Dauphin County commissioners unanimously passed Resolution #22-2014 and Ordinance #2-2014 during Wednesday's commissioner meeting.

The vote will allow the county to enter into SWAP agreements related the 2013 Series B Bonds that the county guaranteed as part of the Harrisburg Strong Plan

Jay Wenger, Susquehanna Group Advisors; Lou Verdelli, RBC and Donna Kreiser and Tim Horstmann, McNees Wallace 1. Resolution #22 2014 Swap Council (***A Vote Is Requested 7/9/14***)

2. Dauphin County/2014 Swap

3. Ordinance #2 2014

(***A Vote Is Requested 7/9/14***)

NOTICE IS HEREBY GIVEN that the Board of County Commissioners (the "Board") of the County of Dauphin, Pennsylvania (the "County") at its public meeting scheduled for Wednesday, July 9, 2014, at 10:00 A.M., prevailing local time, at the Commissioners' Hearing Room, 4th Floor, Dauphin County Administration Building, 2 South Second Street, Harrisburg, Pennsylvania, will, in accordance with the provisions of the Pennsylvania Local Government Unit Debt Act, 53 Pa. C.S. 8001 et seq., consider the adoption of an interest rate management plan (the "Plan") and the authorization of the award of an interest rate management agreement or agreements (the "Agreement"), each such Plan and Agreement being with respect to the outstanding Lancaster County Solid Waste Management Authority Guaranteed Authority Bonds (Dauphin County Guaranty), Series B of 2013 (the "Swapped Bonds"), and at such meeting, or in the alternative at a meeting of the County Commissioners held not less than three (3) nor more than thirty (30) days from the date of advertisement of this notice, the County will consider the enactment of an Ordinance, the contents of which are summarized herewith:

Section 1 ratifies and confirms the appointment of Susquehanna Group Advisors, Inc. (the "Financial Advisor") as financial advisor to the County and as its qualified independent representative in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"), approves the form and content of the Plan as prepared and presented to the Board by the Financial Advisor, describes that the Board has determined that it is in the best financial interest of the County to enter into the Agreement with respect to the Swapped Bonds, and describes the nature of the Agreement to be entered into in accordance with the Plan.

Section 2 approves the Agreement in the form presented to the Board and authorizes the award of the Agreement to the firm named therein, submitting at private sale by negotiation such financial terms and conditions which in the opinion of the Financial Advisor are fair and reasonable.

Section 3 sets forth that the method of award of the Agreement by private sale by negotiation is in the best financial interest of the County. Section 4 indicates that the County will receive a written final market pricing letter from the Financial Advisor.

Section 5 sets forth the covenants of the County with respect to the payments to be made under the Agreement, including the pledge of the County's full faith, credit and taxing power for the payment of the periodic scheduled payments due under the Agreement.

Section 6 provides that the maximum payment obligations in the ordinances authorizing the issuance of the Swapped Bonds are amended to insert a maximum interest rate for calculating net payments to the County under the Swap, in addition to the fixed rates specified for the maturities of the Swapped Bonds.

Section 7 authorizes the Chairman or Vice Chairman of the Board or the Chief Clerk to file required proceedings with the Department of Community and Economic Development. Section 8 authorizes the taking of action by the County to comply with the requirements of Dodd-Frank in connection with the Agreement.

Section 9 provides an acknowledgment by the County that the Swap Counterparty shall only transact within the safe harbors provided by the Commodity Futures Trading Commission Business Conduct Standards.

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Published April 14, 2014.

John Hewlett, of Susquehanna Group Advisors, presents information on a what he defines as a Fixed Receiver Swaption Opportunity.

The proposed swaption would be related to the counties LCSWMA Guaranteed Authority Bonds, Series B of 2013, the principle amount of the bonds are $24 million with an obligation of the county to pay a fixed rate of 4.00%

The terms call for an Upfront Payment to the county of $1,750,000 depending on final structure and market conditions on execution date.

Video. Current Market Opportunity.

PDF. Fixed Receiver Swaption Opportunity.

ARCHIVE VIDEO from Senate Local Government Committee discussing several bills to ban or restrict the use of Swaps published September 9, 2012.

Several testifiers agreed upon the elimination of up-front payments for entering into interest rate swap transactions. Lucien Calhoun, President of Calhoun Baker, Inc. utilized the term “train-wrecks” to describe swap arrangements where the initiating party receives up-front payments for entering into swap agreements. “If you wanted to eliminate 95% of the problems, deny the ability to take money up-front, they’re abusive and they should be stopped,” said Calhoun.

Video Lucien Calhoun. Delaware Valley Regional Finance Authority currently has 1.7 billion dollars notional amount of SWAP transactions outstanding.

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The following information was provided to the commissioners by Susquehanna Group Advisors.

The County’s total non‐electoral debt outstanding is currently $108,552,723, all of which is currently outstanding at a fixed interest rate.

• The County currently has two outstanding swap agreements:

1.) 2015 Swap: $20,330,000 Notional / Effective May 15, 2015 / County Pays 2.252% / Receives 70% 3mo LIBOR;

2.) 2016 Swap: $14,405,000 Notional / Effective May 15, 2016 / County Pays 2.403% / Receives 70% 3mo LIBOR.

• The County’s total lease rental debt outstanding is currently $233,823,283, of which $165,625,503 is deemed self‐ liquidating.

• One of the lease rental debt issues that is not self‐liquidating is the LCSWMA Guaranteed Authority Bonds, Series B of 2013 (the “2013B Bonds”) in the principal amount of $24,000,000.

‐ The fixed rate on the 2013B Bonds is 5.00%. The County is obligated to pay 4.00%.

‐ The maturity date of the 2013B Bonds is December 15, 2033, at which time the entire principal amount is due.

• In connection with the 2013B Bonds, the County has the opportunity to execute a fixed receiver swaption in order to:

1.) Potentially convert its fixed rate obligation to a floating rate; and

2.) Receive an upfront cash payment.

By executing a fixed receiver swaption, the County would potentially convert its fixed rate obligation under the 2013B Bonds to a floating rate (on a future date) by selling an option to a swap counterparty (for the right to commence swap payments) in exchange for a cash payment today.

• Terms:

‐ Exercise (Effective) Date: April 15, [2017] or [2018] (European‐style option)

‐ County Receives: Fixed (Strike) Rate of [4.00%] (only if exercised, commencing on the exercise date)

‐ County Pays: Floating Rate [3‐month LIBOR] (only if exercised, commencing on the exercise date)

‐ Upfront Payment: [>$1,750,000] depending on final structure and market conditions on execution date.

* If exercised by the counterparty on the exercise date, the exchange of swap payments commences. If not exercised, the County keeps the upfront payment and no additional payments are exchanged.

• The proposed floating swap rate [3‐Month LIBOR] is currently 0.236%.

‐ 10‐year average = 2.042% ‐ 10‐year maximum = 5.725%

‐ 20‐year average = 3.301% ‐ 20‐year maximum = 6.851%

• Key risks include:

1.) Interest Rate Risk

2.) Termination Risk

3.) Counterparty Risk

4.) Event Risk

• The County previously executed three (3) fixed receiver swaptions in 2007 with a combined notional amount of $40,055,000 and a combined upfront payment to the County of $1,001,000. The swaptions expired in 2012 without being exercised, at which point the County was released from all future obligations. 

 

FIXED RECEIVER SWAPTION (if exercised)*

Upfront Payment = >$1,750,000**

* The Counterparty would have the right to exercise the swaption (commencing swap payments) only on April 15, [2017] or [2018]. **

Estimated. The County keeps the upfront payment regardless of whether or not the swaption is exercised.

NET INTEREST RATE ON 2013B BONDS:

Before Exercise Date = 4.00%

After Exercise Date (if exercised) = [3‐Month LIBOR]

After Exercise Date (if not exercised) = 4.00%

Photo/Natalie Cake

Updated to include archive video and additional text.