CHICAGO — The Northeast Ohio Regional Sewer District, which serves the Cleveland area, Thursday will sell $338.3 million of Build America Bonds in its largest-ever deal.

The bulk of the proceeds will help finance a $198 million tunnel to control the system’s combined sewer overflow, one of seven tunnels the NORSD will be required to build to address state and federal environmental mandates.

Standard & Poor’s upgraded the utility to AA-plus from AA ahead of the sale, saying it believes that current trends of maintaining strong fiscal metrics and consistent rate increases will continue. Moody’s Investors Service rates the credit Aa1.

Prism Municipal Advisors LLC is financial adviser. The district tapped Barclays Capital as book-running senior manager due largely to the firm’s experience selling BABs, officials said.

The NORSD traditionally issues debt through the Ohio Water Pollution Control Loan Fund. But as it prepared for what would be its largest borrowing, it opted to go to market itself — despite possibly having to pay higher interest rates — to avoid some of the program’s debt requirements that could lead to higher user rates, said finance director Jennifer Demmerle.

“Even though the loan program may have slightly lower rates, we were trying to figure out how to finance a program that had the least impact on ratepayers,” she said. “I talked to them and told them it wasn’t all about the interest rates, it was also about the inflexibility of the program. They said they’re willing to talk later to discuss setting up certain things for large borrowers.”

The NORSD and the Columbus sewer district are the program’s largest borrowers. Ohio requires borrowers to limit maturities to 20 years and maintain level  debt-service payments. It also bars deferring principal payments and refinancing.

“When we looked at all that and then we looked at the market, we thought that was a better option for us,” Demmerle said.

Of the sewer district’s pre-sale $580 million of outstanding debt, $411 million was issued under the program, so much of its debt is front-loaded, maturing within the next 10 years. It opted to defer principal payments on the new bonds for 10 years, when most of its debt service on the state program debt will have been paid.

The BABs consist of a 2030 term bond and a 2040 term bond.

The debt is secured by a senior lien on district revenues. The utility maintains a rate covenant that requires net revenues to equal 1.15 times annual debt service on senior-lien bonds. Senior-lien bonds include a $125 million 2007 borrowing and the current transaction. Subordinate-lien bonds include debt issued through the Ohio water pollution control fund.

Analysts praise the district for annual rate increases, which are expected to continue through 2016, as well as the stability of the Cleveland area and strong treatment capacity.

Like sewer districts across the country, especially in the Midwest, the NORSD faces major capital upgrades to meet Environmental Protection Agency mandates. Its plan is expected to total $3 billion over the next 20 to 30 years. Its five-year capital plan totals $1.3 billion, of which $750 million is related to EPA mandates. Officials expect to next enter the market in 2012.

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.