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6.C. - Page 27 of 57 Bond Allocation and Defeasance Analysis I December 6, 2019 I pt; 3 Town of Atherton Bond Allocation and Defeasance Analysis While the Authority's revenue bonds cannot be redeemed for ten years, the SBVINL-1 can legally retire the Town of Atherton's allocable percentage of the Series 2019 Bonds by executing a partial bond defeasance of this outstanding obligation. We discuss this approach below. Defeasance Description Tile term "defeasance" refers to a method in which an outstanding bond issue can be discharged, both legally and financially and in whole or in part, prior to the time at which the bonds can be prepaid or "called." Bonds are defeased by the creation of an irrevocable escrow that pays the bonds. Although a defeasance is generally utilized as part of a refunding transaction (when the refunded bonds cannot be redeemed on the date of issuance of refunding bonds), a defeasance can also be accomplished with available cash rather than the proceeds of the issuance of refunding bonds. Mechanics ofDefeasance In a defeasance, the issuer purchases federal government securities for deposit in an escrow account. The escrow account is held by a bank or trust company that serves as escrow agent (this would be your existing Series 2019 Bond trustee). Under the terms of an escrow agreement, the government securities are irrevocably pledged to the payment of the outstanding bonds. The specific government securities are selected so that the principal maturities and interest earned are sufficient to pay the principal of and interest on the outstanding bonds as they come due, and to pay the remaining principal on the call date. It is common to purchase a specific type of Treasury security that Nvas designed specifically for this purpose, called State and Local Government Series (or "SLGS"), as they allow for tailoring the maturity of the investments to the specific needs of the defeasance escrow. [_finder the Authority's bond documents, a defeasance of the bonds in the amount allocated to Atherton would result in those bonds being deemed "paid" (even though they would not be actually redeemed until the first available redemption date on September 1, 2029). Once the government securities are deposited in escrow on the date of the defeasance, the defeased bonds would no longer be payable from the revenues of the Solid Waste System. In order for a bond issue to be legally defeased, the types of investment securities selected and the terms of how and where the securities are held must meet the requirements set forth in the documents that authorized the outstanding bonds. If the defeasance is consistent with generally accepted accounting principles and complies with the outstanding bond document requirements, the bonds will no longer be treated as debt for accounting purposes and will not be considered debt for purposes of setting your rates. Defeasance Analysis fox the Town ofAtherton Ob gal'ron The cost of defeasance for the "Town of Atherton's proportional share of the outstanding Series 2019 Bonds will be driven by the calculation of their share of the debt and the specific cost of the escrow required to defense that debt. In addition, the execution of the defeasance will also involve third -party costs (similar to cost of issuance on a bond offering) that should also be considered in the overall cost of the defeasance transaction. 13un Clay Street, Suite 101111 I tlakland, CA 94612 I Main 510-839-82011 I Fas 5111-2118-8382 1411 [wail "teed, Suite 34111 I `eWp-m licach, C k 926611 I Mairt 949-346-49011 I F:tx 5111-2118-8282 5757 N'. Ccnium, Boulevard, Suitt, 7[11) I l.ur NFigele:. CA 911045 I \lain 1I0-3413-24)111 I Fix 510-208-838_' SBWMA BOD PACKET 8/20/2020 AGENDA ITEM: 5A ATTACHMENT 2 - p3 58