CHICAGO — The Metropolitan Water Reclamation District of Greater Chicago will debut expanded pension disclosure and hold its first retail-order period this week when it sells of $400 million of general obligation bonds to finance projects in its $2.6 billion capital program.
The district will take retail orders on Tuesday and open the deal to institutional investors on Wednesday.
The triple-A rated bonds will be offered in three series: f $30 million of limited-tax, taxable GO bonds that mature between 2013 and 2016, $270 million of limited-tax GOs that mature between 2016 and 2031, and $100 million of unlimited-tax GOs that mature between 2028 and 2033 with a possible term bond in 2038.
JPMorgan is senior manager and Citi is co-senior. Seven other firms fill out the underwriting team. Public Financial Management Inc. and Public Finance Advisors LLC are co-financial advisers. Chapman and Cutler LLP and Gonazalez, Saggio and Harlan LLC are co-bond counsel.
The district has room under its board-approved authorization to sell up to $500 million, but has current needs of just $400 million, said treasurer Mary Ann Boyle.
The district originally planned to enter the market late last year with Build America Bonds ahead of the stimulus program’s expiration at the close of 2010, but officials opted to put the sale on hold when a flood of supply and market turmoil drove up interest rates.
“The market was so volatile that we couldn’t achieve our targeted pricing,” Boyle said. “We believe by waiting six months, we will achieve a lower interest rate.”
The district is banking on strong investor interest for a top-shelf credit even though the market will see an unexpected jump to $8 billion in issuance this week. Ahead of the sale, all three rating agencies affirmed the district’s gilt-edged ratings.
The district was especially sensitive to pricing as its $600 million BAB sale in 2009 has come under scrutiny. The district disclosed in the spring of 2010 that the Securities and Exchange Commission had launched a query and then in the fall reported an Internal Revenue Service examination.
The reviews followed several stories from Bloomberg LP about investors profiting in secondary market trading of the bonds. The IRS has requested documents and information about the district’s BABs, including how they were priced when sold and who purchased them. Boyle said the district has provided the SEC with information and has received no further requests. The district is still in the response stage with the IRS.
In conjunction with the sale, Boyle said the district has expanded its pension disclosure section to 15 pages from one due to heightened regulatory scrutiny of the municipal market, and in response to investor comments showing favor for debt from issuers with the better disclosure practices. “It’s what investors are looking for,” Boyle said of the change.
Proceeds of the sale will finance projects that are part of the district’s rolling 10-year, $2.6 billion capital program. Projects include plant expansion and improvements, biosolids management, replacement of facilities, and reservoir construction tied to its deep tunnel intended to hold runoff and sewage during storms and prevent pollution backflows into Lake Michigan and the Chicago River. The district provides wastewater treatment services to 5.3 million customers in Chicago and 128 surrounding municipalities.
The district has not settled on a financing plan to cover the $250 million price tag for disinfecting wastewater at two of its plants before it flows into the Chicago River. Under pressure from federal regulators, the district recently approved the treatment plan after years of resisting such a move.
“We will be looking at various funding sources, including the federal government and the state revolving fund,” Boyle said. “We have room to borrow but we will have to closely manage and prioritize projects.”
Boyle was appointed to replace longtime treasurer Harold “Hal” Downs last March. Downs retired after 40 years with the district. Boyle joined the district in 2004 as the assistant treasurer. She previously worked in various financial positions in the private sector.
Boyle said she intends to continue with Downs’ “conservative approach to management.” The district won three triple-As during Downs’ tenure.
The district will have $2.6 billion of GO debt after the sale “The Aaa rating reflects the district’s sizeable, diverse, and growing tax base … well-maintained financial operations with healthy reserve levels, and modest debt burden despite significant issuance to support extensive capital needs,” wrote Moody’s Investors Service. The value of the agency’s taxing base is $616 billion.
The district is challenged by its growing unfunded pension liabilities, declining property valuations, and regulatory requirements. The district’s pension fund in just 56.5% funded with $885 million of unfunded liabilities. It is seeking state support to broaden its ability to fund its annual contribution, which is now capped by Illinois statute. The agency has an unfunded health-care benefit liability of $479 million and has established a trust to begin funding it on a accrued basis.
“While not constraining the rating, we view the long-term funding of the district’s retiree benefits as a concerning factor,” Standard & Poor’s analysts wrote.
The district drew on its sizable operating surpluses in 2008, 2009, and 2010, but its reserves remain healthy at $204 million, or 62% of expenditures.
