SAN FRANCISCO — California’s East Bay Municipal Utility District plans to issue more than $1 billion of debt over the first half of this year, as it continues to deal with the fallout from the financial crisis and seeks to take advantage of low interest rates and subsidies that the federal government has used to respond to the crisis.
The water and sewer utility — which serves 640,000 residents of Oakland and its suburbs — plans to begin the busy issuance schedule with $200 million of fixed-rate, tax-exempt water revenue bonds next week. The bonds will refund $100 million of unhedged 2008B variable-rate demand notes and $100 million of extendible commercial paper.
“Long-term rates look pretty good right now, and we want to decrease some of our variable-rate exposure,” said Gary Breaux, finance director of the East Bay MUD.
Variable-rate debt costs surged for municipal issuers in 2008 after Lehman Brothers collapsed and many banks that backed variable-rate debt began to wobble. The price of letters of credit or standby bond purchase agreements soared in the aftermath of the crisis, as demand for backing from creditworthy banks outstripped the supply of liquidity.
“It’s so much fun renewing these liquidity agreements,” Breaux joked.
Next week’s issue will reduce the district’s variable-rate exposure to 13% of its water revenue bonds from about 22%. The utility has about $2.3 billion of water revenue bonds outstanding.
De La Rosa & Co. is the book-running senior manager on the refunding.
The utility has used a series of new and experimental approaches to react to soaring liquidity costs for variable-rate debt in the aftermath of the financial crisis, including creation of an extendible commercial paper program, issuance of Securities Industry and Financial Markets Association index notes, and an attempt to access corporate-style liquidity to back its variable-rate demand obligations.
It hopes to have a $320 million revolving credit facility in place by March to back its variable-rate debt.
The corporate-style facility would give the highly rated MUD a cheaper source of liquidity as a fallback in case variable-rate demand noteholders put their bonds. The facility would put the utility on the hook for puts, but the district could turn to the credit facility if it needed to borrow to manage its cash flows.
The district’s water and sewer revenue bonds are rated AAA by Standard & Poor’s, Aa2 by Moody’s Investors Service, and AA by Fitch Ratings. It expects to get updated ratings from the agencies as soon as today.
The utility also plans to remarket $326 million of SIFMA index bonds in early February. It initially sold the novel structure in March 2009. The water revenue bonds pay the SIFMA municipal swap index rate and are putable in one year.
In the new issue, Breaux is breaking the bonds into two series, one with a nine-month maturity and the other with a one-year maturity. “We’re going to start to break it out a little bit so that we have not so much coming due all at once,” he said.
Morgan Stanley, De La Rosa, Stone & Youngberg, and JPMorgan are remarketing agents on the debt.
Breaux said he has been happy with the structure and believes investors like it too because none of the bonds have turned over in the secondary market since he sold them last year.
He said investors get paid “a little higher yield” than they would with VRDOs backed by a top-rated bank because such notes yield just below SIFMA, but the structure saves the district about $1.8 million in liquidity costs and essentially eliminates the basis risk on the SIFMA interest rate swap attached to the debt.
“There seems to be good investor demand and they integrate really well with the swap,” Breaux said.
He plans to issue another $59 million of the SIFMA index bonds in June to replace VRDOs backed by Landesbank Baden-Württemberg. The Metropolitan Water District of Southern California has also been using the structure.
Breaux said the utility is not just fixing its variable-rate portfolio. It is also trying to take advantage of the tumult by selling several years worth of bonds through the Build America Bond program, which was created by the American Recovery and Reinvestment Act of 2009 and expires at the end of this year.
The BAB program allows municipal issuers to sell taxable debt and collect a 35% interest subsidy directly from the U.S. Treasury Department. The direct subsidy replaces the implicit subsidy of tax exemption and has pushed net rates for long-term debt below 4% for highly rates issuers.
Issuers like the East Bay MUD and the San Diego County Water Authority are moving up capital financing to this year to lock in low rates and the government subsidy.
The district plans to price a $400 million new-money taxable BAB issue during the week of Feb. 8. It will be the utility’s first BAB issue.
“That should take care of our needs for the next couple of years at least. Rates are pretty attractive, plus we don’t know what will happen after the end of calendar 2010, whether they’ll renew this or not and what the subsidy will be,” Breaux said. “So we’re trying to maximize” the utility’s benefits under the program.
Morgan Stanley and JPMorgan are the co-senior managers on the BAB deal.
The East Bay MUD will be back in the market with $100 million of long-term, fixed-rate, new-money sewer debt in April.