BRADENTON, Fla. — On the heels of three rating upgrades, Atlanta plans to price about $568.7 million of water and wastewater revenue refunding bonds in two deals over the next few weeks.
It will be the city's first appearance in the bond market with a major water and sewer system offering since 2009. A trader said they should be in big demand.
The deals' objectives are to reduce the overall cost of the Department of Watershed Management's debt, and to make effective use of an existing unhedged swap, city officials said.
The first offering of $328.7 million of Series A multi-modal, variable-rate refunding bonds is expected to price Tuesday, and initially will bear interest based on a London Interbank Offered Rate index.
The variable-rate bonds will be linked to an unhedged swap with UBS AG to reduce interest expense by as much as $9 million annually.
About $240 million of Series B fixed-rate refunding bonds are expected to price around Sept. 10.
The two offerings will refund all or a portion of the city's callable 1999A, 2001A, and 2004 bonds.
The debt is secured by a first lien on net revenues of the combined water and wastewater system.
All three major rating agencies upgraded the city's water and wastewater bond ratings ahead of the upcoming transactions. Outlooks are stable.
Moody's Investors Service assigned an Aa3 rating, up from A1, while Fitch Ratings and Standard & Poor's both assigned ratings of A-plus, which are upgrades from A. The upgrades affect $3.1 billion in outstanding water and wastewater system revenue bonds.
"I think that if the market is stable, and the bonds are priced correctly, there will be a really big demand for these bonds," said a trader familiar with the city's credit. "Especially after Detroit, customers prefer essential service revenues, and these [bonds] being recently upgraded, make them even more attractive.
"I would think the deals will be a great success."
Improving financial results in recent years, stabilization of rates with voters extending a water and sewer sales tax, and a 13-year extension on the timeframe to complete a federal consent decree are among the factors supporting the lift in ratings, analysts said.
They also cited a large and diverse customer base, tempered by high debt levels and exposure to variable-rate debt.
"Rating upgrades are a positive sign that we remain on the right track," said Chief Financial Officer Jim Beard. "Not only is this good news for the Department of Watershed Management, but also for our consumers who benefit when we pay lower interest rates."
The Department of Watershed Management was created in September 2002 to be responsible for Atlanta's drinking water and wastewater systems.
The department is about midway into the $4 billion "Clean Water Atlanta Program," which is a complete overhaul of the city's water and sewer infrastructure prompted in part by the need to address federal consent decrees signed in 1998 and 1999.
The consent decrees "set in motion massive financial, performance, and schedule requirements of the department," according to the 2012 comprehensive annual financial report.
City officials said they have successfully complied with a 1998 federal consent decree completing more than $700 million of sewer system rehabilitation projects on time and under budget.
A 1999 federal consent decree to reduce sewer overflows into the Chattahoochee River has seen more than $1.8 billion in capital improvements and a "significant" reduction in spills, they said.
Atlanta also has negotiated a 13-year extension of the 1999 consent decree that "alleviates some near-term financing needs without subtracting from intended environmental protection."
Watershed Management Commissioner Jo Ann Macrina said in a statement that her department "has worked diligently to address the needs of its ratepayers and to simultaneously comply with all of the requirements of the consent decree."
The rating upgrades demonstrate that the Department of Watershed Management has been a good steward of the water and wastewater system, she said.
The city increased water and sewer rates in prior years to pay for capital needs but in recent years rates have remained flat because of the consent decree extension and financial support from a 1% municipal option sales tax.
The tax, renewed in March 2012 for another four years by approval of 85% of city voters, provides more than $100 million annually for infrastructure improvements.
In fiscal 2009, the Watershed Department implemented the use of multi-year budgeting tools to improve the financial planning process.
Fitch analyst Christopher Hessenthaler said the department's financial metrics have exhibited "considerable improvement in recent years due principally to a series of sizeable rate increases, good cost control, and modest growth in consumption.
"Consequently, both debt service coverage and liquidity now exceed Fitch's rating category medians," he said. "Fitch expects this positive trend will continue based on the department's current financial forecast and conservative assumptions."
The extension of the 1999 consent decree to 2027 will eliminate the need for rate increases through 2016, and will allow for more balanced capital spending over the next 14 years, according to Moody's analyst Lauren Von Bargen.
"The [watershed] system has spent a notable $1.3 billion to date to address consent decrees and officials estimate an additional $450 million of [pay-as-you-go funding] will be spent upon completion of all projects," she said. "Future additional compliance issues are not anticipated given the implementation of a comprehensive preventive maintenance program."
The department's debt ratio is a high 62.1%, though it is down from 74.6% in fiscal 2009, Von Bargen said. The ratio is expected to decline in the medium term given the absence of future debt plans.
First Southwest Co. and Grant & Associates are the city's financial advisors. Mohanty Gargiulo LLC is the swap advisor.
Wells Fargo Securities is the senior manager on the variable-rate bond sale Tuesday. Co-senior managers are Barclays Capital and SunTrust Robinson Humphrey. Co-managers are Bank of America Merrill Lynch, Rice Financial Products, Stifel, Nicolaus & Co., and Ramirez & Co.
Goldman, Sachs & Co. will be the book-running senior manager on the Sept. 10 sale. Co-senior managers will be Morgan Stanley & Co. and Siebert Brandford Shank & Co. Co-managers will be Raymond James & Associates Inc., Jefferies & Co., Sterne Agee & Leach Inc., CastleOak Securities LP, and First Commonwealth Securities Corp.
Hunton & Williams LLP and the Haley Law Firm LLC are co-bond counsel.
Greenberg Traurig LLP and Riddle & Schwartz LLC are disclosure counsel.
Peck, Shaffer & Williams LLP is underwriters' counsel on the Series A bonds. For the Series B bonds, Edwards Wildman Palmer LLP and D. Seaton and Associates are co-underwriters' counsel.
