Regional News

Salt River Joins Deal Parade

DALLAS - Seeing what may be a brief window of opportunity, issuers and their finance teams were scrambling yesterday to bring some long-stalled deals to the muni market this week.

With market conditions improving, Arizona's Salt River Agriculture Improvement and Power District decided to nearly double its sale to $750 million after originally planning a scaled-back offering late last year. Minnesota is bringing a delayed $340 million of general obligation bonds and Ohio is set to offer three refunding issues totaling around $140 million that it has put off for almost a year.

Issuers are banking on continued strong demand from retail investors who have become dominant players in a market where cash-strapped institutions and hedge funds have dramatically cut back on buying.

Merrill Lynch & Co. in a report released yesterday noted that "a surge in demand from retail and crossover buyers coupled with the end of forced selling by hedge funds produced a powerful rally" in recent days, built on a thin base that has resulted from low volume in the tax-exempt market.

As a result, issuers want to take advantage of the thaw in the market that has seen the yield to maturity for The Bond Buyer 40 Index drop from over 7% in mid-December to 5.77% as of Friday.

The Arizona public power utility, commonly known as the Salt River Project, or SRP, began with retail orders yesterday and will offer institutional pricing today.

With the economy plummeting and markets weakening in November, SRP had planned to offer only about $400 million of revenue bonds to expand its transmission services. However, when conditions in the municipal market began to improve markedly in late December, the district decided to offer up a more typically sized issue of $750 million, according to treasurer Steven J. Hulet.

"We have a relatively strong credit and we think the market is pretty receptive to that," he said.

SRP's revenue bonds are rated AA by Standard & Poor's and Aa1 by Moody's Investors Service.

Jeffrey Timlin, portfolio manager for Sage Advisory Services, agreed that a lack of supply has caused yields to dip, a situation that may not continue as volume picks up. Demand for munis with credits of double-A or better is particularly strong, he said.

This week's issue from Salt River is comparable to last year's $800 million sale, which made SRP one of the largest issuers in the Southwest in 2008. What's different this year is the utility's provisions for a retail order period.

"We've seen a lot of the deals, particularly last year, where it just required a retail period to get started and institutional to follow suit," Hulet said. "In the past, we haven't done a lot of retail."

Brokers gave priority to Arizona retail buyers yesterday, followed by investors from other states. Arizona's state income tax makes double tax-exempt credits like SRP popular investments.

The deal includes $380 million of fixed-rate serials from 2011 to 2029, with the remainder issued as 25-year and 30-year term bonds. In preliminary pricing yesterday the bonds due in 2011 were being offered with a yield of 1.71%. Bonds due in 2039 featured a 5% coupon priced to yield 5.05%.

Goldman, Sachs & Co. is senior manager on the deal with Morgan Stanley, JPMorgan, and Citi as co-managers. Public Financial Management is financial adviser, with Drinker, Biddle and Reath as bond counsel.

Hulet said the underwriting team has worked with SRP for years and was chosen for its experience as well as its relative financial strength.

"I've been the treasurer since 2001 and we've used the same team, with the exception of Bear Stearns, during that time," he said. "With the longstanding relationships and by having a group of them that understand our business, we feel we have good input."

Created in the Depression year of 1937, the district operates the Salt River Project, a federal reclamation project, under contracts with the Salt River Valley Water Users' Association.

SRP is now one of the nation's five largest public power utilities in terms of customers served and energy sales. In fiscal 2008, residential customers accounted for about 46% of total electric revenues, including wholesale revenues.

In the past year, population growth has slowed to about 1%, down from a rate of about 3.5% to 4% in previous years as Arizona has been hard-hit by the recession and housing crisis.

"We were seeing 20,000 to 30,000 accounts added each year in the past, and we're down to about 7,000 to 9,000 now," Hulet said. "It's certainly not the growth you've seen the past couple of years. Arizona, along with California and Florida, is one of the poster children for what is happening in housing."

SRP's service area includes large sections of Maricopa County, with a population of 3.9 million that includes Phoenix. It also serves portions of Pinal and Gila counties.

The district expects its $3.8 billion of long- and short-term debt to increase by about 70% by 2014, and annual rate increases will be necessary to preserve strong financial margins as debt service and operating costs increase, according to Standard & Poor's.

Other issuers in the Southwest looking to jump into the market this week include cities, school districts, and universities in Texas.

"The calendar's picking up again after a quiet period the last month or so," said Timlin. "Supply has been low and there's a lot of pent-up demand, so issuers should be able to take advantage of this low-yield environment."

Texas issues on this week's calendar come to about $640 million, including competitive and negotiated deals.

The triple-A-rated Dallas suburb of Irving hopes to sell $130 million of convention center hotel occupancy tax revenue certificates of obligation with JPMorgan as senior manager. Co-managers are Estrada Hinojosa & Co., Banc of America Securities, Morgan Keegan & Co., Oppenheimer & Co., RBC Capital Markets, and Wells Fargo Brokerage Services.

First Southwest Co. is the city's financial adviser, and Vinson & Elkins serves as bond counsel.

The University of Houston System is planning to issue $114 million of consolidated revenue and refunding bonds. The deal is led by RBC as senior manager with First Albany Securities, Loop Capital Markets, and Ramirez & Co. as co-managers.

First Southwest is the university system's financial adviser, with Fulbright & Jaworski as bond counsel.

The bonds, maturing through 2033, carry ratings of AA-minus from Standard & Poor's and Aa3 from Moody's.

Gavin Murphy contributed to this story.



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