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HomeMy WebLinkAbout1997-07-08; City Council; 14256; Selection of UnderwriterAB# MTG. 7-8-97 DEPT. CM L - CITY OF CARLSBAD - AGENbA BILL TITLE: SELECTION OF UNDERWRITER CITY ATTY. RECOMMENDED ACTION: Adopt Resolution No. 9 7-5 &. directing staff to negotiate a contract for underwriting services with Dean Witter, and appropriating funds for bond issue related services. ITEM EXPLANATION: On June 3, 1997 the City Council adopted Resolution No. 97-468 authorizing staff to proceed with the refunding (refinancing) of several bond issues. The goal of this refunding effort is to reduce the cost of each issue by taking advantage of lower interest rates that now exist in the municipal bond market. Following the Council approval of the refunding plan the staff sent out 20 Requests for Qualifications (RFQ) . due back to the City on June 16.1997. RFQs were sent to each underwriting firm that has contacted the City in the past few years. The RFQs were Ten responses were received by the close of business on June 16. The firms responding included: Paine Webber Piper Jaffray Bank of America Union Bank Smith Barney The City Treasurer, Finance Director, and Financial Management Director met on June 19, to screen the proposals, and to identify those underwriters to be interviewed the week of June 23. Although each of the firms listed above has excellent credentials, and experienced and capable staffs, the review team was able to reduce the list of firms to be interviewed to five firms by including only those firms with experience in each type of bond issue to be refunded (Certificates of participation, enterprise debt, and Assessment Districts), and those who had clearly invested considerable effort into analyzing and understanding our needs. The five firms interviewed included: Stone and Youngberg Rauscher Pierce Refsnes Dean Witter Reynolds A. G. Edwards Sutro and Co. Paine Webber Piper Jaffray Stone and Youngberg Dean Witter Reynolds Sutro and Co. On June 23 and 25 staff conducted interviews, and, after considering all of the many variables, is recommending that the Council select Dean Witter to act as the City’s underwriter on this refunding project. Although each of the firms interviewed had excellent qualifications, and could easily handle this refunding assigned to this project would include Celeste Davis and John Sheldon as Co-Project Managers. The City project, the interview team was particularly impressed with the Dean Witter team. The Dean Witter team worked with Celeste Davis in 1988 on the financing of Hosp Grove, and was most impressed with her capabilities. Her prior knowledge of the City of Carlsbad, and the reasoned and considered approach she has used in analyzing the various refunding options reflected a level of care which impressed the interview team. The Dean Witter team has experience with a wide variety of types of debt instruments including each of the types of debt to be refunded. The interview team believes that this experience is important to the success of this refunding project. The interview team made several reference checks on the Dean Witter team and found, without exception, that the services provided by Celeste Davis and John Sheldon were of the highest quality. \ +-. I - PAGE 2 OF AGENDA dLL NO. JV, 256 challenge that is common to all of the issues is how best to market the issues. Because the resulting In addition, the City will be refunding several existing bond issues, each presenting its own challenges. One refundings will be of relatively short duration, that is they will extend only a few years into the future, the primary buyers for these bonds will be retail buyers. Therefore having a strong retail bond distribution system will be important to the City's ability to achieve the lowest possible interest rates. Each of the firms interviewed has the ability to capture this retail market, however the Dean Witter retail distribution system is vast, covering both southern and northern California, and the rest of the country. The interview team felt strongly that, if properly used, this distribution system could provide a marketing advantage for these issues. Dean Witter will also be able to market out issue to the institutional bond buyers should the larger players wish to compete with the retail market for our bonds. Each of the underwriters interviewed indicated that they would adjust their fees to be reasonable and within market. The interview team has not tried to favor any one proposal over another on the basis of price. If adopted by Council, the attached resolution would direct staff to negotiate a contract for services with Dean Witter which would provide confidence that the amount paid for the services related to creating and marketing these issues is fair to both parties. Staff intends to use the services of a debt financial expert to assist with negotiating this agreement. Staff is asking that Council adopt the attached resolution directing staff to negotiate a contract for underwriting services with Dean Witter FISCAL IMPACT: The fee charged by the underwriter is an important part of the cost of any refunding effort. Therefore, the City staff intends to take hvo steps to insure that the fees paid and the interest rates set for these refundings is fair. debt financing industry. The attached resolution will appropriate $30,000 from General Fund reserves to pay First, in negotiating the contract for underwriter services, staff intends to use the services of an expert in the any preliminary costs that may be related to bringing these issues to market. In addition, staff will use the services of a pricing consultant at the time the bonds are sold to establish the proper interest rate for the of the City prior to the sale of any bonds. bonds. The appropriation is requested to allow funds for these and any other services that might be required The costs for underwriting services, and all bond issue related costs will be paid from the proceeds of the refunding issues. This will include repaying to the City any amounts expended in support of the bond issue, both direct costs, and the cost of staff services. The requested appropriation of funds will provide an interim means of funding certain bond issue related costs until the refund is received from the resulting bond issue. EXHIBITS: 2. Resolution No9?-!jzq directing staff to negotiate a contract for underwriting services with Dean Witter, and appropriating funds for bond issue related services. 1. Proposal from Dean Witter dated June 16, 1997 (On File in Clerk's Office) Proposal to Serve as Underwriter to The City of Carlsbad June 16,1997 fH Dean Witter Reynolds Inc. - . - DEAN WITTER REYNOLDS INC. 101 California Street, Sari Francisco. CA 94111 Telephone (415) 693-6536 - CELESTE E. DAVIS Municipal Finance Senior Vice President - June 16, 1997 Mr. James F. Elliott Financial Management Director City of Carlsbad 1200 Carlsbad Village Drive Carlshad. CA 92008-1989 Dear Mr. Elliott: Thank you for the opportunity to respond to your Request for Proposals to serve as underwriter on proposed refundings. We are very excited about the prospect of working with you, your staff and advisors on this project, especially given our recent work on a land-based financing that is adjacent to the City of Carlshad and our familiarity with the Carlshad Municipal Water District through our extensive work with the County Water Authority. It is also important to note that during my tenure with my previous employer, I assisted in the financing of the Hosp Grove acquisition. We, at Dean Witter Reynolds Inc., feel most qualified for this assignment in that we are capable of bringing you the full complement of qualifications necessary to ensure a successful financing - specific experience, superior distribution and the highest level of capitalization among securities firms. Spc12r Experience - As detailed in my proposal, we bring a strong experience base with lease revenue bonds and certificates of participation, 1915 Act bonds and other land-based financings, closing a total of 13 transactions in the last five years. Of particular relevance is our experience with cities and districts that have similar characteristics to the City of Carlshad and its assessment districts. Complementing our land-based experience is our expertise in serving water districts. This knowledge will be critical to maintaining the Carlsbad Municipal Water District’s flexibility for financing future projects. Superior Distribution - Dean Witter is truly unsurpassed in marketing, selling and underwriting California tax-exempt debt. With the largest sales force in California (over 2,000 salespeople) and a capital base that exceeds $1 1 billion, our firm will underwrite your District’s bonds at the lowest possible interest cost. Mike Cochrane, a 22 year veteran of the California municipal market and the current Chair of the California Public Securities Association, will offer structuring advice from a sales and trading perspective and will direct the pricing of your bonds from our San Francisco regional headquarters. Mr. Jim Elliott June 16,1997 Page 2 Capitalization - Dean Witter Reynolds Inc. is an extremely well capitalized and profitable firm both at the subsidiary level and at our parent corporation level, Morgan Stanley, Dean Witter Discover & Co. What this means for the City of Carlsbad is the ability to price issues aggressively and underwrite efficiently. We pride ourselves on delivering comprehensive and extremely high quality services to our client base. From initial structuring meetings to credit presentations to pricing, closing and post-closing stages of a financing, we will play an active role in this financing. Our proposal responds directly to the questions listed in your Request for Proposals. If you have any questions or need additional information, please do not hesitate to contact me at (415) 693-6536 or fax me at (415) 693-6668. Again, thank you for your consideration and we look forward to the opportunity to work with you. Very truly yours, DEAN WITTER REYNOLDS INC. Celeste E. Davis (415) 693-6536 Senior Vice President (415) 693-6668 cc: Lisa HiIdabrand - P ? ’ ’ &of Carlsbad r SIGNATURE OF PROVIDER This document is signed by an individual authorized to bind the Provider. The Provider agrees to be bound by the provisions of this REQUEST FOR STATEMENT OF r - QUALIFICATIONS. r i r PROVIDER Dean Witter Reynolds Inc. ADDRESS: 101 California Street, 2”d Floor 7 San Francisco, California 941 1 1 PHONE: (415) 693-6318 - FAX: (415) 693-6668 r By: * 7 Signature ‘ Date r- Celeste E. Davis, Senior Vice President, Municipal Finance r i i r 1 - Dean Witter Reynolds Inc. - r I c r TABLE OF CONTENTS Municipal Finance Organization Experience with Lease Revenue Bond (COP) and Assessment District Financings Underwriting Team Capital Position Distribution Capabilities Credit Issues, Structuring, Timing & Financing Techniques Litigation Appendices List of transactions managed by the firm Resumes of finance team members Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section I Section A Section B fH Dean Witter Reynolds Inc. Ciq of Curlsbud Topic 1 - MUNICIPAL FINANCE ORGANIZATION Describe the organizational structnre of your,firm as it relates to municipal investment banking, underwriting and sales. Describe the firm’s presence and activity in the State qf Califi~rnia. Include brief sunmaries ofyour firm’s investment banking services, underwriting and trading and the.firrrr’s sales organization. Dean Witter Reynolds Inc. (“Dean Witter”) is a wholly owned broker-dealer subsidiary of Morgan Stanley, Dean Witter, Discover & Co., a diversified financial services organization which provides a broad range of nationally-marketed credit and investment products, with a primary focus on individual customers. Our credit services business consists primarily of the issuance, marketing and servicing of the Discover Card. Dean Witter & Co. was organized in 1924 in San Francisco. In 1978, Dean Witter & Co. Fouttdedin Incorporated (the successor to Dean Witter & Co.) merged with Reynolds Securities Inc., and, in Cdiforniu ulrrrnsl 1981, Dean Witter Reynolds Organization Inc. was acquired by Sears, Roebuck and Co. (‘‘Sears”). 75~,ecrrs up. Dean Witter Discover was a wholly owned subsidiary of Sears until March I, 1993, when it became a public company through an initial public offering of approximately 20% of its common stock. On June 30, 1993, Sears divested its remaining Dean Witter Discover shares through a special dividend to its shareholders. On May 28, 1997, shareholders of Dean Witter, Discover & Co. and Morgan Stanley Group Inc. approved a merger agreement between the two companies to form Morgan Stanley, Dean Witter, Discover & Co. Prior to the merger, Dean Witter, Discover & Co. employed 37,288 people throughout the 50 states, Employs 3,671 the District of Columbia and Puerto Rico, of whom 3,671 were located in offices within the State of Culifiwnirr California. Dean Witter (the broker-dealer) employs 20,312 people nationwide, of whom 3,521 are reviclerrts. based in California. Combined with the merger with Morgan Stanley, these numbers will increase substantially. Dean Wirter Reynold,~ Inc. Section 1-1 City of Curlsbad Dean Witter's Municipal Bond Department years of experience in structuring, underwriting and distributing municipal bonds and notes. In u~uk+d Dean Witter has long been recognized as a leader in the underwriting of municipal debt, with over 65 Uderwihg municipal securities, the company employs over 90 professionals in the areas of trading, underwriting, .~ecrrr;~;~~,s,fi~r over marketing, research and institutional sales, and over 9,000 account executives covering retail sales. h.i~.e~~,~. Underwriting and trading and originates from five regional underwriting desks based in San Francisco, Atlanta, Chicago, Dallas and New York. Brian Devlin in New York heads up the municipal bond department, while Jack McCutcheon is in charge of national underwriting. \I,,,,iriprl R"ll* lh.P.,,1,,,1.,'1 I,cm \\ittrr Ilcy,eld\ h,C. ["-I Rull ,.>w,,*n- R"l- Dean Witter's California Presence Ever since it was founded in California in 1924, Dean Witter has been committed to serving California and its residents, currently employing over 3,500 Californians. Dean Witter's municipal operation is one of the largest in California, consisting of a full complement of hankers, underwriters, traders and salespeople. Our company's municipal bond distribution is the largest in the state, with over 2,200 retail account executives in 74 retail brokerage offices serving over 700,000 California customers. Total California customer accounts total almost $60 billion, including $6 billion in municipal bonds. California Organization Michael Cochrane San Francisco ~ Undenvritcrs (3) __ Traders (5) ~ Sales Liaisons (3) ___ Banking (4) ~ Marketing (2) ~ Operations (2) 2,200 Account Executives California Relail Sales 74 Offices !- i r P -, City of Carlsbad Investment Banking Services As the underwriter for Carlsbad, the Dean Witter bankers will draw upon their numerous years of experience in structuring municipal issues to structure the most advantageous financing plan for the City’s debt issuance. We will take the initiative in assembling a first rate financing team comprised of the best professional in the municipal industry. Document preparation and review, including that of the official statements, will also be handled by us. Our banking team brings over 18 years of combined experience in structuring and underwriting municipal finance debt. We also bring strength and specific experience in the three disciplines that the City would require at this time: general fund certificates of participation, water revenue finances and assessment district debt. Investment Banking Our team is also complemented and supported by the Morgan Stanley banking operation of 30 investment bankers nationwide. Underwriting and Trading The Dean Witter underwriters will direct and manage the sale, pricing and underwriting efforts for the The San City’s proposed issuance of bonds. Headquartered out of New York, the City of Carlsbad‘s debt Francisco office offering would he handled by Mike Cocbrane, the California underwriter, in the San Francisco office. will direct With over 22 years of experience in municipal undenvriting, Mike is very knowledgeable about carlsbadjs California paper and has at his disposal in the San Francisco ofice a full contingent of marketing refundings. staff, liaisons and traders to find potential buyers for the City’s refunding issues. Dean Witter’s demonstrated ability to secure placement of large percentages of the issue it manages through pre- marketing efforts illustrates how effective our distribution is. In addition to our marketing resources, Dean Witter also has the largest capital base in the industry, allowing us to take on risk that most of our competitors cannot. With our significant capital base, we are in a position to aggressively price your issues and provide you with the lowest interest rates. Sales Organization Dean Witter has long been known for its outstanding retail sales force. The firm’s more than 9,000 Third largest Account Executives service over 3.2 million active retail accounts nationwide as part of the third retail sales force network not only provides tremendous distribution power, but also allows for the specific industry. largest retail securities distribution network in the nation. The size and geographical structure of this in the securities geographical targeting of customers for the placement of primary market offerings. Dean Witter’s superior retail strength is complemented by a formidable institutional sales force of 50 people covering 600 major national and regional institutional accounts throughout the US. Institutional sales M~~~ than 9,000 covers small, mid-tier and large institutional accounts, from money managers and investment advisors Account to bank trust departments, insurance companies and municipal bond funds. With the recent merger, ~~~~~~i~~~. #I] Dean Witter Reynolds Inc. Section 1-3 City of Curlsbud Dean Witter now has access to Morgan Stanley's 20 municipal-specific institutional salespeople as well, considered to be some of the strongest in the nation. Morgan Stanley's sales force combined with Dean Witter's creates one of the largest and most efficient distribution networks in the securities industry. National Distribution /l I I I I I I I 10000 9000 x000 ~~ "" ~ _" Dcan A.G. Edwards Millcr & PaineWebkr Stone & Suttc1 WitterIMorgan Schroeder Youngbcrg Stanley . P - City of Carlsbad Topic 2 -EXPERIENCE WITH LEASE REVENUE BOND (COP) AND ASSESSMENT DISTRICT FINANCINGS Describe thefirm's experience in lease revenue bond and certificate ofparticipation and assessment district financing in California and provide no more than two briefcase studies for comparable California financings managed by the lead banker assigned to the City S financing. Please provide assessment districtfinancings managed by yourfirm since 1991. Include the name ofissuer, size of in Appendix 1 a list of negotiated California lease revenue and certificate financings, and financing, pricing date, role of the firm. lead banker, and agency contact. Dean Witter Reynolds Inc. ("Dean Witter") has been one of the most active municipal market participants over the last 65 years, however its municipal banking presence has only recently been reestablished in California with the hiring of Celeste Davis and John Sheldon. While we could recount Dean Witter's significant amount of experience serving as the sole or senior manager for the negotiated issuances of lease revenue securities and certificates of participation, water revenue bonds and 1915 Act bonds prior to 1995, such issuances would only recount transactions that were not structured by our current banking team. Instead, in order to accurately reflect the experience and qualifications of Celeste and John, we have listed in Appendix 1 the transactions in which they served as the sole manager for the negotiated issuance of lease revenue securities and certificates of participation, water revenue bonds and 1915 Act bonds. In addition, due to their very similar credit structure to the City's proposed issues and their proximity to the City of Carlsbad, we have also listed the North City West School Facilities Financing Authority Mello-Roos financings for which Celeste and John have served as sole underwriter. In addition to our sole managed underwriting experience, John has also developed an expertise in enterprise-secured issues, particularly in the water and sewer area. He is the financial advisor to the addition to his responsibility for the issuance of all of the long-term and short-term debt, John is also San Diego County Water Authority of which your municipal water district is a member agency. In responsible for the development of various cash flow and debt issuance optimization models. These models are designed to optimally balance the use of debt and cash to fund capital improvements and yield the lowest possible revenue requirements to fund a program in a fiscally prudent manner. Sole Managed Underwriting Experience in Assessmen: Bonds Experienced in financings similar to Carlsbad's proposed refundings. We frequently assist the San Diego County Water Authority with its debt strategv. Dean Witter's Assessment District experience. 1)) Dean Witter Reynolds Inc. Section 2-1 Cis, of Curlsbud CASE STUDIES North City West School Facilities Financing Authority We have been the investment banker to the North City West School Facilities Financing Authority North City Wesf since 1989. This is a financing authority encompassing the school districts of Del Mar, Solana Beach is sirrtilur to and San Dieguito High School Districts. This joint powers authority was formed to ensure the Cdsshud’s funding and construction of schools in the North City West development area now known as Carmel mw.w)letlf Valley. This financing funded the construction of the new high school in La Costa. The financings dkwict we structured and underwrote are being accomplished through the formation of a community facilities “Cf;~~~c~i~lA~~~ district (CFD No. I) and an $80 million bond authorization for school construction. At the timc of thc first bond issuance in 1989, there were approximately 1,000 developed and taxable parcels in the District. Even with the slow down in development in the early 1990’s, developed parcels rose to a level in excess of 3,000 by the time of the 1995 financing. With 3,000 developed parcels and an extremely strong value to lien ratio, the District appeared to be a relatively strong credit, however it still had a slightly high concentration of ownership among several developers. Specifically, the concentration of ownership that we faced in the North City West financing, and hence, payment of special taxes was the weak link in the credit. Despite the lack of strength in ownership concentration within the District, we were successhl in obtaining bond insurance and a “AAA” rating on the financing (the underlying rating was a Baa/BBB+) through the unique structure that we developed. Concentration of ownership can be mitigated in a financing structure in a number of ways, through the case of North City West, we provided additional coverage to mitigate the concentration of the senior-subordinate structures or through debt service coverage from alternative revenue sources. In largest taxpayer through investment earnings on several related funds. In addition, we addressed the slowdown in development combined with the concentration of ownership problem with an escrow structure that utilized an annual release of bond proceeds based on certain development tests. Finally, we were able to negotiate a relatively low coverage requirement of 105% (a coverage amount sufficient to cover non-payment by the largest taxpayer) with the rating agencies and the bond insurer. Recent Dean Witter Banking Experience Water Enterprises City of Livermore (Reverse Osmosis Project) City of Torrance Municipal Water Departmcnt Monterey County Water Resources Agency Monterey Peninsula Water Management District Otay Water District Placer County Water Agency San Diego County Water Authority San Jose-Santa Clara Clean Water Financing Authority City of Cupertino- Blackberry Farm Open Space Acquisition Project Celeste Davis served as lead banker and sole underwriter on the financing for the City of Cupertino The Cip o/ which was quite similar to the City of Carlsbad’s Hosp Grove Financing. The financing for the City Cupertino is of Cupertino in the amount of $32,970.000 was a certificate of participation structure which funded sinrilur to the acquisition of a large tract of open space property. The property was acquired with the intent of Cur/.sbud’,s //o.sp conserving the property to be used for recreational and open space purposes. Like Hosp Grove, there Grow cert(fictrte.s was a great deal of community support for the acquisition with the ultimate purpose being land ~~~/Jur~ic;/Jclf;~~rr. * F - City of Curlsbud conservation. It has been our experience on the many land conservation financings which we have worked on that the market is quite receptive to these kinds of financing and as a result they price well. Although one may argue that land conservation financings may not be highly essential, unlike many certificate of participation structures, you do not have construction risk and there is virtually no abatement risk as you can never lose use and possession of open space. It is also important to note that Ms. Davis served as the supporting banker in 1988 on the Hosp Grove refunding for the City of Carlsbad. Experience in Open Space Certificate of Participation Financings I Date Issuer Issue Amount .. ::. 7@f94? - City of Oakland General @gationBonds ~ $65,000,000 M8/93, City of Cuprtino Certific&es of Participatlon 36,600,000 City of Cupextiin0 Certifksates of Particip&on 14,585,000 Ci of Cupertino Certificates of Participation 10,785,000 Wilson Park FiMncing Project 3/14/91 City of Cupertino Certificates of Pdcipation 32,970,000 Blackbeny Fm Financing Project 6/26ts9 City of Livermore Certificates of PpEticipation 4,270,000 Golf Course Financing Project 6/13/88 City of Carlsbad Refunding Catificates of Participation 8,690,000 Hosp Grove Project Variw Open Space Projects Vuriw Open Spaca Projects -r;tl24i!+? ,,$ ::~. Manorial Park Financing Project , '6 1)) Dean Witter Reynolds Inc. Section 2-3 Cify of Curlsbud Topic 3 - UNDERWRITING TEAM Identify the individual who will he the .firm's senior representative for the daily management of this transaction ~~ the individual who will attend the City2 financing team meetings. appropriate City Council meetings, and meetings with City staff.' Discuss the availahility of this individual. List the other agency executives who the City may contuct us per.sanal refirences,for the lead bunker. In Appendix 2, members ofyour team including undevwriting and marketing personnel. Please provide a list ofpublic provide hricf resumes ofyour team, their relevant experience, and briefly describe their proposed role in serving the,financing. If an interview is scheduled with yourfirm. only key members of the team should The financing team assibmed by Dean Witter to serve the City of Carlsbad is provided below. As this chart notes, Celeste Davis and John Sheldon would serve as co-project managers for this engagement, allowing the City of Carlsbad to access each individual's expertise during the entire financing process. They would also both directly interface with the City of Carlsbad's staff and its consultants, drawing from both of their respective experiences and ideas. Curlsbud Underwriting Team Professional Role Duties Celeste Davis Co-Project Manager Manageproject andperform all bankingfunctions John Sheldon Mike Cochrane Co-Project Manager Manageproject andperform all bankingfunctions Undcnvriter David Alcala Technical Assistant Direct marketing, sakr and underwriting Quantitative and analytical support Resumes are provided in Appendix 2 for Celeste and John, as well as for Mike Cochrane, the senior Dean Witter professional who will direct the pricing of the City of Carlsbad's bonds, and David Alcala, the Financial Analyst, who will provide the City with analytical support and transaction execution. Celeste and John are available to serve the City of Carlsbad and would make this assignment their hlghest priority. REFERENCES CELESTE E. DAVIS City of Santa Clara Ms. A. Kristin Machnick, Director $Finance 1500 Warburton Avenue City Hall Santa Clara, CA 95050 (408) 984-3261 JOHN I,. SHISI,DOS Otay Water District Suzanne Chambers, Head Finunce 2554 Swcctwatcr Springs Boulevard Spring Valley, CA 91977 (619) 670-2250 North City West School Facilities Financing Authority San Diego County Water Authority Howard Gad, Directar Martin Bridges, Cash Munager 309 North Rios Avenue 321 I Fifth Avenue Solana Beach, CA 92075 San Diego, CA 92 103 (619)458-1141 (619) 682-4212 City of Livermore Monica Potter, Director ofFinunce Livermore, CA 94550 1052 So. Livermore Avenue (W ." > ,. - ,. City of Santee Rene Franken, Finance Director 10601 Magnolia Avenue (619)258-4100 Santee, CA 9207 I - I266 Dean Wirrer Reynolds Inc. Section 3-1 City of Curlsbud Topic 4 - CAPITAL POSITION Provide your,firtn'.s capital position as of the date of your most recentfinancial statement and indicate your,firrn l.7 willingness to commit its capital to underwrite publicfinance transactions in diff;r,,ll mork0,c CAPITAL A firm's capital should be an important factor when selecting an underwriting firm, as it is a firm's capital base that provides the capability to take risk on behalf of a client. Morgan Stanley, Dean Witter is the best capitalized securities firm in the industry. To the extent that a firm is weakly capitalized, taking risk to underwrite an issue at the lowest obtainable interest rates will be difficult because one miscalculated underwriting can reduce that firm's capital base by a very large percentage. Total Capital Equity Capital Net Capital $11,700 $1,761 NIA 1,389 NIA 596 IExcess Net Capital 1,548 485 * Projcctcd upon mcrgcr with Morgan Stanlcy With almost $1.8 billion in capital, Dean Witter is already among the most highly capitalized firms in the municipal securities industry. With the merger with Morgan Stanley, our capital base rises to a level that is the highest in the industry. The chart above highlights Dean Witter's audited capital position as of June 30, 1996. In addition, we have included our capital base after our merger with Morgan Stanley. The following chart provides a graphical comparison of our capital compared to that of selected competitors. ,morlr~irnlllg"rerrrrllrhleor~ublirhd, Capital Comparison $ 12,000,000 $ 10,000,000 - $u,non,non Dean Wimr Reynoldc Inc. Section 4-1 r,. :. r r- T City of Carlsbad Topic 5 -DISTRIBUTION CAPABILITIES Describe your firm S institutional and/or retail bond distribution capabilities. Describe your approach to marketing the COPS or other products you propose, including any investor liaison you would recommend. The City is interested in maximizing local participation in the distribution process if this does not increase the cost of the borrowing to the City. How would you suggest c Dean Witter Reynolds Ine. offers one of the largest and most effective marketing and distribution systems for municipal bonds. We have the largest distribution network for municipal bonds and other securities in California with over 2,200 brokers spread over 74 offices throughout the State. Locally in the San Diego Area we have over 190 brokers. This distribution network for municipal bonds is supported by the Municipal Marketing Department and the Municipal Liaison Network. Municipal Marketing Department - Dean Witter’s Municipal Marketing Department was formed in 1992 and is dedicated to providing marketing information regarding municipal securities and focused approach to the pre-marketing of our client’s issues, interfacing with a variety of areas within Dean Witter such as our Municipal Research Department. In addition, it provides marketing plans and sophisticated media presentations designed to enhance the sales effort. c r i - municipal products to the firm’s sales network. The department provides a coordinated and highly c Dean Witter has one of the largest national distribution networks. Marketing Department will stir up demand for Carlsbad’s issues. ! Municipal Liaison Network - The Municipal Liaison Network serves as an information bridge Municipal Liaison between Dean Witter’s syndicate desk and the Municipal Marketing Department, Municipal Networkensures Research Department and the firm’s local branch offices. This formalized system, which includes national access to “bond coordinators” in each of the firm’s branch offices, is designed to insure that each issue in Carkbad’s issues. which Dean Witter is involved as a managing underwriter receives the full attention of the firm’s obligations and the most aggressive pricing for a new issue. c - vast distribution network. This, in turn, results in the broadest possible distribution of an issuer’s - Dean Witter has long been recognized as a leader in the underwriting of municipal debt. With the Largest retail largest retail sales organization in California, the third largest nationwide, 50 institutional sales forcein salespeople and one of the strongest capital bases in the securities industry, Carlsbad will not find a California. firm that will more aggressively market, price and fund its debt. In addition, Dean Witter can provide the local distribution within and around Carlsbad’s service area that will facilitate community participation in the placement of Carlsbad’s debt. - c In order to judge an underwriter’s overall ability to aggressively place an issuer’s debt, three areas are critical: the distribution network of the firm; the capital base of the firm; and the firm’s marketing plan to efficiently utilize its distribution network and capital. DISTRIBUTION CAPABILITIES As a book-running underwriter, one of the primary resources Dean Witter brings to its clients, Dean Witter’s aside from our proven investment banking and research capabilities, is an extensive securities distribution network. The more extensive the network, the more demand that is created for a extensive particular security, which ultimately results in the lowest interest rates to our issuer clients. In distribution network issuer’s bonds is also predicated upon our knowledge of our investor’s portfolios and investment L~~~~ ratesfor needs. In this way, Dean Witter is able to match our new issue product with our client base most efficiently, thereby resulting in the highest attainable prices (or the lowest yields) to our clients. Carlsbad. ? c - addition to creating the largest demand base possible, Dean Witter’s approach to marketing an = 7 7 Dean Witter Reynolds Inc. Section 5-1 City ofCarlsbad In the case of Carlsbad, this is an extremely important feature, as its securities will require a very strong pre-marketing effort to describe the issues to our sales force. They will in turn identify the invcstors who will provide a large portion of the demand base for this product. In fact, Carlsbad's borrowings, because of their strong credit characteristics, will enjoy very strong demand from the retail sector of the market. The Carlsbad issues will have strong credit characteristics that can he explained rather easily to the individual investor. As a result, Dean Witter would expect to sell between 50 and 60 percent of the Carlsbad issue to retail clients. RETAIL DISTRIBUTION CAPABILITIES National Reluil - Dean Witter has long been known for its outstanding retail sales force. The firm's more than 9,000 Account Executives service over 3.2 million active retail accounts nationwide as part of the third largest retail securities distribution network in the nation. The size and geographical structure of this network not only provides tremendous distribution power, but also allows for the specific geogaphical targeting of customers for the placement of primary market offerings. of any firm in the securitics industry. Currently, Dean Witter maintains 74 branch offices ~ Culifr,rtiia Retuil ~ Dean Witter's marketing presence in the State of California is the largest staffed with 2,022 Account Executives who cover more than 700,000 active retail accounts. These Account Executives manage nearly $70 billion of assets for California investors, making Dean Witter's California brokerage network not only the most extensive in the State but also the most successful. California Sales Forcrs (mxt re<e.t ncures n"sLb* Or publhhpd) 2.500 2.000 1,500 1.0 0 0 50 0 0 Oca" Wiltcri Rlfrrill Lynch Stonc 61 Younghcrg PainrWehhcr Morgan Stanley LIKUI Retail ~ Not only will Dean Witter provide coverage of the national and California sectors of its demand base, but Carlsbad will also benefit from our extremely strong coverage of the local investing community surrounding the City. With numerous offices in San Diego County and offices in Rancho Santa Fe and Carlsbad itself, Dean Witter can provide Carlsbad with coveragc of the investing community within and around its boundaries. The following table details our San Diego County retail presence. X offices willt 196 hrokcrs in the Carl.vhad area. City of Carlshad lncal Distribution 196 Brokers in 8 Offices 0 5 10 15 20 25 30 35 40 45 50 Number of Brokers We would recommend the City hold a retail order period in which priority would be given to local retail sales. Within our organization, we would, as part of our marketing effort make presentations to the brokers in each of our local Carlsbad area offices in order to encourage their presale efforts. These local brokers in the eight offices would be given "first rights of access" to bonds assuring them that their order will be in fact filled. This order flow activity can be easily tracked, documented and reported back to the City as part of our post sales reporting effort. Our local distribution networks are made up of highly successful investment professionals who are quite involved in their local community. They are members of the Chamber of Commerce and involved in many aspects of local political life. Their participation in the distribution of the Carlsbad refunding issues will ensure not only the most efficient distribution of your debt issues, but will also be critical in engendering local community support among the ad valorem tax payers. INSTITUTIONAL DISTRIBUTION CAPABI1,ITES While retail participation provides substantial benefits to our issuing clients, to achieve a truly SO hwdj diversified sale, the institutional sector of the market must be addressed. Institutional investors I,t.sfit/~tio/to/ offer "buying power" for an issue, increased liquidity for a market and will often support an issue SN/C,S/I~O/I/~ re~c/, in markets that retail investors find unacceptable. Dean Witter is a leading distributor of municipal OVO' 600 ,,I+,r bonds to institutions, with 50 Branch Institutional Salespeople who serve approximately 600 major ucc,,,,II~.s. national and regional institutional accounts including second and third-tier institutional accounts. Not only do these salespeople cover the largest institutions, but they also sell municipal product to a broad range of small and mid-tier institutional buyers ~ money managers, investment advisors and bank tmst departments, as well as certain property and casualty insurance companies and smaller bond funds. In addition to Dean Witter's coverage of the institutional investing community, upon our firm's Access to Murgufl merger with Morgan Stanley (completed on May 28th), we now also have access to one of the L%JdeJ,yv 20 strongest institutional sales forces in the nation, comprised of 20 municipal-specific institutional ifrstithfmd unsurpassed sales force to create the largest and most efficient distribution network in the '~'l"lici/'"/'~"['~'r,~. salespeople and 10 additional municipal traders. This addition combines with our already sn/cs/7cf,P/e nffd10 securities industry. r. I P T Cify of Carlsbad Topic 6 - CREDIT ISSUES, STRUCTURING, TIMING & FINANCING TECHNIQUES Please summarize your views with respect to the following matters: a. Discuss the key credit rating factors the City will be facing in the issuance of thefinancing. b. Preferred structure for the proposed issue. c. Timing of the proposed issue, given current and anticipated market conditions. d. Financing techniques you have used in California for minimizing rate impacts. CREDIT ISSUES General Fund Pledge - Certificates of Participation - Hosp Grove This is the simplest, most straightforward analysis and would ultimately hinge on the credit quality of the City of Carlsbad and the financial health of the City’s general fund. Given the open space nature of the underlying asset, the credit consideration would be the lack of essentiality of the asset. This drawback would be more than offset by the inherent lack of abatement risk endemic in the nature of the open space asset. Installment Sale Lease - Certificates of Participation - Water District The credit issue here will be the composition and stability of District revenues. Ultimately the credit analysis will be based on the coverage ratio and District’s ability to demonstrate coverage of debt service payments from stable revenue sources. As the majority of District revenues are from water sales, this would be the best credit structure. Limited Obligation Improvement Bonds -Assessment Districts This is the most difficult credit structure as the debt is usually supported by the willingness of a sometimes concentrated number of property owners to pay an assessment. The only recourse available is the ability to foreclose on the property owned in the District. The key credit factors in order of importance are as follows: Concentration of Ownership Districts with only a few owners, as is typically found in smaller industriaVcommercial districts, cannot hope to receive an investment grade rating. A large diverse number of property owners paying the assessment is necessary in order to receive an investment grade rating. Value to Lien Given the inherent wealth in the District combined with the relative level of development, one would expect the values to lien on all of the assessment district issues to be quite high. Foreclosure Provisions These provisions should be quite rapid, particularly in commerciaVindustrial districts. PREFERRED STRUCTURE We have three distinctly different credits and stmctures here with distinctly different security provisions. At minimum we would have at least three financings: 111 Dean Witter Reynolds Inc. Section 6-I I. P ? Ciq of Carlsbad They are all such unique credits, that we believe the City would be ill advised to issue them all under one advantage of currently strong interest rates, should it choose to do so. The certificate of participation financings structure. However, all of the refunding issues could certainly proceed concurrently in order for the City to take could be combined, however they are different credits. Hosp Grove is a general fund pledge lease, whereas, the Costa Real refunding is an installment sale agreement primarily secured by water revenues. The certificate of participation structures are quite straightforward and are excellent credits. A refunding of these two issues would provide significant saving to the City in today’s market. The assessment district refunding would be much more questionable in terms of the City’s ability to realize a significant reduction in debt service payments. The primary test here would be the ability to obtain an investment grade rating on the refunding bonds. Without the ability to obtain an investment grade rating, the savings would be somewhat marginal. TIMING OF THE ISSUE The market conditions are favorable right now for a successful issuance of all the issues. However, there are other constraints that must be considered at this time. The certificate of participation issues have both been refunded at least once before. From a tax law standpoint, they cannot be advance refunded again. Therefore, an additional refunding of either of these issues must be a current refunding, structured to close within 90 days of the first call date. The assessment bonds by definition have no call protection and are callable on any interest payment date at a call premium of 103%. Given these constraints, the recommended issuance schedule would be as follows: Issue Earliest Sale Date First Call Date Certificates of Participation - Hosp Grove 5/1/98 8/1/98 Certificates of Participation - Water District ASAP 5/1/91 Limited Obligation Improvement Bonds ASAP 9/2/97 Interest rates are very favorable right now and we do not have any reason to believe that they will go much lower. Given an economy which is heating up combined with extremely low unemployment levels, the pressure on interest rates will probably be upward. FINANCING TECHNIQUES FOR MINIMIZING INTEREST RATE IMPACTS This question primarily speaks to the credit concerns surrounding the limited obligation improvement bonds. The certificates of participation issues are excellent credits in their own right and would price aggressively and receive relatively low interest rates. The most effective technique one can utilize in minimizing rate impacts would be to create a structure that would obtain an investment grade rating from the rating agencies. Without the ability to conduct a more in depth analysis of the underlying credit factors surrounding the assessment bonds, it is not clear to us whether an investment grade rating could be obtained. In most cases, concentration of property ownership, particularly in which could be used to address these concerns are: commercial/industrial district issues, tends to stand in the way of investment grade ratings. Some of the structures 03 Create additional debt service through the subordination of administrative expenses and the use of reserve *x* Senior-subordinate structures which create de facto coverage from subordinated revenues. *a Escrow Structures which allow funds to remain in an escrow and drawn out when development comes on line fund interest earnings. and diversity of ownership levels improve. Dean Witter Reynolds Inc. Section 6-2 Topic 7 - LITIGATION Is your firm involved in litigation regarding sales methods, security dealings, undenvritings or relatedpractices? Please disclose the status of such matters. In the course of our broker-dealer and investment banking activities, Dean Witter is frequently named as a party in litigation. The rulings and depositions in each matter are far too numerous to detail. However, to the best of our knowledge, Dean Witter has not been and is not the subject of any action, order, judgement or litigation (pending, threatened or completed) over the course of the past 24 months which would affect in any material way our ability to serve as an underwriter for the City of Carlsbad as contemplated in the Request for ProposaldStatement of Qualifications. Not the subject of any litigation that would hamper our efforts as Carlsbad's underwriter. Dean Witter Reynolds Inc. Section 7-I c c 5 *I . r - ‘ City of Carlsbad Appendix 2 - RESUMES I Resumes offinance team members I CELESTE E. DAVIS SENIOR VICE PRESIDENT Municipal Finance Celeste Davis began her career in municipal finance in 1986 and joined Dean Witter in 1997. Over 11 years of She brings over eleven years of experience as a senior banker, providing account coverage to a experience in number of medium and large municipal issuers primarily in California. Celeste has a broad municipal range of functional expertise with an in-depth knowledge of general city and county financing finance. techniques, combined with a specialty in redevelopment and land-based development financing techniques. She has also maintained a significant practice in K-14 education financing, having provided investment banking services to a number of the larger school Land-based districts and community college districts within the State of California. In addition to the development is a standard financing techniques commonly used in the issuance of debt, Celeste is also quite specialw. experienced in the use of alternative and innovative financing methods such as interest rate swaps, private placements, and various forward investment structures. Prior to beginning her career in municipal finance Celeste worked as a trader on the trading Prior experience the financial markets having rotated through foreign exchange trading, government securities, afinancial floor of a large money center bank. In this capacity, she gained a wide range of experience in as a trader and as agencies, money markets, and municipals trading, spending the majority of her time as a consultant. money market trader on the bank’s Eurodollar Funding Desk. Ms. Davis’ prior experience accounting firms, where she passed the uniform CPA examination. includes over three years spent as a financial consultant with one of the “big six” public Celeste was educated at Boston University where she received her Bachelor of Science degree Master’s degree in Management and Economics in 1977. She received her MBA degree in Finance from the in Finance from University of Southern California in 1979, where she was a dean’s list scholar. USC. JOHN L. SHELDON VICE PRESIDENT Municipal Finance John Sheldon began his municipal finance career in 1989 and joined Dean Witter in 1997. His Eightyears of expertise covers a broad range of security structures, including general obligation bonds, experience in revenue bonds, lease revenue securities and certificates of participation, tax allocation bonds, municipal assessment bonds and commercial paper. In addition to the traditional forms of fixed rate finance. debt, John also has a wealth of experience with alternative financing structures, including restructurings. Finally, John has also developed a number of advanced cash flow models to variable rate debt, current and advance refundings, interest rate swaps and escrow optimize capital financing structures. These models are designed to optimally balance the use of debt and cash to fund capital improvements and yield the lowest possible revenue requirements to fund a program in a fiscally prudent manner. Many issuers have found these models invaluable in accurately and factually projecting a capital financing plan that meets their short and long-term needs. John’s client base covers a broad spectrum of municipal issuers, from cities and counties to school districts to special districts. Over the last several years, however, John has developed 111 Dean Witter Reynolds Inc Section Appendix 2-1 ’ Ciiy of Carlsbad an expertise in enterprise-secured issues, particularly in the water and sewer area. With the Expertise in the exception of one year in New York, John has spent his entire career serving issuers in water and sewer California. Following this summary of John’s qualifications, a partial list of client references area. is provided to represent his broad experience. John received his Master of Business Administration degree from the Wharton School of MBA degree from Business at the University of Pennsylvania, with majors in Finance and Public Policy. He also the Wharton graduated cum laude from Occidental College, where he majored in Mathematics, minored in School of Rowe Price, a mutual fund company based in Baltimore. Economics and earned election into Phi Beta Kappa. Between degrees, John worked for T. Business. MICHAEL P. COCHRANE SENIOR VICE PRESIDENT Municipal Underwriting Michael P. Cochrane is responsible for all municipal bond underwriting, sales and trading Desk averaged activities throughout Dean Witter’s IO-state West Coast Region. During 1996, his desk $19millionper averaged $19 million per day in tax-exempt bonds bought or sold to retail investors in the day in municipal primary and secondary markets, for a total of $4.8 billion. California paper accounted for securities. about 85% of this volume, or approximately $4 billion. Based in San Francisco, Mike will direct and manage Dean Witter’s sales, pricing and Willpersonalfy undenniting efforts for Carlsbad’s proposed issuance of bonds. He will provide pricing and manage structuring recommendations to the assigned banking professionals and to Carlsbad based Carlsbad’s debt upon his continuous involvement in the California municipal market and ensure that Dean issuance. Witter’s resources of capital and California retail distribution strength are marshaled in a timely and effective way in support of the bond issue. Mr. Cochrane has over 22 years of experience in the underwriting, marketing and distribution 22 years of of municipal bonds in California. He currently serves as Chairman of the California Public underwriting Securities Association. Mr. Cochrane holds a B.S. degree from Seattle University. experience. DAVID M. ALCALA FINANCIAL ANALYST Municipal Finance David Alcala is responsible for providing quantitative analysis and technical assistance for Dean Witter’s Municipal Finance department. He will evaluate all scenarios during the structuring phase of the debt issue to ensure that the City receives the lowest possible interest cost on their borrowings. He is responsible for structuring escrows, verifying bids and the other more technical intricacies that an issue requires. David has experience working on many types of debt instruments, including general obligation bonds, certificates of participation, TRAN’s, CAB’S, and variable rate bonds. Prior to joining Dean Witter, David worked for Jones Hall Hill & White as a Financial Analyst where he assisted the investment desk and the Local Agency Investment Fund. for almost two years and prior to that, he worked in the California State Treasurer’s Office, David received his Bachelor of Arts degree from Stanford University in 1994, with majors in Quantitative Economics and Music. Dean Wiffer Reynolds Inc Section Appendix 2-2 >I .#.. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 25 28 c RESOLUTION NO. 9”529 A RESOLUION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA DIRECTING STAFF TO NEGOTIATE A CONTRACT FOR UNDERWRITING SERVICES WITH DEAN WllTER REYNOLDS, AND APPROPRIATING FUNDS FOR BOND ISSUE RELATED SERVICES. WHEREAS, on June 3, 1997 the City Council directed staff to proceed with the refunding of several existing debt issues, and WHEREAS the Council intends to proceed with the refunding of this issue if and when this refunding will provide significant savings to the City, Carlsbad Municipal Water District, or in the case of Assessment District debt, to the assessed property owners, and WHEREAS, staff was directed to solicit proposals from underwriters qualified tc provide investment banking services on these issues, and return to the City Counci with recommendations on the selection of an underwriter to assist with the refunding o these issues, and WHEREAS staff has requested proposals from many qualified underwritin! firms, and has interviewed the most qualified candidates, and WHEREAS, after conducting an extensive review and interview process the Cit has determined that the firm of Dean Witter Reynolds has the necessary skills qualifications, expertise, and abilities to assist the staff in the successful creation, an1 sale of the refunding issues, - .," 1 L L c I E 9 1c 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7) That the amount Of $30,000 is here by appropriated from the General Fund Balance to pay any Preliminary costs that may be required of the City prior to the issuance of any bonds. PASSED AND ADOPTED THIS 8th DAY OF July ,1997, BY THE FOLLOWING VOTE TO WIT: AYES: Council Members Lewis, Finnila, Nygaard, Kulchin, and Hall NOES: None ABSENT: None ABSTAIN: None CLAUDE A. LEWIS, MAYOR A'TTEST: dm" 4. L ALETHA L. RAUTENKRANZ. CITY CLERK -3-