What is bad news for the global markets has proven to be good news for the city of North Battleford in borrowing money to build to the Credit Union CUPlex.
The city is entering a swap arrangement with Bank of Montreal to finance the four components of the CUPlex project, and the terms the city will face to borrow the $24 million from the bank are better than what financial models anticipated earlier this year.
The city had been seeking an interest rate swap arrangement with a financial institution that would guarantee the city a fixed interest rate for a specific term, subject to the stamping fee or credit spread which are not fixed.
In a presentation to city council on Monday night, finance director Byron Tumbach informed council that the interest rates banks had been offering the city were highly favorable due to the stormy market conditions. Financial institutions were approached to submit debt financing proposals for the CUPlex.
Tumbach noted that as a result of the global financial turmoil, rates "are dropping considerably."
"What is bad news for investors is good news for borrowers," said Tumbach.
He told council that originally administration's financial models had anticipated carrying costs at an interest rate of 4.5 to 5 percent. But with the events of the past number of weeks and the financial packages presented to the city by the banks, "that's now down to a 3.2," said Tumbach.
That's a decrease of 1.8 percent on what was anticipated to be the debt to be borrowed. "We are looking at substantial savings for the project," said Tumbach.
According to the resolution passed unanimously by council at Monday's meeting, the city of North Battleford executes a swap arrangement with Bank of Montreal on the following arrangements: that the city will borrow $24 million from BMO, that BMO arrange one swap to cover the construction of the facilities and the redemption of the long term debt, to forward swap rates effective June 1 2012, with the first month of principal repayment cycle being July 2012 being set for a 20 year term and 20 year amortization, that the quoted credit spread of .50% be set for 15 years, and that there be interest only on the draw amounts for the first nine months.
City councillor Ron Crush was pleased with the arrangement and said it confirms that the timing was right to proceed with construction this year.
He adds the city was "able to take advantage of a depressed market and good interest rates" and that the city is able to save the citizens money because of the economic climate.
