Bylaws    Item #   9. b.            
Regular Council Meeting Agenda
Meeting Date: 06/10/2019  
Title: C-1081-19 - All Three Readings - Capital Borrowing Amendment Bylaw - Pungur-Buick
Department: Corporate Services
This topic relates to all three of the City’s strategic vision elements contained in Council’s Strategic Plan

Request for Decision Summary
This proposed bylaw amends a specific clause in three borrowing bylaws that allows the City to move beyond interest-only financing to mature project financing as contemplated under the original credit facility agreements.    

Proposed Motion
That first reading be given to Bylaw C-1081-19 - Capital Borrowing Amendment Bylaw.

That second reading be given to Bylaw C-1081-19 - Capital Borrowing Amendment Bylaw.
That unanimous consent be given to consider third reading of Bylaw C-1081-19 - Capital Borrowing Amendment Bylaw.
That third reading be given to Bylaw C-1081-19 - Capital Borrowing Amendment Bylaw.
In 2016 and 2017, the City entered into a new form of financing through the Canadian Imperial Bank of Commerce (CIBC).  The City passed three borrowing bylaws and signed two credit facility agreements.  The arrangement allowed the City to undertake interest-only financing during the construction phase of the projects and then undertake more permanent borrowing after the construction was complete.  The arrangement also allowed for early repayment flexibility in the event that developer revenues came in sooner than expected or revenues on the RCMP facility leased-portion could be shifted to debt repayment.  The City negotiated these terms with CIBC in contrast to a regular Alberta Capital Finance Authority debenture where the municipality would be required to take out a debenture upon fund advancement and then be locked into a long term repayment structure for 15 - 20 years. 

The credit facility agreements in place for these loans contemplate the interest-only phase at the outset and then entering into swap agreements once a loan payment structure is required.  This would be an interest rate swap agreement that turns interest on a variable rate loan into a fixed cost.   The interest rate swap would allow for flexibility but would also mitigate interest rate risk over the life of the loan.  When CIBC was approached to move forward with the next phase of financing, they required the City to have legal counsel review and provide a legal opinion on the necessary swap agreements.  Reynolds, Mirth, Richards, and Farmer (RMRF) had been involved in the review of original agreements and were familiar with the intent of the financing arrangements.  When RMRF reviewed these documents and the City's borrowing bylaws, they indicated that clause 3.1 (a) in all three bylaws would require amendment before legal counsel could sign off on the City entering into swap agreements.  The following narrative explains the issue with clause 3.1 (a)

The borrowing bylaw details are as follows:
Bylaw # Project Allowed Amount Final Reading
C-928-15 Arterial Roads (Pioneer Road, Campsite Road, other arterial roads) $25,000,000 05/09/16
C-938-15 Water Reservoir $5,000,000 04/11/16
C-963-16 RCMP Facility $18,000,000 06/26/17

These bylaws allowed the City to enter into debentures up to the borrowing amounts shown.  These borrowing bylaws referred to the credit facility agreements signed on January 7, 2016 (Roads and Reservoir) and November 4, 2016 (RCMP Facility).  The original 3.1 clause in each bylaw allowed for borrowing costs of up to 30%.  This was more than adequate to cover either the interest-only phase or the fixed loan phase as shown in the following proviso contained in each bylaw:
"provided that, pursuant to Section 251(2)(b) of the Municipal Government Act, neither the interest rate in respect of such direct loans nor the yield in respect of such bankers' acceptances (after giving effect to applicable stamping fees payable in respect thereof) shall in any event exceed a maximum rate of 30% per annum."

However, Clause 3.1(a) inadvertently referred to the very specific rate of prime interest plus 0% applicable to the interest-only phase.  This rate however is too limiting for the fixed-rate phase of borrowing.  

This clause in each bylaw reads as follows:

" interest on such XXXXXXXXXXXX Loan, or on so much thereof as remains from time to time unpaid, at the Bank's prime interest rate per annum in effect from time to time plus 0.000% per annum, as well after as before maturity, default and judgment, with interest on overdue interest at the same rate as the principal."

Now that the construction phase is over and the City needs to convert the interest-only financing to a swap agreement/fixed loan, the prescriptive rate clause in the bylaws does not allow for the needed flexibility that was contemplated by the original credit facility agreements.   The proposed amendment takes out the specificity of the clause 3.1 (a) in each bylaw and confirms the City's ability to enter into financing on these projects as per the original credit agreements also mentioned within the bylaws.

Amounts actually borrowed to date under these bylaws are:

Bylaw C-928-15 - Arterial Roads  $13,350,000
Bylaw C-938-15 - Reservoir  $1,100,000
Bylaw C-963-16 - RCMP Facility $8,850,000
Without this amendment, the City's interest-only phase would come to an end and a variable rate payment structure would be in place long-term.  This would subject the City to interest-rate risk.
These bylaws and credit facility agreements have been reviewed by RMRF and the proposed amendment has been drafted under legal counsel.  CIBC has also been consulted and is in agreement with the bylaw amendments.  

The three original bylaws were advertised as required in 2016 and 2017 and no petitions were received. 

As advised by legal counsel, the City is relying on section 261 of the Municipal Government Act and therefore is not required to advertise this bylaw.  Section 261 reads as follows:

"If the purpose of a proposed borrowing is to refinance, redeem or restructure the unpaid principal of one or more existing borrowings and the amount and term of the proposed borrowing do not exceed the unpaid principal of the existing borrowings and the longest remaining term of the existing borrowings, the borrowing bylaw for the proposed borrowing does not have to be advertised."
The City will be able to satisfy its original agreement with CIBC to convert the interest-only borrowing to loans with regular principal repayment.

Proposed Bylaw C-1081-19
Bylaw C-928-15
Bylaw C-938-15
Bylaw C-963-16