Portland, Ore. is planning to sell $215 million of second lien sewer system revenue and refunding bonds in a competitive offering Sept. 5.
Proceeds will be used to fund a variety of capital improvement projects, the majority of them for the replacement of older infrastructure, and to refund outstanding debt, according to Abby Coppock, a spokesperson for the city.
Approximately $183 million will go toward capital funding and paying off a line of credit for capital funding. About $32 million will be used to refund a portion of the sewer system’s second lien series 2003A bonds for debt service savings.
Coppock says the city estimates $2 million, or 6%, in present value savings from the refunding portion.
The bonds have a final maturity in 2038.
Ahead of the sale, Standard & Poor’s downgraded the rating on Portland’s second-lien sewer system bonds to AA-minus from AA, based on the system’s lower debt service coverage.
Standard & Poor’s assigned the rating to the new bonds, along with a stable outlook.
“Liquidity has also declined during the past four years,” Standard & Poor’s credit analyst Robert Hannay wrote in a report. “Given the recent lower debt service coverage on both liens, we view the difference in credit quality to warrant a one-notch rating distinction.”
Debt service coverage on the second lien, as calculated by Standard & Poor’s, declined to 1.07 times in fiscal 2011 and 1.11 times in fiscal 2012, which the agency views as “only adequate.”
The second-lien bonds are secured by a pledge of net revenues from the city’s sewer and storm water system, on parity with the city’s outstanding second-lien bonds and subordinate to its first-lien bonds, which Standard & Poor’s rates at AA.
The system includes Portland’s sanitary sewer and storm water collection, transportation, and treatment system within the city boundaries. It serves about 180,000 accounts.
Standard & Poor’s views the system’s customer base as very diverse, with low concentration in any one customer. Analysts noted other strengths supporting the rating, including the system’s completion of major capital improvements, its history of raising rates to support increasing expenses, and its broad service area.
Portland, with a population of about 590,000, is the largest city in Oregon and second largest in the Pacific Northwest, after Seattle.
Moody’s Investors Service assigned an equivalent Aa3 rating with a stable outlook, and affirmed the rating on the system’s $633.5 million of outstanding second lien revenue bonds.
Moody’s rates the system’s $830.6 million of first-lien bonds one notch higher at Aa2.
“The enterprise’s ratings primarily reflect its large and stable metropolitan service area, prudent operating policies, and a sizable debt burden supported by consistent rate increases that lead to satisfactory coverage levels,” Moody’s analysts wrote in a report.
Moody’s also cited low debt service coverage as a credit weakness, as well as large capital needs that will include sizable debt issuances in the future.
Analysts said higher debt service coverage levels or a stronger operating position, including liquidity, could lead to higher a rating.
Hawkins Delafield & Wood is bond counsel on the deal and Public Financial Management is the financial advisor.
