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2020-037 S&P ECP Rating
Date: April 17, 2020 Report No. 2020-037 INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: S&P Global Ratings for Extendable Commercial Paper Notes. BACKGROUND: The purpose of this report is to inform the City Council of S&P’s rating for the newly adopted extendable commercial paper program. On March 30, 2020, staff participated in a rating conference call with S&P regarding the City’s extendable commercial paper program. DISCUSSION: On April 13, 2020, the City received the rating of A-1+ from S&P on our extendable commercial paper rating. The rating of A-1+ is the highest rating offered by this agency on short-term issuer credit ratings. The major reasons for the rating are: A very strong economy, with access to the broad and diverse Dallas-Fort-Worth-Arlington metropolitan statistical area, coupled with a local economy largely based in retail, manufacturing, distribution, education, and health care. A strong budgetary performance, supported by strong financial management practices and very strong reserves. And, a weak debt-and- contingent-liability position. The rating also reflects S&P’s opinion of: • A 'AA+' long-term general obligation (GO) debt rating on the city; and • The city's strong market access to take out the financing with GO bonds or sell rollover ECP notes, if needed. For your review, staff has attached the Credit Opinion report from S&P. Only one rating was needed for the extendable commercial paper program, therefore, no other short-term ratings reports are expected. ATTACHMENT: S&P’s Credit Opinion Report S&P Ratings Chart STAFF CONTACT: David Gaines, Director of Finance (940)-349-8260 David.Gaines@cityofdenton.com 500 North Akard Street Ross Tower, Suite 3200 Dallas, TX 75201 tel (214) 871-1400 reference no.: 1611982 April 10, 2020 City of Denton 215 E. McKinney Street Denton, TX 76201 Attention: Mr. Tony Puente, Jr., Director of Finance Re:US$100,000,000 Denton, Texas, Extendable Commission Paper Notes, Series A, dated: March 24, 2020, due: March 01, 2060 Dear Mr. Puente: Pursuant to your request for an S&P Global Ratings rating on the above-referenced obligations, S&P Global Ratings has assigned a rating of "A-1+" . S&P Global Ratings views the outlook for this rating as not meaningful. A copy of the rationale supporting the rating is enclosed. This letter constitutes S&P Global Ratings' permission for you to disseminate the above-assigned ratings to interested parties in accordance with applicable laws and regulations. However, permission for such dissemination (other than to professional advisors bound by appropriate confidentiality arrangements or to allow the Issuer to comply with its regulatory obligations) will become effective only after we have released the ratings on standardandpoors.com. 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You understand that S&P Global Ratings relies on you and your agents and advisors for the accuracy, timeliness and completeness of the information submitted in connection with the rating and the continued flow of material information as part of the surveillance process.Please send all information via electronic delivery to:pubfin_statelocalgovt@spglobal.com. If SEC rule 17g-5 is applicable, you may post such information on the appropriate website. For any information not available in electronic format or posted on the applicable website, Please send hard copies to: S&P Global Ratings Public Finance Department 55 Water Street New York, NY 10041-0003 The rating is subject to the Terms and Conditions, if any, attached to the Engagement Letter applicable to the rating. In the absence of such Engagement Letter and Terms and Conditions, the rating is subject to the attached Terms and Conditions. The applicable Terms and Conditions are incorporated herein by reference. 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Sincerely yours, S&P Global Ratings a division of Standard & Poor's Financial Services LLC ma PF Ratings U.S. (4/28/16)Page | 1 enclosures cc:Ms. Soyya Chumley, Financial Advisor FirstSouthWest A Division of Hilltop Securiteis PF Ratings U.S. (4/28/16)Page | 2 S&P Global Ratings Terms and Conditions Applicable To Public Finance Credit Ratings General.The credit ratings and other views of S&P Global Ratings are statements of opinion and not statements of fact.Credit ratings and other views of S&P Global Ratings are not recommendations to purchase,hold,or sell any securities and do not comment on market price,marketability,investor preference or suitability of any security.While S&P Global Ratings bases its credit ratings and other views on information provided by issuers and their agents and advisors,and other information from sources it believes to be reliable,S&P Global Ratings does not perform an audit,and undertakes no duty of due diligence or independent verification,of any information it receives.Such information and S&P Global Ratings'opinions should not be relied upon in making any investment decision.S&P Global Ratings does not act as a "fiduciary"or an investment advisor. 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No Third Party Beneficiaries.Nothing in any credit rating engagement,or a credit rating when issued,is intended or should be construed as creating any rights on behalf of any third parties,including,without limitation,any recipient of a credit rating.No person is intended as a third party beneficiary of any credit rating engagement or of a credit rating when issued. PF Ratings U.S. (4/28/16)Page | 4 Summary: Denton, Texas; CP Primary Credit Analyst: Jim Tchou, New York (1) 212-438-3821; jim.tchou@spglobal.com Secondary Contact: Andy A Hobbs, Farmers Branch + 1 (972) 367 3345; Andy.Hobbs@spglobal.com Table Of Contents Rating Action WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 13, 2020 1 Summary: Denton, Texas; CP Credit Profile US$100.0 mil Extendable Comm Paper Nts ser A dtd 03/24/2020 due 03/01/2060 Short Term Rating A-1+ New Rating Action S&P Global Ratings assigned its 'A-1+' rating to Denton, Texas' roughly $100 million series A tax-exempt and taxable extendable commercial paper (ECP) notes. The city may issue ECP notes under the master ordinance for the aggregate principal amount outstanding at any one time, not to exceed $100 million. The rating reflects our opinion of: • A 'AA+' long-term general obligation (GO) debt rating on the city; and • The city's strong market access to take out the financing with GO bonds or sell rollover ECP notes, if needed. The city will issue ECP notes to provide interim or short-term financing for various capital projects and other lawful purposes. ECP notes are special obligations of the city. The sale of ECP notes or GO refunding bonds issued to refinance ECP notes and all funds held and available for such purposes in funds and accounts created or maintained pursuant to the master ordinance and the issuing-and-paying-agent agreement, except the rebate fund, secure ECP note debt-service payments. Any funds raised by a city tax levy; a mortgage or deed of trust on any properties, whether real, personal, or mixed; or any source other than what the master ordinance specifies do not secure the ECP notes. The city cannot issue ECP notes it cannot refinance on or before the program's expiration on March 1, 2060. The master ordinance provides that Denton may, from time to time, elect to enter into a liquidity agreement with one or more liquidity provider--including any standby purchaser in the case of a standby-purchase agreement--to provide one or more liquidity facility for ECP notes. Denton has currently elected not to enter into any liquidity agreements, and ECP notes are not supported by any liquidity facility. Therefore, timely principal-and-interest payments on maturing ECP notes depends on the city's ability to sell rollover ECP notes or GO refunding bonds. Since there is no bank-liquidity support for ECP notes, investors take short-term liquidity and remarketing risks. Our ECP note rating does not address the likelihood of the city extending the notes beyond their maturity date; it only considers payment in accordance with the terms. An extension does not constitute a covenant default or breach under the master ordinance. The city will issue ECP notes with extended maturities of 270 days from their issuance date with original maturities of up to 90 days. If the city cannot take out an ECP note series with long-term debt, rollover note proceeds, or available WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 13, 2020 2 funds on the original maturity date, it will delay ECP note payments to the extended maturity date. In the master ordinance, Denton agrees to undertake its best efforts to issue refunding bonds in amounts necessary to refinance ECP notes maturing on the applicable extended maturity date and apply such refunding bond proceeds to retire such maturing ECP notes. If the city extends the ECP note's maturity date, it will pay accrued interest to the original maturity date from the issue date on the original maturity date. In addition, the ECP note will bear interest at the extended rate to the extended maturity date or the date of prior redemption from the original maturity date. No additional interest will accrue on the accrued, but unpaid, interest to the original maturity date from the issue date. Denton's general creditworthiness reflects our view of the city's: • Very strong economy, with access to the broad and diverse Dallas-Fort-Worth-Arlington metropolitan statistical area, coupled with a local economy largely based in retail, manufacturing, distribution, education, and health care; • Strong budgetary performance, supported by strong financial management practices and very strong reserves; and • Weak debt-and-contingent-liability position. We recognize COVID-19 has caused the national economy to fall into recession (For further information, please see the article, titled "A U.S. Recession Takes Hold As Fallout From The Coronavirus Spreads," published March 17, 2020, on RatingsDirect.), which we think will likely result in a near-term economic slowdown at both local and state levels. Still, we recognize the city's very strong reserves provide a meaningful hedge against near-term revenue volatility, allowing it to enter the recession from a position of strength. We expect near-term finances will likely remain stable, supported by very strong financial management and in-line with similar-rated peers; our opinion, however, could change if the current economic slowdown were longer than expected. (For additional information on the long-term GO rating on Denton, please see the analysis, published May 20, 2019.) Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 13, 2020 3 Summary: Denton, Texas; CP WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 13, 2020 4 STANDARD & POOR’S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial Services LLC. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. 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