CHICAGO - The triple-A rated Metropolitan Water Reclamation District of Greater Chicago enters the market today with its largest-ever sale - $600 million of taxable general obligation Build America Bonds to raise funds towards its $2.3 billion capital program

The limited-tax capital improvement bonds are structured to sell all in one term bond that matures in 2038. The district will apply for the federal government's direct-pay 35% interest subsidy.

Mesirow Financial Inc. is the book-running senior manager and Loop Capital Markets LLC is co-senior manager, with another 10 firms as co-managers.

A.C. Advisory Inc. and Scott Balice Strategies are co-financial advisers. Chapman and Cutler LLP is bond counsel and Pugh Jones Johnson & Quandt PC is co-bond counsel. Katten Muchin Rosenman LLP is underwriters' counsel and Burke Burns Pinelli Ltd. is co-underwriters' counsel.

The bonds offer investors a make-whole call provision. Based on preliminary pricing figures, district treasurer Harold Downs said use of the BAB program is expected to save the district at least $100 million over a traditional tax-exempt issue once the subsidy is factored into the rate.

"It's looking very good for us, which will benefit the taxpayers, as we are expecting a rate under 4% with the subsidy," Downs said.

The district was able to maximize the program's interest rate savings on the long end of the yield curve by putting all its debt in a 30-year term bond taking advantage of its additional bonding capacity further out. The district's last new-money sale, for $350 million, was in 2006.

With the strength of the triple-A rating, the finance team opted to put all the bonds in a single term bond to attract attention especially among large institutional buyers looking for concentration, officials said.

Proceeds will fund various projects included in the district's capital program, including plant expansions and improvements, sewer upgrades, bio-solids management projects, and deep tunnel-related projects. The plan relies on $1.9 billion of borrowing.

All three rating agencies affirmed the district's top ratings on the deal and $1.4 billion of outstanding debt. The district won an upgrade in 2006 from Standard & Poor's to put it in elite ranks of systems with three triple-A ratings.

While the district faces some fiscal strains like most governmental agencies, it benefits from a reliance for 70% of its operating revenues on property taxes, which "contributes to financial stability" over others that also must rely on economically sensitive revenues like sales taxes, Fitch Ratings wrote in its review.

The rating is also supported by the district's favorable liquidity position, low debt profile, good long-term planning, and a large but manageable capital plan and progress on its $3.1 billion tunnel and reservoir project. That project includes 109 miles of interceptor tunnels and three reservoirs to hold runoff and sewage during storms, and prevent runoff into Lake Michigan, the region's source for drinking water. The agency recently completed the first phase of the project, but still has two permanent reservoirs to complete, Downs said.

The district spans Chicago and 128 suburbs, with a tax base valued at more than $666 billion. It is responsible for maintaining the water quality of Lake Michigan and other waterways in the region. In addition to its deep tunnel system, the district operates seven wastewater treatment facilities.

The district made a modest draw on its corporate fund in fiscal 2008, though its balance remained a healthy $229 million. The district faces a shortfall of up to $25 million but is undertaking about $38 million in cuts to eliminate the red ink in the current fiscal year. The district also intends to draw up to $30 million from its fund balance with additional draws expected over the next several years, Fitch wrote.

The district expects to issue new-money debt next year or in 2011 and is watching the market for refunding opportunities this summer. The board approved up to $300 million of refunding issuance last month.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.