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St. Louis Sewer District to Begin Tapping $945 Million of Bonding

CHICAGO — The Metropolitan St. Louis Sewer District will begin tapping $945 million of new bond authority that voters recently granted with a $225 million revenue-backed sale to fund projects included in a $4.7 billion consent decree with federal environmental authorities.

The bonds mature serially from 2016 through 2036, with term bonds further out on the curve. The final maturity is in 2042.

The deal offers more supply from MSD on the shorter end than past sales, when the district issued its earlier maturities under Missouri’s state revolving fund.

“This should open up the sale to more investors,” said district treasurer Karl Tyminski.

The district will take retail orders on the fixed-rate bonds on Wednesday and price them for institutions on Thursday.

Ahead of the sale, Moody’s Investors Service affirmed its Aa1, Fitch Ratings affirmed its AA-plus and Standard & Poor’s affirmed its AAA.

The bonds are secured by most of MSD’s net wastewater operating revenues after payments for operations and maintenance.

Bank of American Merrill Lynch is senior manager.

Public Financial Management Inc. and ButcherMark Financial Advisors LLC are advising the district.

Gilmore & Bell PC and White Coleman & Associates are bond counsel. Thompson Coburn LLP and Worsham N. Caldwell & Associates LLC are underwriters’ counsel. The Hardwick Law Firm LLC is disclosure counsel.

The agency will spend about $1 billion over the next four years to fund projects, including those under the federal mandate.

It anticipates tapping the state’s revolving fund for about $70 million of the $1 billion. The overall $4.7 billion program extends over the next 23 years and comes on top of $2.5 billion already spent on capital over the last two decades, officials said.

In June, voters in the district endorsed the borrowing, which will help keep rate increases in check compared to pay-as-you-go funding. A series of hikes over the next four years has already been approved.

The district will restart the rate-setting review process led by a public commission in 2015 as it looks to fund future projects, Tyminski said. Future referendums are expected.

“We have strong stakeholder support, so the markets should see a more steady supply of MSD paper over the next four to eight years,” Tyminski said.

The agency has selected a selling group of more than a dozen firms with strong retail distribution networks. The district established new underwriting pools earlier this summer.

The underwriters pool the district will draw from for the $945 million worth of borrowing includes Bank of America Merrill Lynch, JPMorgan, Morgan Stanley, Wells Fargo Securities, Siebert Brandford Shank & Co., Backstrom McCarley Berry & Co., Edward Jones, George K. Baum & Co., Stifel Nicolaus & Co., Stern Brothers & Co. and Valdes & Moreno.

Each bond sale will include seven firms in the syndicate.

The district may revisit the pool to add Britain-based Barclays Capital. At the time the board was reviewing the pools, it also was considering a ban on using foreign-based firms. The board later voted down that measure.

The district doesn’t anticipate returning to the market to raise new money until the fall of 2013. when it expects to sell about the same amount it’s selling this week. It’s also eyeing a refunding of about $150 million as soon as September for present-value savings.

A federal judge this past spring approved MSD’s consent decree with federal authorities, bringing to a close a nearly five-year-old lawsuit over clean-water violations.

“Although MSD and its ratepayers will incur substantial costs by implementing the proposed consent decree, this cost will be offset by the public benefit that will be gained through infrastructure improvements and compliance with” federal clean water rules, Judge Carol E. Jackson wrote in her order.

The settlement resolves claims brought against the sewer district in 2007 by federal and state authorities and others, including the Justice Department, the Environmental Protection Agency and environmental groups.

The claims alleged violations of federal clean-water laws for allowing untreated sewage to seep into area waterways and the ground. The litigation resembled action taken by the EPA against other major cities alleging violations of federal clean-water laws.

Settlement of the litigation resolved an issue that rating agencies had considered a credit challenge, and many of the projects outlined in the decree are already in MSD’s long-term capital program.

Ahead of a sale late last year, the district got mixed signals from rating agencies, winning an upgrade to AAA from Standard & Poor’s but losing its top mark from Fitch Ratings.

That sale exhausted the district’s 2008 voter-approved $275 million authorization.

In affirming the rating on a total of $615 million of senior-lien debt, Moody’s said its decision reflects the system’s large and diverse service area that covers the city of St. Louis and most of neighboring St. Louis County, serving a population of 1.4 million, in 425,000 accounts.

“The rating assignment is also based on the district’s demonstrated willingness and ability to raise rates at regular intervals; declining but still satisfactory debt service coverage; and debt levels that will significantly increase to fund extensive capital improvements,” the Moody’s report read.

Total debt service coverage declined as expected in fiscal 2011 to 1.7 times, after generating coverage levels above 2.5 times between fiscal 2005 and 2009, and margins are expected to remain at the lower level going forward as the district more than doubles its debt load, Fitch said.

“Nevertheless, DSC levels remain consistent with the AA-plus rating level,” the agency noted.

The credit also benefits from strong liquidity, with unrestricted cash and investments at the close of fiscal 2011 covering more than a year of operations. Reserve balances totaled $228 million. The fiscal 2012-2016 capital program totals a substantial $1.13 billion, with outstanding per-capita debt increasing to over $1,100 by fiscal 2016 from a current $447 in fiscal 2011.

The approved increases will raise rates annually by an average of 9.8% from fiscal 2013 to fiscal 2016. The current average monthly wastewater bill of $28.73 is considered affordable at 0.6% of median household income, but the planned rate hikes will reduce overall affordability, Fitch noted.

Standard & Poor’s analyst Corey Friedman, in the rating agency’s latest report, said the district’s stable outlook reflects the “expectation that MSD will adjust rates as necessary to maintain strong debt service coverage as it issues additional debt, as well as to generate at least good net revenues to support its large capital program.”

The Metropolitan St. Louis Sewer District, which began operations in 1956, is the fourth-largest wastewater treatment system in the nation.

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