Alaska Utility Selling $2M ‘Mini Bond’ Deal, Sans Underwriter

SAN FRANCISCO — The Anchorage water utility plans to eliminate the middleman by selling $2 million in revenue bonds to individuals next week, without an underwriter.

“We’re offering it to our customers and to the residents of Anchorage to go ahead and invest in their water utility,” said Chris Kosinski, spokesman for the Anchorage Water and Wastewater Utility. “It’s also to offer the opportunity for individuals to participate in municipal bonds. Usually you can’t get into a bond except at levels of $5,000 or more.”

The bonds will be zero-coupon bonds available in $1,000 denominations and will be restricted to individual buyers who will be limited to a par amount of $10,000 per buyer. The bonds will be sold to the public at the utility’s office from Tuesday to Thursday.

Preston Gates & Ellis is bond counsel on the transaction, and partner Cynthia Weed said such “mini bond” deals are not unprecedented, particularly for utilities — the Anchorage power utility did one in 1994 and Juneau issued one in 2003, she said. The Snohomish County, Wash., Public Utility District has done them as well, she said.“It’s sort of a customer relations gesture so that people who are customers of the utility can feel as if they are investing in the utility,” she said.

“It’s quite a bit of work to put together one of these mini bond projects,” she said. “It’s a lot easier to call your investment banker.”

Not coincidentally, the Anchorage bonds will be sold during the week most Alaskans receive their dividend payment from the Alaska Permanent Fund, the investment fund set up for the state’s citizens, which will pay them each $919.84 this year.

The 10-year, zero-coupon bonds will sell at a discounted cost of $650.29 for each $1,000 in par value, resulting in a yield of 4.35%, and owners will also have the option of tendering the bonds twice per year.

The requirement that buyers appear in person will effectively limit the market to local residents.

The bonds will have a junior lien to the utility’s other water bonds and will be neither rated nor insured.

Even though Alaska has a small population and no state income tax, there is a solid retail market for Alaska debt, said Deven Mitchell, executive director of the Alaska Municipal Bond Bank.

“On our last bond bank negotiated sale, $28 million, I think we sold $8 million in Alaska retail orders,” he said. “I think folks are still interested in hearing a name they’re familiar with and being able to see the project being constructed.”

Kosinski said the Anchorage water mini bonds evolved from an idea general manager Mark Premo had earlier this year as the utility put together a $41.2 million refunding and revenue bond issue. Those bonds were sold through the conventional negotiated underwriting route.

“His thought process was, it’s hard for the public to get in on any of these good deals,” Kosinski said. “We did a little research and thought we could probably pull this off.”

The May sale included $18.6 million in water revenue bonds and $22.6 million in wastewater revenue bonds. All were insured by MBIA Insurance Corp.

There were no 2014 maturities in the water bonds, but 2013s were priced to yield 4.13% — 27 basis points above the Municipal Market Data’s triple-A yield curve at the time.

The yield on the mini bonds, which are subordinate to the utility’s other revenue bonds, is 80 basis points above Monday’s MMD triple-A curve for bonds due in 2014.

There is an official statement for the bonds, and Weed said buyers will be provided with the appropriate disclosure documents.

Those buyers may get the wrong impression if they read about the bonds on the utility’s Web site, where a “Question and Answer” section states that the utility’s “most current ratings” are triple-A from all three rating agencies.

The utility’s last water bond issue, which will be senior to the mini bonds, is rated triple-A based on bond insurance, but carries underlying ratings of AA-minus from Standard & Poor’s and A2 from Moody’s Investors Service.