CHICAGO - The triple-A rated Metropolitan Water Reclamation District of Greater Chicago is leaning towards tapping the taxable Build America Bonds program for the new-money sale of up to $600 million it plans for July.
The district's finance staff is finalizing its selections for the financial advisory and underwriting team and will seek board approval later this month for the transaction, district treasurer Harold Downs said Friday.
Structural details of the sale, such as call features and a maturity schedule, are still in the early stages, but Downs said the Build America Bond program, based on current market conditions, offers the best savings opportunities, given the district's capacity to add debt on the long end.
"We have to sell some bonds in the next couple months because we are running out of proceeds from prior sales. We have four years open on the long end and since that's where BABs are the most beneficial, it looks like BABs would be the most advantageous," Downs said.
The district - which provides flood control and wastewater treatment for the Chicago region - would apply for the federal government's direct-pay 35% interest subsidy.
While a handful of borrowers in Illinois have issued under the program, the largest deal to date there was the Illinois State Toll Highway Authority's $500 million sale May 12. Downs said he has authorization to sell up to $600 million but the final size of the borrowing won't be determined until closer to pricing based on "what the market dictates."
Downs - the district's longtime, risk-averse fiscal chief - dislikes the notion of issuing long-term bonds without a traditional 10-year call feature, but is willing to forgo such flexibility based on the savings offered by BABs. Structural features on BABs are growing more diverse as the novelty of the program wears down. The tollway divided its deal into two maturities, with a smaller $100 million 2024 maturity carrying a traditional call and the larger 2034 maturity a make-whole call that limits financial flexibility.
The water district last sold debt in early 2007, when it sold a refunding. It took out $188 million of floating-rate bonds originally sold in 2002, converting them to a traditional fixed rate. The original deal included a swap with payments based on 70% of the London Interbank Offered Rate on the portion of the deal maturing in 2017 and after.
Downs had decided - well before last year's market turmoil - that it was a good time to shed any risk associated with the swap as the agency had already captured a good chunk of savings associated with the swap structure. The district also refunded about $200 million of fixed-rate debt to achieve lower rates.
The district won an upgrade in 2006 from Standard & Poor's to put it in elite ranks among like systems with three triple-A ratings. The rating agency attributed the upgrade to substantial growth in Cook County's tax base to $542 billion since the district's last upgrade six years earlier, to a history of strong financial operations, and to progress made on its deep tunnel project. The district also operates seven wastewater treatment facilities.
The $3.1 billion tunnel and reservoir project consists of 109 miles of interceptor tunnels and three reservoirs that are intended to hold runoff and sewage during storms, and prevent runoff into Lake Michigan and the Chicago River. The agency recently completed the first phase of the project.
The district faces a challenge in its unfunded pension obligations. The unfunded ratio of the district's pension-related liabilities fell to 70 % for fiscal 2007 from 87% in 2001, according to a report earlier this year from the Civic Federation of Chicago. Those numbers don't reflect the 20% to 40% in losses anticipated in the pension systems for fiscal 2008.
