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HomeMy WebLinkAboutE-5 Staff Report - Underwriter Recommendation POBCONSENT ITEM E-5 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL VIA: SERGIO GONZALEZ, CITY MANAGER FROM: TALIKA M. JOHNSON, DIRECTOR OF ADMINISTRATIVE SERVICES DATE: FEBRUARY 3, 2019 SUBJECT: SELECTION OF UNDERWRITER FOR PROPOSED PENSION OBLIGATION BONDS BACKGROUND: On December 2, 2019 staff presented the analysis outlining the City’s significant long-term liabilities relating to pension and other post-employment benefits (OPEB) which increasingly strains the City’s budget. To address the growing cost of pension benefits, Staff recommended the City Council authorize the following: 1) Commence Judicial Validation Proceedings related to the Sale of Pension Obligation Bonds; 2) Authorize Urban Futures, Inc. (UFI) to serve as municipal advisor to the City; 3) Authorize Best, Best & Krieger to serve as Bond & Disclosure Counsel to the City and to manage the validation proceedings; and 4) Solicit proposals for underwriting services. On December 14, 2019, UFI provided a select group of qualified bond underwriting firms with the City’s Request for Proposals (RFP). The firms receiving the RFP have taxable bond experience as well as experience with the issuance and structuring of Pension Obligation Bonds (POBs). Proposals were received by UFI on Friday, January 3rd and provided to the City’s Administrative Services Director and City Manager for evaluation. RECOMMENDATION: Staff recommends that the City Council take the following action: 1) Authorize Staff to engage services with BofA Securities to serve as Underwriter for financing of the City’s proposed Taxable Pension Obligation Bonds. APPROVED CITY COUNCIL 2/3/2020 Underwriter Selection – Pension Obligation Bonds February 3, 2020 Page 2 ANALYSIS: At the request of City staff, Urban Futures, Inc. requested proposals from qualified underwriting firms to provide services in connection with the proposed City of Azusa Taxable Pension Obligation Bonds. The Underwriter is an investment banking firm that assists in structuring the bonds, assists the team with the bond rating and credit enhancement process, and markets/sells the bonds to potential investors. Proposals were received from the following six (6) firms: 1) BofA Securities 2) Hilltop Securities 3) Ramirez & Co 4) Raymond James 5) RBC 6) Stifel Nicolaus The proposals received for underwriting services were reviewed by an evaluation team consisting of UFI, serving as the City’s municipal advisor, the Director of Administrative Services and the City Manager. Proposals were ranked using a scoring system ranging from one to three points, with three points as the highest score possible based on financing team depth and experience, issuer knowledge, credit and savings analysis, marketing and distribution, and underwriting fees. While all the proposals represented underwriting competence and experience with the issuance of Pension Obligation Bonds, the process concluded with unanimous concurrence of the evaluation team that BofA Securities was the firm that would best serve the City due to taxable bond experience nationally and in California, pension bond experience, depth of the proposed financing team, institutional and retail distribution network, and underwriting fees. In addition to the above criteria, prior performance working with the City was also considered. Underwriter Recommendation Highlights Taxable Bond Experience and Pension Obligation Bond Expertise: BofA Securities is the #1 ranked senior manager of taxable bonds nationally. Over the past ten years, BofA Securities ranked #1 in California with more than $10 billion of taxable par, presenting 12.8% market share. In several of the underwriter proposals, other measures of underwriter issuance rankings were provided including total transactions and par in California, negotiated taxable transactions in California and nationally, and par amount of Pension Obligation Bonds. Under each measure, BofA Securities is ranked consistently within the top tier indicating the strongest overall underwriting execution experience. BofA Securities was one of three underwriters to include a pension financing expert as part of the underwriting team. BofA Securities pension expert has over 30 years of municipal finance experience and is a former credit rating analyst. BofA Securities’ assigned team has California taxable and pension bond financing experience with issuers including the counties of Los Angeles, Riverside, Sacramento, San Bernardino and San Diego, as well as the cities of Anaheim, Los Angeles, Fresno, Long Beach, Manhattan Beach and San Jose. RBC and Hilltop Securities also included a pension expert as part of their proposal. Underwriter Selection – Pension Obligation Bonds February 3, 2020 Page 3 The RFP requested that bidding firms include specific Pension Obligation Bond experience from 2010 to the present. Since 2010, BofA Securities senior managed $400 million in par of California Pension Obligation Bonds and $1.4 billion in par of Pension Obligation Bonds nationally. Several of the evaluated firms, including Hilltop, Ramirez & Company and Stifel Nicolaus presented more recent California Pension Obligation Bond experience when compared to BofA Securities. Additionally, most of the bidding firms have pending Pension Obligation Bond transactions in progress, including BofA Securities. Overall, Stifel Nicolaus has more California experience over the past five years when compared to the other firms. Based on the evaluation taxable bond experience and pension expertise, BofA Securities, Hilltop Securities, Ramirez & Co. and Stifel Nicolaus scored three (3) points. Pension Bond Structuring Analysis: Each prospective underwriter included a detailed analysis of bond structuring options, including models focused on with overall savings, cash flow savings and credit risk mitigation. As presented to the Council on December 2nd and on December 16th, the City’s financing team, including the selected underwriter, will work together to present a recommended bond structure to Council prior to the issuance of bonds. Based on the level of analysis provided by all bidders, each firm scored three (3) points. Issuer Knowledge: BofA Securities and Stifel Nicolaus both have sole senior manager underwriting experience with the City. Ramirez & Co. served as a co-manager on a recent CFD refinancing. And, the lead banker from RBC was the underwriter for the City’s 2008 Pension Obligation Bonds. Each bidding firm represented basic knowledge of the City as part of its analysis included within each proposal. Based on prior sole senior manager experience, BofA Securities and Stifel Nicolaus scored three (3) points each. Two (2) points were awarded to Ramirez & Co. as a recent co-manager on a CFD refinancing. One and a half (1.5) points were awarded to RBC based on the lead banker’s experience with the City as the sole manager of the Series 2008 Pension Obligation Bonds while working at another firm. The remaining firms were awarded one (1) point for basic knowledge of the City as demonstrated in their proposal. Depth of Sales and Distribution Network: BofA Securities has one of the largest institutional sales forces dedicated to municipal bonds with 381 institutional sales representatives in 23 offices who sell a myriad of investment products and services to institutional accounts nationwide. Additionally, the City’s bonds would be marketed and sold through BofA Securities network of 17,000+ Merrill Lynch retail financial advisors. Particularly important, Merrill Lynch has 79 retail offices in California with 1,794 retail financial advisors. Within Los Angeles County, Merrill Lynch has 12 retail offices with 604 retail financial advisors. BofA Securities coordinates all taxable debt issuances for municipal credits from its municipal syndicate desk in coordination with its investment grade corporate desk. This type of coordination will enable the City’s taxable Pension Obligation Bond offering to have broader access to taxable investors. Underwriter Selection – Pension Obligation Bonds February 3, 2020 Page 4 Proposals from Hilltop Securities, RBC and Stifel Nicolaus also included significant investor account coverage; however, the depth of the BofA Securities’ institutional and retail distribution network is unmatched compared to the other underwriters, which we believe would lead to a lower cost of borrowing for the City. Based on the extensive distribution and retail depth, BofA Securities, Hilltop Securities, RBC and Stifel Nicolaus scored 3 points. Proposed Underwriting Fees: Underwriting fees ranged from $2.50 to $4.40 with the average of roughly $3.00 per bond. Based on recent Pension Obligation Bond transactions, including the pending transactions in Pomona and Huntington Beach, the weighted comparable underwriting fee average is $3.38. The fee for underwriting from BofA Securities is $2.50 per bond, $0.88 below the weighted average and a savings of $71,280. RBC quoted a fee at $2.50 per bond as well. The other underwriting firms quoted higher fees with Stifel Nicolaus bidding the most at $4.40 per bond. Overall Evaluation: Based on the highlights above, and the evaluation completed by City staff and UFI, BofA Securities and Stifel Nicolaus represent the most qualified underwriting firms. Because the two firms scored the same, the evaluation team reviewed proposed fees to make a final determination. Based on a lower fee proposal, BofA Securities is the staff recommendation. FISCAL IMPACT: Based on an $81 million Pension Obligation Bond issuance, BofA Securities will be paid $202,500 for underwriting services. The lead underwriter, financial advisor, and bond counsel are paid from the proceeds of the Pension Obligation Bonds. The financing team is not paid unless the POBs are sold, except for the costs of the judicial validation proceedings. City staff and the financing team will present an updated saving analysis when the financing documents are presented to Council after the validation proceedings are completed. At that time, the Council can determine if the issuance of Pension Obligation Bonds is in the best financial interest of the City. Underwriter Firm and Team Experience Issuer Knowledge Credit/Savings Analysis Marketing/ Distribution Total BofA Securities 3 3 3 3 12 Hilltop Securities 3 1 3 3 10 Ramirez & Co. 3 2 3 2 10 Raymond James 2 1 3 2 8 RBC 2 1.5 3 3 9.5 Stifel 3 3 3 3 12 Underwriter Selection – Pension Obligation Bonds February 3, 2020 Page 5 Prepared by: Reviewed and Approved: Talika M. Johnson Sergio Gonzalez Director of Administrative Services City Manager