RAVEN RUN — The Municipal Authority of the Borough of Shenandoah board decided to move forward Friday to refinance its existing debt and borrow $2.5 million for much-needed upgrades.
Before the vote, the board was updated on the current status of the refinancing plan by two representatives of PFM Financial Advisors LLC, Malvern: Jamie Schlesinger, director, and Melissa Hughes, senior analyst. Also attending was bond counsel Timothy B. Anderson, a partner with Dinsmore & Shohl LLP, Philadelphia. PFM is the authority’s financial adviser for the debt restructuring.
The current debt of the authority is about $4 million, which is owed to the Pennsylvania Infrastructure Investment Authority (PennVEST) and the Rural Utilities Service of the U.S. Department of Agriculture. The intent of the authority is to restructure the debt and add approximately $2.5 million in order to replace and upgrade equipment needed for supplying drinking water to customers in Shenandoah, most of West Mahanoy Township, plus small portions of Butler and Mahanoy townships.
One proposal had been received a few months ago from PNC Bank that offered an interest rate of 3.88 percent. At the time, the best scenario in the restructuring process was to have the Shenandoah Borough Council agree to guarantee the new debt to receive the best terms from PNC through a bond pool loan.
The borough council received requests to approve the guarantee, but each time decided to table a decision either way. PFM has searched for other funding options, such as a bank loan. PNC Bank had responded to the request for proposals.
“PNC Bank has been working with us and they have formally provided us with an update to that proposal,” Schlesinger said. “Time has gone on since they have their initial proposal. The only major change is that the rate is a little bit higher than what was originally because, frankly, interest rates have gone up since the first time we started speaking of this. The rate did not go up dramatically, but it did go up.”
The new rate is 4.05 percent, which would be fixed for seven years.
“The idea is that we would refinance the authority’s outstanding debt in three different issuances — two of which are from PennVEST and the third is from the USDA,” Schlesinger said. “The goal is to have overall level payments over a 20-year period. However, in this case, the rate that the bank will offer is for seven years fixed at 4.05 percent.”
Schlesinger said the refinancing would extend the PennVEST debt and shorten the USDA debt.
“The payments that the authority would make from their current budget would go down, so from a cash flow perspective, the authority would be in a better place in the initial years,” he said.
He said the downside to the refinancing is that since the overall debt, along with the new loan, would be over a longer period of time, the total amount of interest paid would be higher than leaving everything as is.
Schlesinger said that once the seven-year period is over, the bank has options. It can extend the loan agreement for a minimum of three years to a maximum of seven years. The rate could increase depending on market rates.
“Another risk is that since the proposal is fixed for seven years, so prior to the seventh year, the bank will have the right to have a ‘put’ feature, which means that if the bank so chooses, they can tell the authority that ‘we don’t want to be with you. You need to find another source of funding and refinance us,’ ” Schlesinger said. “That may or may not be a benefit to this authority, of course, because there may not be funding available. It’s possible, and I hope it doesn’t happen, so we’re going to do our best to make sure of that. The financials of the authority may be worsened and you may be able to get a loan because of that.”
“The put is definitely the biggest risk that you should consider,” Hughes said. “The second big risk you should consider is whether $2.5 million is a sufficient amount of money to meet your capital needs.”
Alfred Benesch & Co. project manager Christopher McCoach explained that the $2.5 million will address the immediate needs of the authority. There are also long-term needs that would have added to the loan.
“One of the things that Melissa and I have been talking about for the last few months is that in moving forward, we will be working with the authority if this loan happens,” Schlesinger said. “We’re not going away. One of our suggestions is that we meet at least annually and build a long-term projection for the authority, and annually we will review that to make that we are comfortable that things are going well financially.”
Currently, the authority pays about $53,000 per month for the existing debt service ($43,000 to PennVEST and $10,000 to USDA/RUS). The refinancing and new loan will reduce the monthly payment to $39,742, which is about $13,000 less.
The estimated total of the refinancing issue is $6,530,000, according to PFM, broken down as follows:
• Required to call PennVEST loan 161 — $138,037
• Required to call PennVEST loan 275 — $1,957,511.99
• Required to call USDA Note Series 2009 — $1,862,698.86
• Legal Fees — $25,000 (estimated)
• Financial Advisor Fees and Expenses — $26,500 (estimated)
• Bank Counsel — $3,000
• PennVEST legal fee — $1,500 (estimated)
• Construction Fund deposit — $2,515,751.45
The settlement date is Sept. 4.
After considering the options, the board in a 3-0 vote approved the refinancing plan. Voting were board Chairwoman Donna Gawrylik, Vice Chairman Joseph Anczarski, and Treasurer/Secretary Gary Wood.
Chief Plant Operator Daniel Salvadore said the filtration plant is in need of improvements and the new loan will help in getting that work done.
“The plant is working fine, but there are a lot of upgrades that we need. We haven’t had any major upgrades for 23 years,” Salvadore said.
Schlesinger said the next steps now that the refinancing was approved.
“From your perspective, what’s going to happen next is we will reach out to PennVEST today,” Schlesinger said. “We will begin the process with the documentation. We will also reach out to USDA, as well, to get the payoff numbers.”
After the presentation, Hughes explained the original refinancing plan was created with the possible loan guarantee approved by the borough council.
“They (MABS) don’t need it (borough guarantee) with this type of a loan,” Hughes said.
Contact the writer: jusalis@republicanherald.com; 570-628-6023