The Massachusetts Water Resources Authority today will sell $1.16 billion of multi-modal subordinated revenue refunding debt to help it exit the auction-rate market and address variable-rate debt insured by Financial Guaranty Insurance Co. and Ambac Assurance Corp.
The transaction will convert $407 million of auction-rate securities into variable-rate demand bonds, with the remaining $760 million of floating-rate debt currently insured by FGIC and Ambac to instead carry enhancement through standby purchase agreements. The purpose of the refunding and conversion transaction is to reign in escalating debt service costs, according to Rachel Madden, the MWRA's chief financial officer.
In the third quarter of fiscal 2008, the authority paid $3.3 million of additional interest-rate costs, 4% more than officials had budgeted. Of that $3.3 million boost to debt service, approximately $2.6 million is due to FGIC and Ambac rating downgrades and failures in the auction-rate market, according to the preliminary official statement.
"We're just going to clean it all up while we're doing it because we can see the writing on the wall," Madden said. "We had FGIC on a number of our series, FGIC and Ambac, so that was what was motivating us to proceed to the refunding."
FGIC used to carry triple-A ratings, but now holds Baa3 and BB ratings from Moody's Investors Service and Standard & Poor's, respectively. Fitch Ratings rates the monoline insurer BBB. Fitch also dropped Ambac to AA from AAA, while Standard & Poor's and Moody's maintain triple-A ratings. Both insurers have negative outlooks from all three rating agencies.
Public Financial Management Inc. is the financial adviser on the $1.16 billion transaction and McCarter & English LLP is bond counsel. Standard & Poor's and Fitch assign their AA-minus ratings to the deal. Moody's rates the credit's subordinated debt Aa3.
The MWRA will offer the $1.16 billion weekly-rate 2008 bonds in six different tranches, Series A through F. Previous plans included an additional portion, Series G, with UBS Securities LLC as underwriter, but due to the Swiss bank's imminent withdrawal from the municipal market, the authority restructured the deal, Madden said.
"There was going to be a Series G but UBS is no longer [in the transaction] so that's been reassigned and consolidated," Madden said.
Citi will price Series A for $337.96 million, which carries a standby purchase agreement from Dexia Credit Local. Current plans call for Series A proceeds to refund 1997 Series A, 2000 Series C, and 2001 Series A, all variable-rate debt, and 2002 Series G bonds, which are auction-rate securities.
The authority plans to transfer two existing swap agreements to the 2008 Series A bonds, including a SIFMA swap with Lehman Brothers as counterparty and the MWRA paying a fixed rate of 4.47%. Goldman, Sachs & Co. is counterparty on the second swap, with the bank paying 67% of the London Interbank Offered Rate and the authority paying a fixed rate of 4.127%.
Lehman is senior manager on the 2008 Series B bonds for $124.58 million, maturing in 2031. Bank of America NA will supply a standby purchase agreement. The MWRA anticipates the Series B proceeds will refund auction-rate Series 1999 D bonds and variable-rate 2001 Series B bonds. There is no swap attached to the series.
JPMorgan will price Series C and D bonds for $199.37 million and $83.6 million, respectively, and the debt will carry a standby purchase agreement from Bayerische Landesbank. Series 2008 C bond proceed will refund Series 1998 D bonds and take on two SIFMA swaps attached to the 1998 debt. In those swap agreements, the authority pays Citi and Morgan Stanley fixed rates of 3.99% and 4.03%, respectively. Series 2008 D will convert 2002 Series E auction-rate securities into variable-rate mode and take on a Libor swap with Goldman Sachs paying 67% of Libor in exchange for a fixed rate of 4.127% from the authority.
Morgan Stanley is the senior manager on the Series E bonds for $224.74 million, which will carry a standby bond purchase agreement from JPMorgan. The debt will refund Series 2000 B variable-rate bonds and Series 2002 F auction-rate securities and take on two swap agreements, the Lehman SIFMA swap and the Goldman Sachs Libor swap, both mentioned above.
Goldman Sachs will price the last tranche, Series 2008 F for $191.69 million. The Bank of Nova Scotia will supply a standby purchase agreement and the bonds will refund Series 1997 B and Series 1999 A variable-rate bonds and convert Series 1999 C auction-rate debt into variable-rate mode. There is no swap attached to the transaction.
The MWRA has roughly $5.7 billion of outstanding debt and provides 2.5 million people and 5,500 businesses across 61 communities with clean water and sewage treatment.