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Water's Fine in Atlanta

BRADENTON, Fla. - Atlanta on Tuesday plans to price $600 million of uninsured water and wastewater revenue bonds in a one-day negotiated sale.

Proceeds will be used to convert commercial paper into long-term, fixed-rate debt and to provide new money for ongoing projects related to the city's $4 billion water and sewer program, which largely is driven by state and federal consent decrees.

The deal is expected to be structured as serial bonds maturing between 2010 and 2029, as well as term bonds in 2023 and 2039 to provide level debt service.

The bonds will be uninsured, although Atlanta has insured its water and sewer debt in the past. The city did get bids for this deal from one of the only remaining top-rated bond insurers, Assured Guaranty Corp.

"The value of insurance isn't what it was before all the downgrades," said Carmen Pigler, the city's chief of debt and investments. "For this transaction [insurance] wasn't viable compared to the benefits ... so if we had a vibrant insurance market certainly we would have gotten these bonds insured."

While the transaction itself is plain vanilla, the city's water and sewer bonds have split ratings.

Fitch Ratings assigned a BBB-plus with a stable outlook, Moody's Investors Service assigned a Baa1 with a stable outlook, and Standard & Poor's gave it an A rating while revising the outlook to negative from stable. All three affirmed their ratings on nearly $2.5 billion of outstanding parity debt.

While acknowledging that the rating agencies view risk factors differently, Pigler pointed out that the system has been in compliance over the years it has issued debt for what it calls the Clean Water Atlanta program.

Between 1994 and 2008, the city has spent nearly $3 billion on capital improvements mostly aimed at meeting the requirements of consent decrees.

But since starting the program to rectify water and sewer problems, it has faced major hurdles, ranging from the massive size of the overall program to today's economic downturn, Pigler said.

Despite the size of next week's uninsured offering in a troubled market and the split ratings, she said the city's underwriting team has assured her it can be done.

Senior manager JPMorgan and co-manager Banc of America Securities LLC have "very good distribution" capabilities, Pigler said.

"They both understand the credit and I'm sure they can get this done," she said. "For this size of a bond issue and with this credit rating, it's primarily a structure that's going to appeal to the institutional investor."

Like other regional water and sewer systems, Atlanta's is suffering from the recession and effects of cutbacks in service related to a lingering drought.

In response, the city has raised rates, initiated internal cutbacks, and reduced the 2009 through 2014 capital improvement program by approximately $800 million, although it still totals $1.7 billion.

The resulting pressures on the water and sewer system prompted Standard & Poor's to revise its outlook on the debt.

John Sugden
"The outlook revision reflects our assessment of the system's increased revenue and expenditure pressures associated with a weak economic environment and lower consumption," said analyst John Sugden.

"Furthermore, the system has reduced financial flexibility with rates that are already high and expected to continue to rise. The outlook revision also reflects increased risk associated with the system's debt profile."

Moody's said the system has above-average exposure to swaps and variable-rate debt with $752.8 million of variable rate debt outstanding, including $543 million in variable-rate demand obligations and $209.8 million in commercial paper notes.

Some $436.2 million of VRDOs are currently being held by Dexia Credit Local following the expiration of a standby bond purchase agreement on May 1. The bank-held bonds are subject to a bank rate of Prime plus 100 basis points, Moody's said.

There are also four interest-rate swap agreements, including two synthetic variable-rate swaps with a total notional amount of $216.8 million and two synthetic fixed-rate swaps with a total notional amount of $436.2 million - all with UBS AG as the counterparty.

Pigler said swaps are not a problem and the city anticipates coming back into the bond market in August to convert the variable-rate bonds that are experiencing liquidity-rated problems to a fixed rate.

She said it still must be determined whether to associate the swaps with other bonds or terminate them.

"The system does have new-money needs which we plan to address in future years," Pigler added.

Other underwriters on next week's offering are Citi, Morgan Stanley, M.R. Beal & Co., Rice Financial Products Co., and SBK-Brooks Investment Corp.

Co-financial advisers on the deal are First Southwest Co. and Grant & Associates LLC.

Kilpatrick Stockton LLP and Howell & Associates LLC are co-bond counsel. Greenburg Traurig LLP and Riddle & Schwartz LLC are co-disclosure counsel. Hunton & Williams LLP is underwriters' counsel.

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