NEW YORK - Moody's Investors Service downgraded to A2 from A1 and revised the outlook to stable from negative on Pittsburgh Water and Sewer Authority, Pa.'s $385 million of outstanding parity first lien rated debt (includes 1998B, 2008A, 2008B-1, 2008B-2, 2008D-1, and 2008D-2 issues).
All of the rated series are secured by a first lien pledge of the net revenues of the water and sewer systems. The authority has a total of $764 million in debt outstanding, comprised of $660 million of first lien revenue bonds, $104 million of second lien revenue bonds, and $14.2 million of Pennvest state loans outstanding, which are subordinate to the authority's first and second lien bonds.
The downgrade reflects the authority's narrow debt service coverage levels and liquidity position supported by weak legal provisions and a highly leveraged system (debt ratio 105%). The rating also incorporates the authority's large, diverse, and stable customer base.
The stable outlook reflects Moody's expectation that the authority's debt service coverage levels will improve slightly over the medium-term to be more in line with previous years and that more adequately offset the risks related to the authority's debt structure.
These risks include: interest rate risk from the 53% of its debt that are variable rate demand bonds, all of which are swapped to fixed rate; the rollover risk associated with its liquidity providers, given that the letter of credit and liquidity agreements for 73% of their puttable debt expire in 2011; and counterparty concentration risk, given that all of the authority's surety bonds, swap insurance policies, and the majority of their variable and fixed rate bond insurance policies are provided by Financial Security Assurance, Inc. (FSA/Assured - insurance financial strength rated Aa3/negative).
