Virginia Agency to Sell $180M of Triple-A SRF Bonds to Help Clean the Chesapeake

200807233577ygpm-1-0724deal.jpg

WASHINGTON - The Virginia Resources Authority is readying $179.5 million of triple-A clean water state revolving fund bonds for a negotiated sale Wednesday.

The subordinate revenue bonds will finance 10 major wastewater upgrades for nine local governments and authorities, eight of which are designed to decrease elevated nutrient levels in the Chesapeake Bay watershed that threaten marine life, said Sheryl D. Bailey, the agency's executive director.

Bailey said for this deal, the VRA has pledged its entire existing portfolio of direct loan payments, which have an outstanding principal amount of $709.8 million, significantly increasing borrower participation to 132 from 35 one year ago. She said the bonds are also backed by several layers of security, including the 2008 loan repayments, a subordinate debt service fund, a subordinate claim on the general reserve fund, and interest income of various other funds.

The pledge of the entire clean water SRF portfolio creates greater credit diversification, increased debt service coverage, and "extraordinary" default tolerance, Bailey said.

"The bonds are secured by the entire clean water revolving loan portfolio and this has been a program enhancement this year," she said.

The bonds will have a retail pre-order period on Tuesday with institutional pricing on Wednesday, according to the VRA.

Moody's Investors Service rates the deal Aaa with a stable outlook. Both Fitch Ratings and Standard & Poor's give it AAA ratings with stable outlooks.

Fitch and Standard & Poor's also affirmed a AAA on the VRA's existing clean-water state fund senior- and subordinate-lien bonds, both with a stable outlook.

Davenport & Co. and Strategic Solutions Center LLC are co-financial advisers for the deal. Lead underwriter is Morgan Stanley. BB&T Capital Markets Inc., Loop Capital Markets LLC, Morgan Keegan & Co., and Wachovia Securities are co-underwriters. U.S. Bank is the trustee. Troutman Sanders LLP is underwriters counsel, and McGuireWoods LLP is bond counsel.

"I would say given the credit crunch and the flight to quality, especially with what's going on with the bond insurers ... that because this is a natural triple-A across the board, we're going to have a very wide and mass appeal to investors," said Roland Kooch, a first vice president at Davenport.

When Moody's late Monday put the ratings of triple-A bond insurers Financial Security Assurance Inc. and Assured Guaranty Corp. on review for possible downgrade, it opened up the possibility that the muni market would be void of triple-A bond insurers, adding to growing uncertainty in the market.

Kooch said that because of that and other disturbances in the market, there will be an "open field" of potential buyers looking for high-quality paper.

He added that the VRA decided to go the negotiated route to best explain the deal to investors because of the complexity surrounding state revolving fund programs, when compared with a straightforward general obligation deal.

The subordinate Series 2008 bonds will be the fifth new-money clean water SRF leveraged bond deal since 1999. The VRA sold $247 million of clean water revenue bonds in its largest offering ever in April of last year. The agency also sold $160.8 million of bonds backed by SRF funds in 2004, $106.7 million in 2000, and $111.6 million in 1999. In addition, the authority did a $188.5 million refunding in 2005.

Under the 2000 Chesapeake Bay Agreement, the federal government, Virginia, Maryland, Pennsylvania, and the District of Columbia are obliged to work together to protect and restore the bay's fragile ecosystem.

The massive project, which is supposed to be completed by 2010, could cost as much as $20 billion. In Virginia, the state plans to spend about $750 million to $1 billion, with matching funds from local governments. Next week's transaction represents a portion of the local governments' share.

The bonds will finance projects for the Alexandria Sanitation Authority, Arlington County, the Fauquier County Water and Sewer Authority, the Hampton Roads Sanitation District, the Harrisonburg Rockingham Regional Sewer Authority,Newport News, the Prince William County Service Authority, Stafford County, and the Western Virginia Water Authority. While Arlington County remains the largest borrower, the concentration of its total loan balance decreases to 15% of the portfolio from 31% last year, Bailey said.

The VRA director said the natural triple-A ratings that the program carries result from the strength of the credit enhancements.

The overall credit quality remains strong with 81.6% of outstanding loan principal made to borrowers that are estimated to have investment-grade characteristics, according to a Fitch ratings report. The underlying loan security is also strong, with all loans secured by wastewater revenue pledges, general obligation pledges, or a double-barrel pledge.

The VRA also has a state-aid intercept feature, which allows the agency to intercept the state aid of borrowers that have defaulted on GO or revenue-backed debt, which provides additional bondholder protection, Fitch said. Under the provision, if a locality defaults on a payment, the governor can direct the state comptroller to withhold any portion of appropriated funds to that locality until the default is "cured," a feature that has never been used.

The VRA also conducts at least annual surveillance of all borrowers with outstanding debt.

The senior-lien bond reserves are ample, funded at $64.1 million, or 43% of outstanding principal of the underlying loan agreements associated with the 2004 bonds, well above the 25% minimum required.

The VRA's ample reserves, leveraged and direct loan repayments, and interest earnings allow the senior- and subordinate-lien bonds to withstand borrower defaults of 51% to 72% for various four-year periods, exceeding Fitch's AAA stress test requirements given the size and credit quality of the loans, the rating agency said.

The Virginia Rescources Authority was established in 1984 and can finance infrastructure related to roads and federal facilities, drinking water, wastewater, solid-waste management and recycling, airport facilities, law enforcement and emergency preparedness projects, brownfields remediation, and petroleum storage-tank cleanups.

The VRA will come to market next under its pooled financing program sometime in the fall, but details were not yet available, Bailey said.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER