Yuma stands to save $72 million if the city buys back revenue bonds that it previously issued.
Rates have increased and prices have decreased since the city priced its bonds in February 2021. This means the bonds are currently trading at lower prices than when they were originally sold. The city can now buy its bonds back at a lower price than they were originally sold.
Representatives from Stifel, an investment bank and financial services company, attended the council meeting on Sept. 4 to explain the opportunity.
As long-term investments mature, the city’s Finance Department works to repurpose the cash earned into other long-term investments.
However, as Finance Director Doug Allen noted, “sometimes, reducing long-term debt can be more advantageous than renewing the investment.”
In 2021, Stifel Financial assisted the city in issuing bonds to refinance its public safety pension shortfall with an all-in borrowing cost of 2.381%.
Since then, the 10-year U.S. Treasury interest rate has risen from 1.34% to 4.26% and the Dow Jones Industrial Average Index rose from $31,494 to $39,150 as of June 21.
This led to an expected savings of 49%, or $72 million of value, for Yuma.
“You guys have absolutely hit it out of the park in terms of your borrowing costs as well as your investment returns, that you’ve received an annualized return of 7.63% so far, program to date,” said Mark Reader, managing director of Stifel. “The borrowing rates today have gone up, which means you hit the market at the right time, and your investments have done really well. Kudos to the finance team for acting.”
As rates have increased, investors who hold those bonds are now more willing to sell them back at a discount because they’ve taken a loss. As market interest rates increase, the value of their bonds decreases.
Stifel expects that some of these investors might agree to sell their bonds back to the city at $0.80 or $0.90 on the dollar. This is a time-sensitive proposition, however, so Stifel noted that this is a window for the city to realize extra value.
The council took no action on Sept. 4, but if the city chooses to move forward with buying back the bonds, pricing levels would be put into place for investors to offer to sell the city back its bonds. The city would have the right, but not the obligation, to choose the best ones.
There is no guarantee that any bond holders would consent to selling the city back its bonds at their own loss.
Also, it’s possible that if enough holders want to sell their bonds, the city can make them compete, which would be the best case for the city.
If the city decides to pursue the buy-back program this year, there are two savings scenarios that officials can choose, one that benefits the city upfront and one that benefits the city in the latter half of the 2030s.
To begin the process, the city would incur a $5,000 non-refundable fee, but all other fees would be payable only in the instance that the city completes a tender. Stifel is working with the city as an at-risk partner, meaning that Stifel doesn’t get paid if a transaction isn’t completed.
Council members expressed interest in moving forward with this program.
“This intrigues me and I definitely would be interested in us continuing the conversation for such a minimal upfront cost as $5,000,” Deputy Mayor Chris Morris said.
Mayor Doug Nicholls also expressed interest in saving money rather than spending it and thanked Reader for pursuing this project at his own risk.
Nicholls then asked Allen whether the city has the recommended $10 million to commit to this project.
“As the investment pool matures, we do have that money coming in,” Allen said. “We had some long-term investments as well that were invested at 1% for 5 years, so as that’s coming in, we’re looking to get that redeployed rather quickly.”
This program is very time-sensitive depending on the market, which can be volatile around election time, so the city hopes to pursue the necessary legislation at upcoming meetings. According to Reader, the city could get offers in as little as three weeks after the council gives its authorization.
