financing. While underwriting fees are only one aspect of what the District will ultimately pay in connection with the financing,they are important consideration. The majority of the proposals included fees that were very comparable and considered industry standard(range of$150,000-165,000). Stone&Youngberg was one of two firms that proposed more aggressive fees that demonstrated their strong desire to work for District. While Stone&Youngberg's fee was not the absolute lowest proposed,at approximately $135,000 it is$15,000-30,000 below what we consider market levels for this type of transaction. The firms were also evaluated on the overall quality and professionalism of their proposals. While a great deal of time and effort was expended by many firms,a few proposals stood out from others for their direct and thoughtful response,appropriateness of the information presented and careful review. This is the form in which we will want the District's credit presented to rating analysts,bond insurers and investors. Stone&Youngberg's proposal demonstrated the likely involvement of senior professionals and attention to detail we would expect from your senior manager. Summary There are a number of qualitative measures used to determine which firm is best suited to manage the District's proposed financing. In the many areas evaluated,a single proposer, Stone&Youngberg,came up as one of the top firms by each measure. We are confident that the firm will pay considerable attention to the District's financing,is already up to speed and well positioned to execute relatively quickly,has a strong network of buyers for comparable bonds,and will efficiently execute the transaction at a very low all-in cost. We recommend approval of Stone&Youngberg for the proposed transaction. 2