| AFN's debt load is approximately $14.0 million and is projected to remain
in that neighborhood for the next five years as revenues continue to increase
and soon become greater than operating costs. Debt service on existing loans
outstrips any operating income and result in additional internal borrowings
beyond the principle amount paid to banks.
Discussions with bond counsel and financial advisors have identified that
the city could continue the current practice of borrowing internally, paying
it back the next year and re-borrowing the needed amount for the ensuing
year. However, projects show the future need for internal borrowing eventually
exceeding $9.0 million and staff is concerned that there will not be enough
funds available during the time frame it may be needed.
Instead of the status quo, discussions considered revenue bonds, general
obligation bonds, additional bank loans, taxes and/or subsidies to replace
part or all of the existing debt or to meet annual debt service. Each alternative
has many issues but the most promising is a "taxable" revenue bond issue
restructuring all internal and external loans.
The reasoning behind revenue bonds (especially ones that are not tax exempt
per the IRS Code) are as follows:
| 001. |
The intent remains that debt service will be paid by revenues. |
| 002. |
Revenue bonds normally have a 20 year life and that better matches the
near future cash flow projections. |
| 003. |
Taxable status gives the city maximum flexibility for construction and
operations financing. |
| 004. |
Covenants can be constructed pledging AFN and Electric Fund revenues
first before looking to other city resources. |
| 005. |
The market is still relatively good for this type of issue. |
Additionally, a refinancing of the internal debt will restore other funds'
balances reducing confusion on the total budget and mechanics of borrowing
internally as well. It should be remembered that internal borrowing could
be less attractive in the near future if interest rates rise and the opportunity
for restructuring passes the city by.
Difficult aspects are not knowing the interest rate until bid opening, issuance
costs and fees may exceed $400,000 and bond covenants will require a coverage
ratio of net revenues for Electric and AFN to exceed annual debt service
by approximately 1.30 times.
Bond covenants include coverage calculations to provide assurance to the
investor that the city will take proactive steps over the life of the loan
to generate enough revenues to make debt payments. The usual approach is
to compare net revenues (loosely defined as operating revenues minus operating
expenses) to the amount of debt service in the same year. Covenants require
the agency to take action if the ratio does not meet or exceed the required
ratio (example: a 1.30 requirement calls for net revenues to be $1,300,000
if debt service that year is $1,000,000). In the early years of the loan
this is obtainable but there is not a great excess above this required amount.
The estimated coverage is in the 1.64 to 1.90 range and it is projected to
exceed 2.00 after 6 years with what we can calculate today.
The challenges in restructuring all debt include getting to the market and
being well received by the financial community. AFN's success in acquiring
about half of all cable television customers in Ashland (37% of residential
passings) and surpassing the competition for cable-modem customers (40% of
residential passings) will help but the financial community will look to
the city commitment to guarantee revenues that will be adjusted to meet or
exceed bond debt service requirements, including subsidies if necessary.
Staff will attempt to structure an offering that remains attractive to investors
and gives the city all the flexibility it needs to move ahead with AFN and
meet or exceed debt service over the life of the financing. |
