Report to/Rapport au :

 

Corporate Services and Economic Development Committee

Comité des services organisationnels et du développement économique

 

and Council / et au Conseil

 

12 March 2007 / le  12 mars 2007

 

Submitted by/Soumis par : Greg Geddes,

Chief Corporate Services Officer/Chef des Services généraux

 

Contact Person/Personne ressource : Marian Simulik, Director, Financial Services and City Treasurer/Directrice des services financiers et trésorière municipale

Financial Services/Services financiers

(613) 580-2424 x 14159, Marian.Simulik@ottawa.ca

 

City Wide

Ref N°: ACS2007-CRS-FIN-0007

 

 

SUBJECT:

POLICY ON DEBT AND FINANCING

 

 

OBJET :

politique sur les dettes et le financement

 

 

REPORT RECOMMENDATION

 

That Corporate Services and Economic Development  Committee recommend Council adopt  the Policy on Debt and  Financing  attached as Annex A.

 

RECOMMANDATION DU RAPPORT

 

Que le Comité des services organisationnels et du développement économique recommande au Conseil d’adopter la Politique sur les dettes et le financement ci-jointe en Annexe A.

 

 

BACKGROUND

 

The Policy on Debt and Financing ("Policy") provides the policy framework to administer both short-term and long-term financing for the City. The proposed Policy sets out objectives for the debt program, standards of care in administering debt, provides a list of authorized financing instruments and provides guidelines to use in selecting the appropriate financing mechanism and various risk management tools.

 

As at 31 December 2006, the long-term debt outstanding for the City was $666.6 million (net debt of $508.7 million net of sinking funds).  The City's outstanding debt includes instalment debentures, sinking fund debentures and amortizing debentures. Although the City has primarily issued debentures in the Canadian public financial markets it has also entered into loan agreements and guaranteed bank loans amounting to $60.3 million including interest rate exchange or swap agreements, in connection with three Public Private Partnerships.

 

The Municipal Act and its related Regulations govern all short and long-term financing activities of Ontario municipalities. The Province enacted Regulation 604/06 which provides a framework to consider capital leases and permits the use of bond forward agreements to mitigate the risks resulting from changing interest rates when issuing debentures.  The proposed Policy permits the City to enter into Bond Forward Agreements and provides a Lease Financing policy as required by this Regulation.

 

Lease Financing Agreements

 

Ontario Regulation 604/06 requires municipalities to adopt  a statement of policies and goals which includes a discussion of the risks in using lease financing agreements and which may provide  for a category of lease financing agreements which would not result in a material impact on the municipality.  This Regulation requires, before entering into a lease financing agreement, the Treasurer to prepare a report assessing the costs and risks associated with the proposed lease, provide a comparison with other methods of financing, indicate the effective cost of the lease, and provide a summary of any contingent payments and the assumptions applicable to any variations in the payment schedules.  The proposed Policy addresses these requirements and also identifies other criteria to be considered including the overall economic benefit expected from undertaking the project.

 

The regulation also requires Council to receive a report at least once a year providing a summary of the total lease financing arrangements undertaken and the proportion this represents of the total long-term debt of the City.

 

Bond Forward Agreements

 

Ontario Regulation 604/06 also permits municipalities to enter into bond forward agreements to reduce the risk of changing interest rates before a debenture is issued. A bond forward agreement is a contract with an approved financial institution that allows the municipality to effectively fix the interest rate on a debenture issue in advance of the issue date.  Bond Forward agreements have been used by Federal Government Crown Corporations, Provincial Governments, corporations, universities and municipalities outside of Ontario, for many years.

 

The City normally obtains long-term financing by issuing debentures in the Canadian public financial markets which is generally regarded as the most cost effective alternative to obtain fixed rate long-term financing.  However the interest rate is not fixed until the actual time the debentures are launched or issued in the market.  It is only at that time that investors actually commit to purchase the City’s debentures  for a specific term and with a specific fixed rate of interest.  Thus the City is exposed to changes in interest rates up until the time the issue is launched. By using bond forward agreements, a municipality now has the ability to lock in yields on the underlying Government of Canada or Province of Ontario bonds at any period in time for all or part of its borrowing requirements thus eliminating or reducing the risk of unfavourable movements in interest rates.  The Provincial regulation currently limits the period for which a bond forward can fix an interest rate to 60 days.  While the debentures will be issued at the interest rates prevailing at the time of issue, payments resulting from the bond forward agreements will be received from or made to the financial institution which will effectively fix the cost of the rate on the debentures.

 

The proposed policy provides guidelines on the use of bond forward agreements.  It is proposed that the amount of any bond forward contract not exceed seventy-five per cent of the applicable debenture issue.  Also in accordance with the regulation, bond forward agreements may only be entered into with eligible schedule I, II and III banks.  

 

The proposed Policy as set out in Annex A complies with the requirements of Regulation 604/06.

 

 

CONSULTATION

 

The proposed Policy is an administrative matter and the public consultation process is not applicable.

 

 

FINANCIAL IMPLICATIONS

 

The proposed Policy on Debt and Financing will allow the City to consider and enter into Lease Financing arrangements as an alternative financing mechanism.  The Policy also permits bond forward agreements in accordance with the Provincial Regulation which provides a mechanism to manage interest rate risk on its debt issues.  At the present time the Province has limited the use of bond forward agreements to 60 days. 

 

 

SUPPORTING DOCUMENTATION

 

Annex A - Policy on Debt and Financing

 

 

DISPOSITION

 

Following consideration at Corporate Services and Economic Development Committee, this report and Policy will be sent to Council for its consideration.

 

 


ANNEX A

 

 

DEBT AND FINANCING POLICY

 

 

 

POLICY STATEMENT:

 

A policy governing the use and administration of capital financing and debt.

 

APPLICATION:

All financial obligations including related agreements and capital financing leases that are entered into by the City,  as well as those employees responsible for the control, administration or management of capital financing and debt issuance activities.

 

PURPOSE:

This policy establishes objectives, standards of care, authorized financing instruments, reporting requirements and responsibilities for the prudent financing of the City’s operating and infrastructure needs.

 

DEFINITIONS:

Amortizing Debentures: Debentures for which the amount of the periodic (annual, semi-annual, monthly) payment of principal and interest is approximately the same throughout the life of the debenture issue.

Banker’s Acceptance:  A short-term credit obligation created by a non-financial firm such as a Corporation which is endorsed  by a bank as to payment effectively making the obligation that of the bank.

Bond Forward Agreement:  A financial contract with an eligible Schedule I, II or III bank used to hedge future interest rates by short selling a particular Government of Canada or Province of Ontario bond and repurchase the same bond at a predetermined future settlement date.  A settlement payment may be required by either the issuer or the bank if there is a difference between the price at which the government debt instruments are sold and the price at which they are bought back on the settlement date.

Bought Deal: A financing transaction, such as a debenture issue, in which an individual underwriter or underwriting group purchases the entire amount in order to resell to investors.

Capital Financing: A generic term for the financing of capital assets using debt, financing leases, swaps and other financing mechanisms.

Construction Financing: A form of debt financing in which the issuer does not pay any principal and/or interest for periods of normally up to 5 years during the construction or rehabilitation of the facility.

Cross-Border Lease: A lease in which the lessor and lessee are located in different countries, and where the holder of legal title to the asset can claim tax benefits in its home country, while the tax laws of the asset user treat it as owner for tax purposes in its own country.

Debenture: A formal written obligation to repay specific sums on certain dates. In the case of a municipality debentures are typically unsecured.

Debt and Financial Obligation Limit: A calculation provided annually to a municipality by the Ministry of Municipal Affairs and Housing that determines the maximum amount of new annual debt servicing costs that a municipality can undertake or guarantee without seeking the approval of the Ontario Municipal Board  in accordance with Ontario Regulation 403/02.

Debt: Any obligation for the payment of money. For Ontario municipalities, debt would normally consist of Debentures as well as either notes or  loans from financial institutions but could also include loans from reserves, Sinking Fund or the Endowment Fund. Debentures issued to Infrastructure Ontario are also considered as debt.

Financial Guarantee:  An agreement whereby the City will take responsibility for the payment of debt in the event that the primary borrower fails to perform.

Foreign Currency Debentures: Debentures that are denominated or payable in a foreign currency. In Ontario a municipality is permitted to issue debentures denominated in United States dollars, Pound Sterling, Japanese Yen, Euros, Australian dollars, and Swiss Francs.

Foreign Currency Exchange Agreements:  An agreement entered into with a financial institution to fix the rate of exchange for future payments made in a foreign currency.

Hedging: A strategy used to offset or mitigate currency and/or interest rate risk.

Infrastructure Ontario (formerly Ontario Strategic Infrastructure Financing Authority (OSIFA)):  An entity established by the Province of Ontario to provide Ontario municipalities, universities and hospitals access to alternative financing service for longer-term fixed rate loans for the building and renewal of public infrastructure.

Instalment (Serial) Debentures: Debentures of which a portion of the principal matures each year throughout the life of the debenture issue.

Interest Rate Exchange Agreements:  An agreement entered into with a financial institution to fix the future rate of interest paid on a variable rate debenture or short-term or long-term bank loans.

Lease Financing Agreements: A lease  allowing for the provision of Municipal Capital Facilities, including those capital  facilities designated by Council as Municipal Capital Facilities under Section 110 of the Municipal Act, that:

·        transfers substantially all the benefits and risks incident to ownership of the property to the lessee;

·        is entered into for the purpose of obtaining long-term financing of a capital undertaking; and

·        may or will require payment by the City beyond the current term of Council.

Long-Term Bank Loan: Long-term debt provided by a bank or a syndicate (group) of banks.

Long-Term Debt: Any debt for which the repayment of any portion of the principal is due beyond one year.

Municipal Capital Facilities: Includes land, as defined in the Assessment Act, works, equipment, machinery and related systems and infrastructures.

Non-Material Leases: A class of financing leases in which the annual payment for individual leases will be less than  $500,000, the term of the lease does not exceed ten years and as a class does not exceed one percent (1%) of the City’s net tax levy.

Project Financing: Financing in which principal and interest payments are structured so as to more closely match the revenues or cost savings of a specific project.

Refinancing: As applied to debentures, describes the process of issuing a new debenture to fund a lump sum amount maturing in one or more outstanding debentures to extend the maturity date but not exceeding the term authorized by Council.

Retirement Fund Debentures: Debentures for which money is accumulated on a regular basis, commencing several years after the issuance of the debentures, in a separate custodial account that is used to redeem the debentures.

Short-Term Debt: Any debt for which the repayment of all the principal is due within one year.

Sinking Fund Debentures: Debentures for which money is accumulated on a regular basis in a separate  account that when combined with interest earned is used to retire the debentures on maturity.

Syndicated Bank Loans:  A loan between the City and a bank listed in Schedule I, II or III of the Bank Act (Canada), a loan corporation registered under the Loan and Trust Corporations Act or a credit union to which the Credit Unions and Liaison Popalaires Act, 1994 applies where the financing to the loan is obtained through a financing agreement in which each of the institutions that is a party of the term agreement agrees to contribute a portion of the loan.

Tile Drainage Debentures: Debentures issued to the Province of Ontario to finance the construction of a tile drainage system for agricultural land in accordance with the Tile Drainage Act R.S.O. 1990.

Underwriter(s): An individual or group of investment bankers appointed as principals or on an agency basis, for the purpose of purchasing and reselling new debentures issued by the City.

Variable Interest Rate Debentures: Debentures that provide for one or more variations in the rate of interest payable on the principal during the term of the debenture.


DESCRIPTION:

A)      Capital Financing And Debt Issuance

Council may, where it is deemed to be in the best interest of its taxpayers, approve the issuance of debt for its own purposes, or those of its municipal business corporations if any.

Through its Long Range Financial Plan as it is updated and amended from time to time, Council has adopted a number of guiding principles related to debt financing for capital projects as follows:

·        Maintain current tax-supported debt servicing costs at existing levels by allowing  new tax supported debt each year (excluding Police Services) in an amount which approximately corresponds to the principal amount of debt maturing.  Thus tax-supported debt is referred to as revolving debt as it replaces maturing debt with new debt.

·        Debt funding for lifecycle projects should be reduced and employed on projects related to capacity expansion or growth, projects financed by development charges, future new non-traditional infrastructure projects and projects tied to third-party matching funding. It is recognized that the goal of eliminating debt financing for lifecycle projects would be phased in.

·        When required, debt funding is considered an appropriate way to finance longer-life capital projects since future taxpayers who will benefit from the project will pay for it through future debt charges.

These guiding principles  will be met through the objectives outlined below.

B)      Primary Objectives Of The Capital Financing And Debt Program

The primary objectives for the City’s capital financing and debt program, in priority order, shall be:

·         Adhere to statutory requirements;

·         Ensure long term financial flexibility and sustainability;

·         Limit financial risk exposure;

·         Minimize long-term cost of financing;

 

By successfully fulfilling all of these objectives the City will endeavor to maintain attractive credit ratings by Standard and Poor’s Rating Services and Moody’s Investors Service Inc. or such other rating agencies as may be approved from time to time.

 

1) Adhere to Statutory Requirements

Capital financing may only be undertaken if and when it is in compliance with the relevant sections of the Municipal Act, the Local Improvement Act, or the Tile Drainage Act, and their related regulations. Requirements include but are not limited to the following:

a)      The term of temporary or short-term debt for operating purposes will not exceed the current fiscal year;

b)      The term of the capital financing will not exceed the lesser of 40 years or the useful life of the underlying asset;

c)      Long-term debt will only be issued for capital projects;

d)      The total annual financing charges after a proposed debt issue will not exceed the Debt and Financial Obligation Limit for the City, unless otherwise approved by the Ontario Municipal Board;

e)      Prior to entering into a lease financing agreement, an analysis will be prepared that assesses the costs and benefits as well as the financial and other risks associated with the proposed lease with other methods of financing;

f)        Prior to passing a debenture by-law which provides that instalments of principal or interest, or both, are not payable during the period of construction of an undertaking, Council will have considered all financial and other risks related to the proposed construction financing; and

g)      Long-term debt will be a  full faith and credit obligation of the City

2) Ensure Long-Term Financial Flexibility

The capital financing program will be managed in a manner consistent with other long-term planning, financial and management objectives.

Prior to the issuance of any new capital financing, consideration will be given to its impact on future ratepayers in order to achieve an appropriate balance between capital financing and other forms of funding.

3) Limit Financial Risk Exposure

The capital financing program will be managed in a manner to limit, where practicable, financial risk exposure.  As a result, it will be the City’s normal practice to issue debt that is only denominated in Canadian dollars with an interest rate that will be fixed over its term.

Notwithstanding, if a situation arises where there is a material financial advantage and/or it is deemed prudent for the City to issue debt that is subject to fluctuations, in foreign currency and/or interest rates, a hedging strategy will be considered to either reduce or eliminate the risk.

This strategy would include the following:

a)      For debentures that are not denominated in Canadian currency, the rate of exchange will be fixed for the term of the obligation (both principal and interest payments) on or before the date of issuance.

b)      For variable interest rate debentures with a term exceeding one year, the interest rate will be fixed within six months of the issuance date.

However, long-term bank loans for which the interest rate may vary may not be fixed if prevailing market conditions are such that in the opinion of the City Treasurer it is in the City’s best interests to allow the rate to float where such debt, in addition to any other outstanding variable rate loans or debentures, do not exceed fifteen percent (15%) of the total outstanding debt of the City as authorized by O.Reg 276/02 s(2).

Finally, it is recognized that financing leases have different financial and other risks than traditional debt that must be considered, and where practicable mitigated prior to its use, including; contingent payment obligations for items such as; lease termination provisions; equipment loss; equipment replacement options; guarantees and indemnities. These risks will be identified prior to entering into any material financing lease.

(Refer to Section E of this Policy – Financing Risk Identification and Mitigation Strategies.)

4) Minimize Long-Term Cost of Financing

The timing, type and term of financing for each capital asset will be determined with a view to minimize   the City’s overall long-term cost of financing.

Factors to be considered will include:  current versus anticipated future interest rates; the availability of related reserve fund monies; the pattern of anticipated revenues or costs savings attributable to the project or purpose; the applicability of using bond forward agreements to hedge interest costs; and, all costs related to the financing of the project whether by debenture, construction financing or financing lease.

5) Match the Term of the Capital Financing to the Useful Life of the Related Asset

The City’s normal practice will be to issue debt for a term that does not exceed 20 years unless otherwise specifically approved by Council. In no case shall the term of financing exceed the anticipated useful life of the underlying asset.

C)      Standard Of Care

      All officers and employees responsible for capital financing and debt activities will follow the standard of care identified in this Policy.

      1) Ethics and Conflicts of Interest

      Officers and employees involved in the capital financing process are expected to abide by the City’s Code of Conduct.

2) Delegation of Authority

The City Treasurer will have the overall responsibility for the capital financing program of the City. As authorized by By-law 2006-112 the City Treasurer is authorized to proceed to launch debenture issues provided that the annual debt charges are within the debt servicing budget approved by Council in the annual operating and capital budgets and the project debt authority has been authorized by Council. The Manager Treasury will have responsibility for directing/implementing the activities of the capital financing program as well as the establishment of procedures consistent with this Policy.  No person shall be permitted to engage in a capital financing activity except as provided for under the terms of this Policy. The City Treasurer will be responsible for all activities undertaken, and shall establish a system of controls to regulate the activities of subordinate officials and exercise control over that staff.

Notwithstanding, the City Treasurer may approve non-material financing leases as previously defined. In considering such leases, the City Treasurer should be satisfied that there are real benefits including the overall economic benefits expected from undertaking the project/capital asset itself, to entering into a lease compared to purchasing the material/equipment on a cash basis or financing the purchase through traditional debentures or bank loans. In assessing the overall economic benefit of a lease financing transaction, the analysis will include, if applicable, its alignment with Council priorities and strategic plans, its community impact, any leveraging of partnership funding as well as its impact on economic development and quality of life.

 3) Requirement for Outside Advice

The City’s staff will be expected to have sufficient knowledge to prudently evaluate standard financing transactions. However, should in their opinion the appropriate level of knowledge  not exist for instances such as capital financing transactions that are unusually complicated or non-standard, or as otherwise directed, outside financial and/or legal advice will be obtained.

D)      Suitable and Authorized Financing Instruments

The form of financing that meets the objectives listed above will be dependent in part upon its term and the type of asset to be financed.

1) Short-Term – Under One (1) Year

Financing of operational needs for a period of less than one (1) year pending the receipt of taxes and other revenues, or interim financing for capital assets pending long-term capital financing may be from one or more of the following sources:

a)      Bank line of credit or loan agreement;

b)      Short-term promissory notes issued to aforementioned institutions; 

c)      Bankers' Acceptances;

d)      Receiver General Auction (municipalities are eligible to obtain short-term funding by bidding on Government of Canada surplus cash balances through the Bank of Canada ); and

e)      Infrastructure Ontario short-term advances pending issuance of long-term debentures.

2) Long-Term – Greater than One (1) Year

Financing of assets for a period of greater than one year may be from any of the following sources:

a)      Debentures (including those issued to Infrastructure Ontario), which may be in the following form or a combination thereof:

·         Instalment (including those with a refunding provision)

·         Sinking Fund

·         Amortizing

·         Variable Interest Rate

·         Foreign Currency

·         Retirement Fund

 

b)         Long-Term Bank Loans (including Syndicated Bank Loans)

 

These may be used if deemed cost effective or otherwise necessary.  These loans may be either fixed or variable interest rate loans as determined by the City Treasurer.

 

c)      Construction Financing

 

May be used for a period of normally up to five (5) years during construction or rehabilitation of certain facilities from which a revenue stream or cost savings is expected to be generated  upon its completion.

 

d)         Lease Financing Agreements (Capital Financing Leases)

 

May be used when it provides benefits, including the overall economic benefits expected from undertaking the project/capital asset itself,  compared with other forms of financing.  Capital financing leases may include cross-border and rolling stock leases.

 

e)         Tile Drainage Debentures

 

These will be used to finance the construction of tile drainage systems for agriculture and for those individual farmers who apply and are accepted for financing.

3) Credit Rating Requirements

The City may only issue foreign currency debentures, variable rate debentures, or variable rate long-term bank loans if its long-term debt obligations are rated by:

a)               Dominion Bond Rating Service Limited as “AA (low)” or higher, or

b)               Fitch Ratings as “AA-“ or higher, or

c)               Moody’s Investors Service, Inc. as “Aa3” or higher, or

d)               Standard and Poor’s as “AA-“ or higher.

E)      Financing Risk Identification And Mitigation Strategies

It is explicitly recognized that there may be additional risks associated with certain types of financing. It is expected that these risks will be identified and considered prior to their use in relation to other forms of financing that would be available.  Also, the mitigation strategies discussed below will be used to reduce the additional risk when deemed practicable.

1) Construction Financing

Construction financing may be used to “lock-in” the debt needed for a capital project generally when the amount required is considered too large to finance from internal cash flow or when it is considered appropriate to segregate all the financing required for a particular project.  Construction financing is unique in that the debt may be accrued in advance of the project’s completion and the interest accrues and no payments are made during the building period.

The following risks compared to other forms of financing will be considered prior to the use of construction financing:

a)   The financial risks include the following:

·            The possibility that interest rates may fall from the time the rate for the construction loan is established and completion of construction.  Should there be a high probability of this occurring, staff will consider the use of variable interest rate rather than fixed rate financing as a method to mitigate this risk; and

·            The possibility that the final cost of construction could be materially less than initially forecasted and financed.  Staff will consider whether or not to issue debt until a fixed rate contract has been awarded or to issue debt that does not exceed 75% of the projected cost as a method to mitigate this risk.

 b)     Other risks include that the construction project may not be able to proceed or is not completed for technical or other reasons.  The mitigation option to be considered in this case will be not to issue long-term debt until all critical construction contracts have been awarded.

2) Financing Lease Agreements

Leases may be used to finance equipment, buildings, land or other assets.

The following risks compared to other forms of financing will be considered prior to the use of capital financing lease agreements.

a)      The financial risks include the following:

·         The ability for lease payment amounts to vary if based on changes in an underlying benchmark debt instrument (generally expressed as a particular Government of Canada Bond).  This risk usually applies only to new assets being added to a leasing schedule and would be the same as new debt being issued from time to time;

·         The ability for lease payment to vary based on changes in the assumed residual values of the asset being leased.  Again, this risk usually applies only to new assets being added to a leasing schedule and would not be riskier than other forms of financing;

·         Uncertainty over leasing costs if contract needs to be extended or renewed.  The normal practice of the City will be to negotiate these costs prior to the leasing agreement being executed.

b)             Other risks include the potential for the seizure and removal of leased equipment if the leasing company goes into default of its obligations to creditors, and its creditors have the legal right to seize assets of the leasing company.  The practice of the City will be to assess the financial strength of the normal leasing company prior to the leasing agreement being executed and/or to adopt other measures and strategies to protect as far as practicable, the leased equipment/facilities from seizure.

3)  Variable Interest Rate Debenture and Long-Term Bank Loans

Variable rate debentures and long-term bank loans may be used when there is volatility in the financial market and/or there is an expectation of significantly lower interest rates occurring within a few months of their issue. In all cases, the interest rate will be fixed no later than 6 months after issue by means of an interest rate exchange (i.e. hedging) agreement in order to mitigate the financial exposure.

The City may only enter into interest rate exchange agreements as part of a variable rate debenture with an eligible institution whose credit ratings are equivalent to those cited in Section D(3) above.

4)    Foreign Currency Debentures

Foreign currency debentures may be used when the “all in” cost of financing in a foreign market is cheaper or the market conditions are such that domestic financing is not practicable.  The risk associated with foreign currency debentures is that the rate of exchange incurred for future interest and principal payments could significantly increase over the term of the debt, raising its overall cost.

The City’s practice with respect to foreign currency debentures will be to have the rate of exchange for all interest and principal payments fixed prior to their issue by means of foreign currency exchange or hedging agreement in order to mitigate the financial exposure. The City will manage the counterparty risk primarily by only entering into a foreign currency exchange agreement with an institution whose credit ratings are equivalent to those cited in Section D(3) above.

Any foreign currency exchange agreement or agreements for a debenture will, when read together, provide for the reduction of currency risk with respect to the entire amount of principal and interest payable under the debenture and shall require any amount payable to any person under the agreement or agreements to be expressed as a Canadian currency amount. 

The currencies set out in Appendix 1 are prescribed foreign currencies eligible under provincial regulation.

5) Bond Forward Agreements

When issuing debentures the interest rate is not fixed until the actual time the debentures are launched or issued in the market.  It is only at that time that investors commit to purchase City debentures for a specific term and interest rate.  As a result, the City is exposed to changes in interest rates up until the issue is launched. Bond forward agreements will allow the City to fix the underlying interest rate on all or part of a planned debt issue prior to the issue date thus reducing the risk of changes in interest rates.

Bond forward agreements may only be used for the issue or the refinancing of debentures denominated in Canadian currency for which Council approval has already been given or authority to proceed with a debenture issue has been delegated to the City Treasurer in accordance with By-law 2006-112.

Furthermore, it will be the City’s normal practice to limit bond forward agreements to apply to no more than seventy-five percent (75%) of the principal amount of debentures to be issued.  Bond forward agreements will have a settlement date which within the length of time approved by Provincial Regulation which currently is not longer than 60 days after the day on which the agreement is executed.

It will be the City’s normal practice that counterparty payments resulting from the use of these agreements, if material, will be added to or deducted from the principal of the amount being financed.

Utilizing bond forward agreements exposes the City to the following risks:

a)               Credit risk to the counterparty (financial institution) in the event interest rates have risen and the counterparty cannot fulfill the terms of the agreement.  Although this is considered a remote risk, credit exposure resulting from any or all outstanding bond forward agreements executed with any financial institution will be added to any outstanding investments held in the City’s investment portfolio and will be subject to the same limitation guidelines set out in Appendix 1 of the Investment Policy.

b)               There will be an opportunity cost if interest rates fall and the City has to pay the counterparty to the bond forward agreement.  This is recognized, however the primary use of a bond forward agreement is to “lock-in” the anticipated borrowing rate associated with the future debenture issue and reduce or eliminate the risk of higher interest rates.  The City’s practice of hedging less than 100% of the planned debenture issue would result in some of the savings still being achieved.

By not utilizing a bond forward agreement, the City will be exposed to movements in interest rates that will be either beneficial or detrimental and will have less certainty about the cost of borrowing on a prospective debenture.

Before entering into a bond forward agreement, treasury staff and the City Treasurer  will analyze and provide:

a)            The fixed costs and estimated costs to the City resulting from the use of such agreements.

b)            A detailed estimate of the expected results of using such agreements.

Bond forward agreement may only be entered into with a bank listed in Schedule I, II or III to the Bank Act (Canada) and only if the bank's long-term debt obligations on the day the agreement is entered are rated by:

a)            Fitch Ratings as “A+” or higher; or

b)            Moody’s Investors Service Inc. as “A1” or higher; or

c)            Standard and Poor’s as “A+” or higher.

d)            Dominion Bond Rating Service as “A(high)” or higher.

 

F)      Methods Of Marketing/Selling Debenture Issues

Debenture securities may be sold by the following means:

a)      Underwriting Syndicate
The use of an underwriting syndicate will be the normal method by which debentures will be sold by the City; or

b)      Bought Deal/Private Placement
This may be appropriate for only "one off" or unusual financing structures when significant savings would be expected or when market conditions are volatile or otherwise difficult.

G)     Financial Guarantees And Letters Of Credit

Financial guarantees and/or letters of credit provided by the City  will be considered as debt and will be governed by this Policy.

H)      Sinking/Retirement Fund Debentures

A Sinking Fund  will be established whenever sinking and/or retirement fund debentures are issued during a calendar year.

As a guideline when setting the internal capitalization rate for new sinking/retirement fund debt at the time of its issue, the rate shall not normally exceed  the 5-year Government of Canada bond rate at time of issue.

I)       Reporting Requirements

In addition to any information requested by Council or that the City Treasurer considers appropriate, the following reports will be provided:

1)      Annually, the City Treasurer shall submit to Council a report or reports that:

a)            Requests authority for temporary borrowing up to a stipulated amount to meet day-to-day expenditures, pending receipt of tax levies, user fees and revenues anticipated during the year;

b)            States the amount of levies, if any, that must be raised for sinking fund purposes in that year;

2)      As required, the City Treasurer shall submit to Council, the following:

a)            A report, before entering into a financing lease which is other than a non-material lease with a recommendation assessing the costs and financial and other risks associated with the proposed financing lease as of the date the report is made. This report shall include:

·         A comparison between the fixed and estimated costs and the risks associated with the proposed lease and those associated with other methods of financing;

·         A statement summarizing, as may be applicable, the effective rate or rates of financing for the lease, the ability for lease payment amounts to vary, and the methods or calculations, including possible financing rate changes, that may be used to establish that variance under the lease;

·         A statement summarizing any contingent payment obligations under the lease that in his or her opinion would result in a material impact for the municipality, including lease termination provisions, equipment loss, equipment replacement options and guarantees and indemnities;

·         A summary of the assumptions applicable to any possible variations in the lease payment and contingent payment obligations; and an assessment of the overall economic benefits expected from undertaking the project and /or acquiring the equipment/materials. In assessing the overall economic benefit of a lease financing transaction, the analysis will include, if applicable, its alignment with Council priorities and strategic plans, its community impact, any leveraging of partnership funding as well as its impact on economic development and quality of life.

b)    Lists of any outstanding financing leases including the following details:

·         Estimates of the proportion of financing leases to the City’s total long-term debt and provides a description of any change in that proportion since the previous year's report; and

·         A statement that in his or her opinion all financing leases were made in accordance with the lease policy and goals as outlined in this Policy or as otherwise adopted by Council.

c)            A statement before passing a by-law providing for construction financing, which shall consider:

·         The fixed and estimated costs to the City;

·         Whether the costs of the proposed financing for the construction of the undertaking are lower than other methods of financing available;

·         A detailed estimate with respect to the terms of the City’s expectations of revenue generation from the undertaking, once constructed;

·         The risks to the City if the undertaking is not constructed or completed within the period of construction as estimated by Council; and

·         The financial and other risks for the City.

d)            A report detailing at least once in a fiscal year, any bond forward agreements in a fiscal year which the City has entered into.

         The report must contain the following information and documents:

·         A statement comparing the expected and actual results of using bond forward agreements during the period of the report; and

·         A statement indicating whether, in his or her opinion, all of the bond forward agreements entered during the period of the report are consistent with the bond forward policies and goals in this Policy or as otherwise adopted by Council.

e)               A report detailing at least once in a fiscal year, any subsisting variable interest rate bank loan agreements and any subsisting interest rate exchange agreements applicable to them.

f)                 Lists any outstanding construction financing debentures including the following details:

·         A description of the estimated proportion of the total debentures of the municipality issued to the total long-term debt of the municipality and a description of the change, if any, in that estimated proportion since the previous year's report;

·         A statement as to whether, in his or her opinion, all debentures issued were made in accordance with this construction financing policy and goals outlined in this Policy or as otherwise adopted by Council;

·         A record of the date of the repayment of each instalment of principal, interest or both principal and interest made during the period of construction of the undertaking for which the debentures were issued;

·         A statement of the outstanding instalments of principal, interest or both principal and interest repayable during the currency of the debentures issued that will be due and payable in each year; and

g)               Details of all outstanding hedging instruments related to foreign exchange, interest and swap agreements, describing type, amount and purpose; and

h)               A report detailing, at least once in a fiscal year, any outstanding variable interest rate debentures or foreign currency debenture and any subsisting interest rate or foreign currency exchange agreements applicable to them.

RESPONSIBILITIES

Officers and staff of the City complying with this Policy shall have the necessary authority to carry out the responsibilities and duties identified therein the Policy.

In addition, the following specific responsibilities are identified:

1)      City Treasurer and/or Manager, Treasury:

·         Reviews and recommends the type and term of financing for capital projects and operating requirements;

·         Updates  the financial debt and obligation limit for the City as prescribed by the Municipal Act;

·         In consultation with the lead underwriters, approves the timing and structure of debt issues;

·         Coordinates with the City Solicitor the preparation of debt issue by-laws for Council;

·         May execute and sign documents on behalf of the City and perform all other related acts with respect to the issuance of debt securities;

·         Liaises and assists rating agencies in the evaluation of the credit worthiness of the City's debt securities;

·         Reviews and recommends to Council the financial and business aspects of any material lease agreements and transactions; and

·         Ensures all reporting requirements identified within this Policy are met.

2)      Chair of Council

The Mayor may execute and sign documents on behalf of the City with respect to the issuance of debt securities.

3)      City Clerk

The City Clerk may certify and sign documents on behalf of the City with respect to the issuance of debt securities.

 

 

REFERENCE:

Municipal Act, 2001, S.O. 2001, c. 25 Sections 405(1), 407(1), 408(3,4), 409(2)

Local Improvement Act, R.S.O. 1990, c.L.26, Section 53(2)

Tile Drainage Act, R.S.O. 1990, c.T.8, Section 2(1)

Ontario Regulation 266/02 - Financing Leases for Municipal Capital Facilities

Ontario Regulation 278/02 - Construction Financing

Ontario Regulation 276/02 – Bank Loans

Ontario Regulation 604/06 – Debt Related Financial Instruments and Financial Agreements

By-law 2006-112

 

CONTACT:

 

Manager of Treasury, Corporate Services, Financial Services Branch, Treasury  Services Division


APPENDIX 1

Prescribed Foreign Exchange Currencies

 

1.      Dollars of Australia.

2.      Yen of Japan.

3.      Francs of Switzerland.

4.      Sterling money of the United Kingdom.

5.      Dollars of the United States of America.

6.      The euro currency adopted by member states of the European Union.

O. Reg. 247/01, Sched.