BACKGROUND
In accordance with the City of Roseville Swap Policy, a written report detailing the status of all interest rate swap agreements entered into by the City is required to be provided to the City Council on an annual basis.
Starting in 2002, the Roseville Electric Department (Electric) began to diversity its debt portfolio with the use of interest rate swaps. The purpose of these swaps was to reduce debt service cost over fixed rate debt while limiting the unpredictability of variable rate debt. Swaps reduce debt service by taking on additional risks (e.g. basis risk, liquidity renewal risk, and counterparty risk). These instruments are not done for speculative reasons.
The City makes fixed interest payments to Morgan Stanley and Bank of America in exchange for floating rate interest payments based on the notional amount of the 2008A Electric bonds. In 2012, the 2008A Electric bonds were refunded by the 2012 Electric bonds and the 2012 Electric bonds were purchased by U.S. Bank through a direct purchase agreement. The direct purchase option removed the liquidity banking trading risk, remarketing risk, and any LIBOR manipulation. In May 2016 U.S. Bank renewed the terms of the direct purchase agreement for another 3.5 year term based on 70.5% of one-month LIBOR plus 55 basis points (bps). The LIBOR payments will net to zero leaving Roseville Electric with a low swap rate payment plus 55 bps. The chart below illustrates the swaps and direct purchase agreement.
The swaps have saved the City over $10.9 million in debt service payments when compared to conventional fixed rate arrangements. The table below illustrates the combined debt service of the 2008A Electric interest rate swaps and the 2012 Elect direct purchase payments. The swaps have helped Electric control their debt service payments and have generally performed as expected.
