Moody’s Investors Service this week upgraded San Diego’s sewer bonds ahead of two issues worth as much as $1 billion.
The agency upgraded the sewer revenue bonds to A2 from A3 and changed the outlook on the bonds to stable from negative. The move follows an upgrade by Fitch Ratings, which raised the bonds to AA-minus from BBB-plus. Standard & Poor’s affirmed its A-plus rating on the debt.
The Moody’s upgrade applies to $893.7 million of outstanding debt, sold via the San Diego Public Facilities Financing Authority, much of which will be refunded in two deals the city plans to price this month.
The rating boosts follow four years of financial reforms, prompted by a 2004 pension and municipal disclosure scandal that led to deep downgrades of the city’s debt and a five-year absence from the public municipal bond market. San Diego returned to the public bond market in January with a $157.2 million water revenue bond deal.
“The rating upgrade is based on the system’s significantly improved financial performance since 2005,” Moody’s analyst Kevork Khrimian said in a report. “The improved finances are primarily attributable to sizable and necessary rate increases which reflect the city’s renewed commitment to financial health throughout its operations.”
Between 2004 and 2008, the sewer system raised rates and held down cost increases to increase its senior-lien debt service coverage increased to 1.95 times from 1.29 times,. The utility also increased unrestricted cash from $218.5 million in 2004 to $291.2 million in 2008, which is “a very strong liquidity position,” Moody’s said.
San Diego, California’s second-largest city, plans to sell the two sewer deals this month, according to director of debt management Lakshmi Kommi. The first deal, Series 2009A, will refund a $224 million private placement sold to Citi in 2007, finance $145 million of new capital spending, and refund $51 million of sewer bonds for economic reasons. With issuance costs and reserve funds, the deal is expected to total about $458 million. The city plans to price the bonds next week.
Banc of America Securities LLC is the book-runner on the deal. Citi and Siebert Brandford Shank & Co. are co-senior managers. Fidelity Capital Markets and Wedbush Morgan Securities are co-managers.
The second deal, Series 2009B, is an economic refunding. The offering, which could be as big as $550 million, is scheduled to price the week of May 18. Citi is the book-runner. JPMorgan and Banc of America are co-senior managers, with Fidelity and Wedbush again rounding out the syndicate as co-managers.
