Update (Jan. 4): On Wednesday, the county commissioners unanimously approved the resolution authorizing the refinancing plan to move forward. As stated at Tuesday’s work session, the bond issue is contingent on the county saving at least a nominal amount through the deal.
The Lancaster County commissioners appear poised to approve a resolution Wednesday that would authorize the refinancing of just over $16 million in debt.
The debt stems from a $25 million variable-rate note issued in 2002. The county would pay it off with the proceeds from new fixed-rate tax-exempt bonds, and would pay off an associated interest-rate swap liability of around $1.9 million.
The move would result in lower debt service, though the swap payoff would offset most of the savings, according to an analysis by the county’s financial advisors. The real benefit would be the elimination of the county’s only remaining variable-rate debt and its only remaining interest-rate swap liability.
That eliminates interest rate risk and cleans up the county’s balance sheet, Ken Phillips and Lou Verdelli of financial firm Raymond James told the commissioners at a preliminary discussion in December. Raymond James is acting as underwriter in conjunction with co-manager RBS Capital Markets.
That in turn will make the county look better to credit rating agencies. Currently, the county’s credit rating is Aa2, the third highest on a scale of 20. Maintaining a favorable rating will be key to securing the best possible interest rate when it comes time to issue debt to build the new county correctional facility.
As Phillips and Verdelli pointed out, the transaction parallels the one recently completed by the Lancaster County Convention Center Authority. It accomplishes the same goal — lower debt service and reduced uncertainty — and is currently feasible for the same reason; namely, the recent run-up in interest rates after a long period of historically low ones. The swap liability moves inversely to interest rates, so their rise has pushed it into manageable territory.
On Tuesday, the county commissioners and county Controller Lisa Colon all agreed the refinancing makes sense and is in the county’s best interest.
The resolution on Wednesday’s agenda authorizes a bond issuance of up to $18 million and an interest rate of up to 6%. The actual principal amount and interest rate will depend on market conditions.
The arrangement calls for paying down the swap liability with cash. Tax-exempt debt proceeds can’t be used for that purpose, so otherwise the county would have to issue taxable debt, Verdelli and Phillips said.
As was the case with the convention center, the bond team is looking to time the market and hit a sweet spot: An interest rate high enough to reduce the swap liability, low enough to keep the new bonds’ debt service manageable. The resolution explicitly states that the refinancing shall only move forward if the net outcome is savings for the county.
The $16 million to be refinanced accounts for a little over one-tenth of the county’s $146.4 million in outstanding debt. It will pay $24.4 million in debt service this year, according to the budget passed last month.
The team is looking to close the refinancing deal in February or March, bond attorney Tim Horstmann of McNees Wallace & Nurick said.