Cleveland Readies $170 Million Water Revenue Bond Refunding

CHICAGO - Cleveland today enters the market with roughly $170 million of water revenue bonds in a refunding transaction that will allow the city's water district to shed its final piece of insured variable-rate debt.

The sale comes after the city held a one-day retail period for the bonds yesterday.

The $170 million issue is divided into three tranches: an $86 million fixed-rate piece, a $54 million variable-rate tranche, and a $26 million variable-rate tranche.

The refunding allows Cleveland's water district, which serves roughly 1.5 million customers, to shed its last piece of variable-rate debt that was covered by now-downgraded insurer Financial Security Assurance. After today's transaction, the district will have roughly $810 million of outstanding debt, of which $173 million is variable-rate debt backed by letters of credit and hedged with interest-rate swaps.

In addition to the fixed-rate tranche, today's sale includes $54.7 million of variable-rate debt that is backed by a letter of credit from BNP Paribas and $26 million of variable-rate debt backed by a letter of credit from Allied Irish Banks plc.

Loop Capital Markets LLC is senior manager on the $86 million fixed-rate tranche. Morgan Stanley is senior manager on the $55 million variable-rate tranche, and Merrill Lynch & Co. is acting as senior manager on the $26 million variable-rate tranche.

Squire, Sanders & Dempsey LLP is bond counsel. Phoenix Capital Partners is co-financial adviser with Government Capital Management LLC.

Cleveland planned to issue the debt last November but postponed the sale to wait out the credit crunch and to renegotiate existing interest-rate swap agreements with counterparties JPMorgan and Morgan Stanley, according to Steven Hoffmann, a managing director with Government Capital Management.

He said the new swap agreements saw rates rise for the city - two basis points for a swap with JPMorgan and 6.5 basis points for a swap with Morgan Stanley. Despite the increased rates, it was still cheaper than terminating the agreements, Hoffmann said.

The renegotiation also included shifting one of the swaps from one tranche to another.

In addition to increased swap costs, Cleveland, like issuers across the country, had to pay dramatically higher fees to secure letters of credit. The cost of an LOC has nearly tripled from late 2007, Hoffmann said.

"Fees have gone way up, and [securing an LOC] included shopping around a lot because a lot of people are still sitting on the sidelines," he said.

Moody's Investors Service assigned an underlying rating of Aa2 to all three series of debt as well as a VMIG-1 short-term rating. Standard & Poor's assigned a AA rating to the fixed-rate tranche, an A-1-plus rating to the $55 million issue, and an A-1 rating to the $26 million issue.

Meanwhile, the city plans to enter the market in two weeks with about $40 million of refunding bonds for the Cleveland-Hopkins International Airport, and sell $35 million of new-money general obligation bonds in the next few months to finance a series of capital projects.

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