CHICAGO – Milwaukee's $10 million competitive sale of water revenue bonds Thursday will mark its first publicly offered issuance under the credit since 1958 and launches a shift to more borrowing for water projects.
Fitch Ratings and S&P Global Ratings both assigned AA ratings to the bonds. That's on par with the AA rating Fitch assigns to the city's sewer revenue bonds and a notch higher than the AA-minus S&P assigns to the sewer debt.
Proceeds will take out $10 million of commercial paper notes that financed system improvements. The bonds are payable from the system operated by Milwaukee Water Works and a mortgage lien. MWW provides water to 865,000 people in 16 communities in Milwaukee, Ozaukee, and Waukesha counties. The system pulls water from Lake Michigan and treats it at two city plants.
Additionally, the city pledges any legally available funds, subject to annual appropriation, to subsidize any revenue shortfall.
"The 'AA' rating is supported by the strength of the net revenue pledge of the system and does not rely on the strength of the city's annual appropriation pledge," Fitch wrote.
"MWW's historically low debt burden has led to very high debt service coverage levels, although cash levels are low from a primarily cash-funded capital program," Fitch wrote. "DSC will decline with additional planned debt issuances but remain strong over at least the near term. Liquidity should remain stable."
The city bolstered capital improvement spending in 2014 primarily to fund a long-term, comprehensive water main replacement program required by the Wisconsin Public Service Commission as a condition for future rate increase approvals. The 2017-2021 capital program totals $195 million.
Additional CIP projects include replacements of service lines made of lead and water treatment plant improvements. Lead lines have come under heightened scrutiny nationally as a result of the Flint water contamination crisis.
The city has largely used cash flow to finance improvements, said Richard Li, debt specialist in city Comptroller Martin Matson's office, which manages city debt issuance.
The city has also tapped the state revolving fund. In 1998, the city borrowed $100 million under its general obligation credit to finance treatment plant upgrades following a Cryptosporidium outbreak, Li added.
With the public service mandate in hand and dwindling cash reserves, the city opted to turn to borrowing.
"We anticipate borrowing an average of $10 million to $30 million a year on a publically offered basis, with a financing every two to three years," Li said. "The amount is highly dependent upon what is available from the state."
The city also has begun the process of replacing its $200 million extendable municipal commercial paper program and a $30 million extendable seven-day variable rate demand bond program with bank lines. The city closed on an $80 million line Nov. 18 with US Bank and plans to close on a $150 million line with another bank in December.
The shift is due to the new Securities and Exchange Commission money market fund rules that took Oct. 14. The changes impact how investors account for the weighted average maturity of products. The products had saved the city on borrowing costs but the rules put a dent in those savings. Because the extendible programs offer an extended maturity in the event of a failed remarketing the appeal to funds looking to keep their portfolios in the shortest maturities has been curbed driving up costs.
"The city performed a request-for-proposal process this summer, and the lines of credit provided a lower all-in cost than liquidity enhancement for a traditional commercial paper program," Li said. "Given the limited number of investors for the extendable products, we decided to go a more traditional route to replace the expiring EMCP program."
