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5. LONG-TERM BANK LOAN AND AMENDMENTS TO DELEGATION OF AUTHORITIES
PRÊT BANCAIRE À LONG TERME ET MODIFICATIONS À LA DÉLÉGATION DES POUVOIRS
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That Council:
1. Authorize the Treasurer to enter into a loan agreement with Royal Bank of Canada for a bank loan in an amount up to $25 million with a variable interest rate and to enter into an interest rate exchange agreement to provide effectively a fixed rate of interest satisfactory to the Treasurer;
2. Delegate authority to the Debenture Committee to enact by-laws to enter into bank loan agreements and interest rate exchange agreements on similar terms to the Committee’s delegated authority to enact debenture by-laws and amend the Terms of Reference for the Debenture Committee accordingly; and
3. Amend By-law No. 2011-28 as amended, the Delegation of Authority By-law, to authorize the Treasurer to enter into bank loan agreements and interest rate exchange agreements provided that the same conditions set out in Section 15 of Schedule “A” to By-law No. 2011-28 as amended, which apply to the issue of debentures, are met.
RECOMMANDATIONS DU COMITÉ
Que le Conseil:
1. autorise la trésorière à conclure avec la Banque Royale du Canada une convention de prêt relativement à un prêt bancaire d’un montant allant jusqu’à 25 millions de dollars à un taux d’intérêt variable, ainsi qu’un accord portant sur l’échange de taux d’intérêt, dans le but d’offrir de façon efficace à la trésorière un taux d’intérêt fixe satisfaisant;
2. délégue le pouvoir au Comité des débentures afin qu’il puisse adopter des règlements visant la conclusion de conventions de prêt bancaire et d’accords portant sur l’échange de taux d’intérêt selon des conditions semblables à celles de la délégation de pouvoirs au Comité des débentures, afin que ce dernier adopte des règlements sur les débentures et modifie les clauses et conditions du Comité des débentures en conséquence;
3. modifie le Règlement municipal no 2011-28, tel que modifié, le Règlement municipal sur la délégation des pouvoirs, afin d’autoriser la trésorière à conclure des conventions de prêt bancaire et des accords portant sur l’échange de taux d’intérêt, pourvu que les mêmes conditions énoncées à l’article 15 de l’annexe A du Règlement municipal no 2011-28, tel que modifié, qui concernent l’émission de débentures, soient respectées.
DOCUMENTATION
1. City Treasurer’s report dated 25 October 2011 (ACS2011-CMR-FIN-0053).
Report to / Rapport au :
Finance and Economic Development Committee /
Comité des finances et du développement économique
and Council / et au Conseil
25 October, 2011 / le 25 octobre, 2011
Submitted by / Soumis par : Marian Simulik, City Treasurer/Trésorière municipale
Contact Person/Personne ressource : Gerry Mahoney, Manager Treasury / Gestionnaire Tresorerie
Finance Department/Service des finances
613-580-2424 ext./poste 21310, Gerry.Mahoney@ottawa.ca
______________________________________________________________________________
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SUBJECT:
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LONG-TERM BANK LOAN AND AMENDMENTS TO DELEGATION OF AUTHORITIES |
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OBJET :
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PRÊT BANCAIRE À LONG TERME ET MODIFICATIONS À LA DÉLÉGATION DES POUVOIRS |
That Finance and Economic Development Committee recommend that Council:
1. Authorize the Treasurer to enter into a loan agreement with Royal Bank of Canada for a bank loan in an amount up to $25 million with a variable interest rate and to enter into an interest rate exchange agreement to provide effectively a fixed rate of interest satisfactory to the Treasurer;
2. Delegate authority to the Debenture Committee to enact by-laws to enter into bank loan agreements and interest rate exchange agreements on similar terms to the Committee’s delegated authority to enact debenture by-laws and amend the Terms of Reference for the Debenture Committee accordingly; and
3. Amend By-law No. 2011-28 as amended, the Delegation of Authority By-law, to authorize the Treasurer to enter into bank loan agreements and interest rate exchange agreements provided that the same conditions set out in Section 15 of Schedule “A” to By-law No. 2011-28 as amended, which apply to the issue of debentures, are met.
Que le Comité des finances et du développement économique recommande au Conseil :
1. D’autoriser la trésorière à conclure avec la Banque Royale du Canada une convention de prêt relativement à un prêt bancaire d’un montant allant jusqu’à 25 millions de dollars à un taux d’intérêt variable, ainsi qu’un accord portant sur l’échange de taux d’intérêt, dans le but d’offrir de façon efficace à la trésorière un taux d’intérêt fixe satisfaisant;
2. De déléguer le pouvoir au Comité des débentures afin qu’il puisse adopter des règlements visant la conclusion de conventions de prêt bancaire et d’accords portant sur l’échange de taux d’intérêt selon des conditions semblables à celles de la délégation de pouvoirs au Comité des débentures, afin que ce dernier adopte des règlements sur les débentures et modifie les clauses et conditions du Comité des débentures en conséquence;
3. De modifier le Règlement municipal no 2011-28, tel que modifié, le Règlement municipal sur la délégation des pouvoirs, afin d’autoriser la trésorière à conclure des conventions de prêt bancaire et des accords portant sur l’échange de taux d’intérêt, pourvu que les mêmes conditions énoncées à l’article 15 de l’annexe A du Règlement municipal no 2011-28, tel que modifié, qui concernent l’émission de débentures, soient respectées.
Ontario Regulation 276/02 provides for municipalities to enter into bank loan agreements instead of issuing debentures to finance works. Where the bank loan agreement provides for a variable interest rate, municipalities may enter interest rate exchange agreements to reduce interest rate risk and provide for a fixed amount of interest. The regulation sets a limit for the total amount of variable rate bank loans which is not to exceed 15% of total outstanding debt and set minimum ratings for banks and any other entities which enter into interest rate exchange agreements with municipalities.
City Council approved the Administration of Capital Financing and Debt Policy on April 11, 2007 which provides for long-term bank loans as a source of financing and such bank loans may be used if deemed cost effective or otherwise necessary. These loans may be fixed or variable interest rate loans as determined by the Treasurer. Where variable interest rates apply, the interest rate will be fixed no later than six months after issue by means of an interest rate exchange agreement.
Council established a Debenture Committee on January 27, 2010 and delegated authority to the Debenture Committee to enact debenture by laws to authorize the issuance of debentures where the project debt authority has been approved by Council and the Treasurer has proceeded with one or more debt issues in accordance with the delegation of Authority By-law No. 2011-28 as amended.
Subsection 15 (1) of Schedule “A” of By-law 2011-28 as amended, authorizes the Treasurer to proceed with one or more debt issues at any time during the calendar year provided the actual debt charges in the calendar year are within the Council approved operating budget for that year, Council has been advised of any resulting impact on budgets in future years and the project debt authority has been previously approved by Council.
The Royal Bank of Canada (RBC) has offered to provide a bank loan to the City of up to $25 million on repayment terms over ten (10) years with a variable rate of interest and to enter into an interest rate exchange agreement to provide a fixed rate of interest.
The current interest rate environment and worldwide economic uncertainty continue to provide very attractive opportunities for the City to issue long-term financing for its capital asset debt financed program. The City’s banker, Royal Bank of Canada has approached the City with an offer to provide a long-term bank loan in an amount of $25 million payable monthly over 10 years with interest on a floating or variable rate basis and to enter into an interest rate exchange agreement (swap agreement) to provide an effective fixed rate of interest for the full term of the loan. Similar to the City’s debenture issues in the capital markets where the final interest rate on a debenture issue is only set at the time the issue is launched, the fixed rate on the proposed bank loan will be set at the time the loan is funded and the interest rate exchange agreement is booked.
Based on interest rates prevailing at this time RBC has indicated that the all-in equivalent fixed rate for the proposed bank loan would be 2.58%. This rate compares favourably with the City’s most recent public market debenture issue on 10 year terms which was issued at 2.857% and the current rate posted by Infrastructure Ontario of 2.98% for a 10 year amortizing loan. However interest rates are subject to change and there is no certainty that the conditions in the financial markets which create this opportunity will remain for long periods of time. Therefore it is recommended that the same authority which Council has delegated to the Treasurer to issue debentures be provided for the Treasurer to enter into bank loans and interest rate exchange agreements in order to respond quickly when such financing opportunities arise. Similarly it is recommended that the Terms of Reference for the Debenture Committee be amended to delegate authority to the Debenture Committee to enact by-laws to enter into bank loan agreements and interest rate exchange agreements.
Ontario Regulation 276/02 which sets the regulations for Ontario municipalities to enter into bank loan agreements and interest rate exchange agreements sets a limit for such loans which is not to exceed 15% of the total outstanding principal of indebtedness of the municipality including the proposed loan. The City has previously entered into a bank loan agreement and an interest rate exchange agreement with Canadian Imperial Bank of Commerce to finance the expansion and refurbishment of the Ray Friel recreation centre. The principal amount outstanding under this loan is approximately $10.8 million. The principal amount currently outstanding for bank loans including the proposed RBC loan represents 2.7% of the total outstanding debt including the proposed bank loan, which is well within the Provincial limit.
RBC secured debentures are currently rated Aa1 by Moody’s, AA- by Standard and Poor’s and AA by DBRS which exceed the minimum ratings set by the Province in Ontario Regulation 276/02 as amended for banks and other organizations which enter into interest rate exchange agreements.
There are no rural implications as a result of this report.
The public consultation process is not applicable.
Comments by the Ward Councillor(s)
Not applicable.
LEGAL IMPLICATIONS
There are no legal impediments to approving the recommendations contained in this report. The amendments to the Municipal Act, 2001 made in 2007 have expanded the ability to delegate legislative functions to a body having members of whom 50% are members of Council, individuals appointed by Council or a combination thereof. Council may place conditions on such delegation. In this instance, the proposed conditions are the same as those placed on the authority to enact debenture by-laws by the Debenture Committee. With respect to the loan agreement, Section 401 of the Municipal Act, 2001 provides that a municipality may incur debt by borrowing money and Ontario Regulation 276/02 as amended regulates bank loans and bank loan agreements.
The proposed bank loan would be within the limits set by Ontario Regulation 276/02 as amended, and is considered acceptable.
FINANCIAL IMPLICATIONS
The proposed bank loan does not involve any new debenture authority but provides the financing authorized by Council at the time the various capital works were approved.
The proposed bank loan will not impact the 2012 Tax Supported Budget to be tabled at City Council on October 26, 2011 since the projects to be financed from the proceeds of the proposed bank loan are financed by water and wastewater rate supported debt. The debt servicing for the bank loan will be included in the 2012 Rate Supported Budget which is scheduled to be considered in January and February 2012.
Approving the recommendations to delegate authority to the Treasurer and to the Debenture Committee will provide more flexibility in issuing debt without diminishing the guidelines provided in the Fiscal Framework, the Debt and Financing Policy approved by Council and the Delegation of Authority By-law 2011-28 authorizing the City Treasurer to issue debt.
Accessibility Impacts
Not applicable.
Environmental Implications
Not applicable.
Technology Implications
Not applicable.
City Strategic Plan
There are no implications to the Strategic Plan in implementing the recommendations contained in this report.
There is no supporting documentation.
If the recommendations are approved, the City Clerk and Solicitor will prepare a by-law(s) authorizing amendments to the delegation of authority and to amend the Terms of Reference for the Debenture Committee, as described in this report for enactment at the next available Council meeting.
If approved, the Treasurer will proceed to finalize the terms and conditions of the bank loan and interest rate exchange agreement satisfactory to the Treasurer.