Montgomery Township last month has increased its indebtedness by $8,745,000 through the sale of bonds that will be applied to the construction of a recreation community center and the refunding of a $5.5 million bond from 2012.
Finance Director Shannon Drosnock said the increase of indebtedness of Montgomery Township could not exceed $10 million through a 2013 bond offering.
"Proceeds of this bond offering will be used for two principal purposes: finance certain capital improvement projets in the township, including the design, construction and equipping of a recreation community center, and to refund a portion of the township's general obligation note series 2012," she said.
That 2012 general obligation bond totaled $5.5 million, of which $1,914,366.46 remains outstanding.
The new debt is expected to yield an annual debt service payment of between $475,000 and $525,000, according to Drosnock. The new loan will reduce the current interest-only payment of $125,000 to $60,000 on the 2012 open space loan, "thus allowing the total debt service payment to be funded by current year revenues and existing fund balance with no additional funding needed for life of the loan," according to Drosnock.
On Feb. 25, the township went to market on the $8.7 million bond via its underwriter RBC Capital Markets.
James Gray, vice president of the municipal bond investment banking firm, said Montgomery Township's financial strength, evidenced by its new AA+ rating and favorable market conditions, provided a successful sale.
"At this point in time, 98 percent of the time rates are higher than they were today (Feb. 25) over the history of the bond market," Gray said. "Your timing and diligence financially in management of this made it a success."
Brian Bradley, vice president of RBC Capital Markets, said the firm priced and sold $8,745,000 on behalf of the township to investors on Feb. 25. The paying agent was U.S. Bank National Association. The closing date is March 28, 2013.
Bradley said the principal is due on the bond issue on June 1, 2013, with interest payments due semi-annually on June 1 and September 1.
The term of the bond issue is 30 years, bringing the bond to close in 2043.
"The arbitrage yield on the financing is 2.59 percent. Municipal bonds are sold with the right of the issuer to redeem those bonds prior to maturity, similar to what you have in mortgage," Bradley said. "You can prepay and refinance with another rmortgage, in this case municipal bonds."
If Montgomery Township refinances the bonds, the cost of capital on the transaction is 2.59 percent. If the township opts to keep the bonds to maturity, then the transaction is fixed rate with no variable at 3.44 percent.
The call provision is June 1, 2018, he said.
Bradley said the first annual principal payment would be $200,000 on June 1, 2014. The final principal payment would be in 2043 in the amount of $470,000.
Interest is $187,000 in 2013, and $276,000 in 2014, he said.
"Through and including 2043, (interest) decreases to $9,400, obviously because the bonds have matured," he said.
The total debt service payment is $187,000 in 2013, and the average in 2014 through 2043 is $478,300, he said.
"The township currently has sufficient resources in place to service both this debt and the existing debt," he said.
The debt payment in 2013, he said, is $478,000. In 2014, $586,000, and in 2015, $693,000.
"It drops to $479,000 in 2016 through 2043," Bradley said.
In 2043, the estimated fund balance in the township will be $1,014,000, he said.
Bradley informed supervisors that the township can call the bonds before June 1, 2018, but there will be escrow to and including that date.