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Minnesota Selling SRF Debt

CHICAGO — The Minnesota Public Facilities ­Authority today will take bids on $380 million of new-money and ­refunding state revolving fund bonds, including taxable Build America Bonds, to finance clean water and drinking water loans in a deal that will establish a new modernized indenture.

The offering includes $33 million of BABs, with the proceeds going to fund new loans, and $347 million of tax-exempts that include $16 million of new money for loans. The remainder will current and advance refund debt for about 4.5% in present-value savings, according to authority executive director Terry Kuhlman.

Public Financial Management Inc. is serving as financial adviser and Briggs and Morgan is bond counsel.

The bonds will be issued ­under a new Master Clean Water and Drinking Water Bond Resolution.

“The new resolution will give us more flexibility,” Kuhlman said.

Much has changed since the authority adopted the clean water resolution in 1991, including a shift away from the reserve fund model used by some state SRFs to a hybrid cash-flow reserve fund structure.

The authority will be able to issue bond anticipation notes and issue for both clean water and drinking water loans in the same financing. The resolution also includes provisions regarding variable-rate issuance and hedge agreements.

The authority hasn’t issued new-money debt in more than two years, with federal stimulus funds, additional grant funding from the Environmental ­Protection Agency and loan repayments on its $1.87 billion loan portfolio covering new loan demand, according to Kuhlman.

With a total of $580 million outstanding after the issue, the authority will close the existing indenture to future issuance but it will remain senior to any new bond issuance.

The programs’ debt includes $446 million of clean water bonds and $134 million of drinking water bonds.

The new bonds are secured by borrower-loan repayments after debt service is paid on the senior bonds and by a subordinate pledge on interest earnings on a reserve fund and an operating account. The debt service reserve totals $178 million and the operating reserve is $55.6 million.

Fitch Ratings, Moody’s Investors Service and Standard & Poor’s all assign top marks to the bonds.

“Because of the coverage levels we consider strong, both on the senior-lien and subordinate-lien bonds, we have not differentiated the ratings,” Standard & Poor’s wrote.

The credit’s strengths lie in the cross-collateralization feature that allows reserves from one program to be used to cover shortages in the other, the strong credit quality of the system’s borrowers, and overcollateralization that is achieved from excess cash flow and reserves.

About 325 borrowers participate in the pools with the top-rated Metropolitan Council that serves Minneapolis-St. Paul being the largest and accounting for 34% of the outstanding loans.

“The remainder of the loan pool is diverse, with no one borrower making up more than 5% of the portfolio,” Fitch wrote. “All borrowers are current on their payments.” The average general obligation credit assigned by Fitch to the participants is AA-minus.

The program can survive a loan default rate of 49% and still meet debt service coverage through final maturity of the bonds, according to Moody’s analysts.

The SRF’s challenges include some concentration in the loan portfolio, the lack of a debt service reserve pledged to repayment, and the subordinate status of the bonds.

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