23 Aug 2014
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Mineola to Save $1.4 Million with Debt Refinancing

Village to restructure debt with bond swap transaction.

Mineola to Save $1.4 Million with Debt Refinancing Mineola to Save $1.4 Million with Debt Refinancing Mineola to Save $1.4 Million with Debt Refinancing

Everyone likes saving money, whether it be a few dollars or 1.4 million of them. Admittedly, the majority of us would like the latter amount, but while we all can’t reap a windfall, the Village of Mineola has managed to do so through restructuring some of its bonded debt.

Taking advantage of the current low interest rate environment, Richard Tortora, president of Great Neck-based Capital Market Advisors, which serves as the village’s financial advisor, presented a plan at the ’s April 18 meeting to refund a number of bonds that were issued in 2003 to finance several projects and would have originally lasted through 2023 with newer ones with lower interest rates.

“When you issued those serial bonds in 2003, you reserved the right to call in and refinance those bonds at your option at any time after Aug. 15, 2013,” Tortora explained. “Under current market conditions, we’re able to sell interest rates, sell the bonds at considerably lower interest rates” and adding that the interest rates currently range from under one-half of one percent to “just under” 2.75 percent.

One of the keys that makes the transaction possible was an to AA3 status. The net effect would save $1.4 million over 12 years, with savings showing as $115,000 each year. If the village did not take any action, interest rates on the bonds would range from 4 percent and rise up to 5 percent.

The firm is required to submit all the paperwork associated with the transaction for review with the state comptroller’s office, which typically looks for savings of at least 3 percent on the refinancing.

“Your issue saves almost 10 percent,” Tortora said, “which makes it a very attractive opportunity.”

Capital Market would go into the market over the next several weeks selling the bonds and receiving bids to purchase the new bonds.

According to Tortora, the transactions would be completed using the following process: selling bonds in late May and close on them in mid June. On the day the village closes on the bonds it would purchase a portfolio of U.S. Treasuries using the proceeds, the money would sit in escrow and an escrow agent would use a portion of those proceeds to pay the pre-refunded bonds until they were to be called in August, 2013.

The village is not going to call the bonds until August 2013, yet Tortora said that “we want to structure this deal  such that you get savings starting in the next fiscal year.”

The transaction would save $117,000 in the 2013 fiscal year and going forward the next 12 years.

The village would also be financing the interest expense on the bonds that they are calling.

Once the refunding bonds are issued, there would be two revenue streams paying interest on the refunded bonds prior to the village paying them off in August 2013. The escrow will pay interest in all of the bonds that mature from 2014-23  that the village refunded until August 2013 at which time all of the bonds will be called in, paid off and the new bonds take their place.

“But the net effect of the transaction, even when you factor in the fact that those treasuries are probably yielding less than a quarter of a percent,” Tortora said, “so you’re investing at less than a quarter, you’re borrowing at a little over 2 percent... we think your cost of capital is going to be just under 2.25 percent.”

Since the village will be selling the bonds at a premium – in excess of what the amount they will refund is – it will be taking in money but the premium will go into the escrow account, not the general fund.

“Any premium that comes in as a result of the sale,” Tortora said, “because the way it’s structured, the proceeds from this transaction, the proceeds from the refunding bond issue, they can’t be used for any purpose other than to refund these bonds and pay the costs associated with that refunding.”

In response to a series of questions from trustee Lawrence Werther, who has a financial background, Tortora said that buyers would want a coupon (a periodic interest payment) protection because “the expectation is that interest rates are going to rise so the investor wants a bond with a higher coupon than prevailing market conditions.”

Tortora feels that the time is right for the village to make the refinancing as the level of savings is quite high and “very few” of the refinancing transactions he oversees has the level of savings as good as Mineola at 9.95 percent.

The village board – which unanimously approved the transaction to begin the process – still has the option of rejecting the bids on the day the offers are opening and would only incur costs of printing the notices for the bidding.

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