7a Supp
ITEM NO.: _ 7a_______ DATE OF MEETING: 10/05/2010 Commercial Paper Letter of Credit Extension October 5, 2010 Introduction Bank of American Letter of Credit (LOC) for $100 million commercial paper (CP) expires in November, 2010 Port has negotiated an extension of the LOC Due to numerous changes since 1997, the LOC agreement will be amended and restated Pursuant to Resolution No. 3456, authority to extend the letter is delegated to the Port's CFO This briefing will highlight key changes included in this extension Impact of financial crisis Negative and positive changes Update on the next LOC expiration in January, 2011 2 Introduction Variable Rate Debt The Port uses LOCs to provide liquidity and credit support to its variable rate debt The Port uses two types of variable rate debt Long-term bonds with floating interest rates Short term commercial paper Variable rate debt is a useful component of the Port's debt portfolio Low cost - short term rates are lower than long term rates Currently about 30 50 basis points Average since 1997 approximately 2.5% Risk management - variable rates on debt off-set variable rates on investments 3 Background Commercial Paper 1997 Port instituted a CP program for $100 million Issued on the Port's Subordinate Lien, secured by operating revenues after payment of prior lien debt service Short-term borrowing maturities less than 270 days Can "roll over" multiple times (revolving credit) Used as bridge financing in anticipation of grant receipts or long- term debt issuance Initial program backed by an LOC from Bank of America 2001 Port increased the program to $250 million Added an LOC for $150 million with Bayerische Landesbank (BLB) 4 Letter of Credit function A direct pay LOC provides immediate liquidity support When the Port rolls-over maturing CP, if there are no investors the LOC bank will buy and hold the CP until 1. an investor is found 2. the Port pays off the CP If repayment has not occurred after 6 months (liquidity period), the Port begins repayment to the bank over an extended time period. This feature of the LOC is referred to as "term out" or "term out loan". Port LOCs typically provide for a 5-year "term-out" or 5 years to repay the CP held by the bank While the bank holds CP, the Port pays the bank an interest rate to the bank established in the LOC documents 5 2008 Financial Crisis The financial crisis resulted in significant constraints on credit and therefore, the LOC market Fewer LOC providers Providers are more selective prefer existing clients or clients with whom they have more extensive relationships Credit approvals are slower and often involve bank staff who are not familiar with municipal credits More cost and risk have shifted to the borrower Fees have increased significantly LOCs are typically now 1-3 years in term rather than 3-7 years Liquidity periods (period bonds or notes are held by the bank prior to term-out) and term-out periods are shorter Covenants have become more restrictive and there are more Events of Default 6 Bank of America LOC - Changes Consistent with the current LOC market this LOC extension includes several changes adverse to the Port LOC fee increases from 20 basis points to 140 basis points Early termination Port can terminate at any time, but fee is paid for first 3 years instead of first 1 year (unless the banks credit is downgraded) Bank rate the interest rate the Port pays if CP is held by the bank is a minimum 7.5% rather than Fed Funds + 50-150 basis points Downgrade A below investment grade rating on the Port's Subordinate Lien is an Event of Default 7 Bank of America LOC - Changes There are several provisions that are better than the Port's current agreement and lower the Port's risk The Port was able to preserve Expiration LOC is issued for 5 years Liquidity period 6 months Term out - 5 years Port was able to improve Set-off - re-written with appropriate restrictions and clarifications to protect the Port and maintain the integrity of existing liens Cure periods extended for certain Events of Default Lower risk of triggering a default Higher threshold for certain problems to become a default Fewer repetitive representations that could trigger a default 8 Schedule Bank of America LOC for CP Extension and amendments will take effect in November upon expiration of the current LOC New LOC for Seaport Variable Rate bonds Existing LOC expires January, 2011 provider is not longer offering LOCs Per FT-01 policy competitive solicitation for a new LOC Only 3 responses Best offer from Bank of America Resolution No. 3238 delegates authority to the CFO to negotiate and execute the LOC agreement 9
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