TITLE
Recommendation to adopt resolution approving the issuance and/or incurrence, from time to time, by the Board of Harbor Commissioners, on behalf of the City of Long Beach, of Subordinate Harbor Revenue Revolving Obligations secured by Subordinate Harbor Department Revenues, in a principal amount not to exceed $250,000,000 outstanding at any one time, to finance and refinance certain capital improvements and otherwise to be used as permitted by applicable law. (Districts 1,7)
DISCUSSION
The Board of Harbor Commissioners (Board), acting on behalf of the City of Long Beach (City), proposes to renew the Harbor Department’s short-term borrowing program and increase the borrowing limit under the program from a not-to-exceed aggregate principal amount outstanding of $200,000,000, to a not-to-exceed aggregate principal amount outstanding of $250,000,000. The Harbor Department originally established the short-term borrowing program in 2013. The Harbor Department will continue to utilize the short-term borrowing program for the purposes of financing and refinancing certain capital improvements at the Port of Long Beach (Port) and certain other purposes of the Harbor Department as permitted by applicable law.
MUFG Union Bank, N.A. (Union Bank) currently provides the Harbor Department with a $200 million line of credit, in the form of City of Long Beach, California Subordinate Harbor Revenue Revolving Obligations, Series B (Tax-Exempt) and Series C (Taxable) (Series B/C Obligations). The short-term borrowing program was established to allow the Harbor Department to quickly access funds on an interim/short-term basis to pay for capital projects. The short-term borrowing program was originally approved by the Board on July 15, 2013, and reapproved by the Board on June 30, 2016 and April 22, 2019. It is scheduled to expire on May 13, 2022.
The Harbor Department has an approximately $2.28 billion capital plan through fiscal year 2032; however, capital activities are expected to increase with borrowings spanning several years. The short-term borrowing program allows the Harbor Department to periodically borrow on a low cost, short-term basis until sufficient size is accumulated to efficiently convert the borrowings to permanent long-term debt. The benefits of such a strategy are to delay the incurrence of higher cost, fixed rate debt service and avoid substantial amounts of idle cash invested at low rates.
The Harbor Department staff finds it prudent to maintain the revolving line of credit because (1) variable-rate debt lowers the overall cost of borrowing due to variable interest rates typically being lower than long-term interest rates; (2) the revolving line of credit offers the flexibility of short-term borrowing and paying off debt as the needs fluctuate; and (3) the revolving line of credit can be converted to long-term debt if the financing is needed for an extended period of time.
The Harbor Department staff has determined that it is in the best interest of the Harbor Department to increase the borrowing limit under the line of credit to $250 million. The $50 million increase will provide additional flexibility in bridging the Harbor Department’s short-term financing needs.
The approaching May 2022 expiration of the revolving line of credit created the opportunity to negotiate with the Bank to extend the term, increase the borrowing limit to $250 million, and lower the cost of utilizing the financing vehicle. The written offer from Union Bank included a commitment fee reduction of 5 basis points (0.05 percent) per year, a tax-exempt interest rate reduction of 12.5 basis points (0.125 percent) per year, and a taxable interest rate reduction of 36 basis points (0.36 percent) per year.
Under the current line of credit, the tax-exempt and taxable interest rates paid by the Harbor Department are based on a percentage of the one-month London Interbank Offered Rate (LIBOR). With the end of the publication of LIBOR in the near future, the tax-exempt and taxable interest rates to be paid by the Harbor Department for borrowings under the amended Union Bank Line of Credit will be based on a percentage of the Secured Overnight Financing Rate (SOFR), plus an adjustment of 0.11448 percent (the current basis point spread adjustment determined by the Alternative Reference Rates Committee for converting loans from LIBOR to SOFR). Union Bank will make the New Union Bank Line of Credit available to the Harbor Department for three years (unless terminated earlier or extended pursuant to their terms).
The Board is expected to determine that it is in the best interest of the Harbor Department to continue to maintain a short-term borrowing program (and increase the borrowing limit by $50 million) in order to provide the Harbor Department with the flexibility to issue and/or incur short-term Subordinate Harbor Revenue Revolving Obligations to provide funds to finance and refinance the acquisition, construction, rehabilitation and equipping of facilities at, and improvements to, the Port. It is anticipated that some, or all, of the Series B/C Obligations may be refinanced in the future, subject to approval by the City Council, with long-term Harbor revenue bonds.
The short-term borrowing program will consist of the issuance and/or incurrence, from time to time, by the Harbor Department of its Subordinate Harbor Revenue Revolving Obligations Series B/C and draws under a revolving line of credit that will be provided by Union Bank. Union Bank also provides the current revolving line of credit. The Board is expected to approve a renewal/extension of the Union Bank revolving line of credit for a three-year term. The Subordinate Harbor Revenue Revolving Obligations Series B/C (and the related obligations of the Harbor Department under the Union Bank revolving credit agreement) shall be secured and payable from subordinate Harbor Department revenues.
This matter was reviewed by Principal Deputy City Attorney Richard Anthony, Interim City Treasurer David Nakamoto, and Financial Management Director Kevin Riper on March 18, 2022.
TIMING CONSIDERATIONS
City Council action is requested on April 5, 2022 to facilitate the renewal of the line of credit being provided by Union Bank in advance of the May 2022 expiration.
FISCAL IMPACT
The total cost of issuance including consultants and counsel fees for the renewal/extension of the New Union Bank Line of Credit is estimated to be $43,000. To maintain the New Union Bank Line of Credit, the Harbor Department will be obligated to pay an annual commitment fee. The annual cost will range from approximately $500,000 assuming only the commitment fee on the New Union Bank Line of Credit to a maximum of $1,386,000, if the line of credit is fully drawn on a taxable basis, plus interest based on SOFR. The actual annual cost will vary based on the amount drawn on the New Union Bank Line of Credit and the variable interest rates. The Subordinate Harbor Revenue Revolving Obligations, Series B (Tax-Exempt) and Series C will be special, limited obligations of the City. The Board has pledged and assigned subordinate revenues of the Harbor Department to secure the payment of the Series B/C Obligations (and the related obligations of the Harbor Department under the Union Bank revolving credit agreement). Only Harbor Department revenues are pledged for the repayment of this debt. This recommendation has no staffing impact beyond the normal budgeted scope of duties and is consistent with existing City Council priorities. There is no local job impact associated with this recommendation.
SUGGESTED ACTION
Approve recommendation.
BODY
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Respectfully Submitted,
KEVIN RIPER
DIRECTOR OF FINANCIAL MANAGEMENT
MARIO CORDERO
EXECUTIVE DIRECTOR
PORT OF LONG BEACH
APPROVED:
THOMAS B. MODICA
CITY MANAGER