The District of Columbia Water and Sewer Authorityplans to bring $310 million of fixed-rate subordinated-lien revenue refunding bonds to market this week, joining the growing list of issuers that are refunding auction-rate securities amid the disruption in the ARS market.

The Series 2008A bonds will benefit from a rating upgrade for the authority from Standard & Poor's.

WASA also expects to bring $44 million of Series B variable-rate bonds in the near future as part of a plan to refund all of its outstanding ARS. The Series 2008A bonds will refund Series 2004 subordinate-lien bonds and a portion of the authority's Series 2007B outstanding subordinated-lien taxable auction-rate debt. The Series 2008B bonds will refund the remainder of its Series 2007B auction-rate debt as variable-rate demand bonds or commercial paper.

Senior book-runner on the deal is Bear, Stearns & Co., and co-manager is Citi. Public Financial Management Inc. and P.G. Corbin & Co. are co-financial advisers. Squire, Sanders & Dempsey LLP and Leftwich & Ludaway LLC are co-bond counsel.

While none of WASA's auctions have failed, chief financial officer Olu Adebo said the agency was not "taking any chances." He said the interest rates peaked at 15% at one weekly auction.

"Since then, it's come down to the 5% average," Adebo said. "The reason we're getting out of it is just because of the volatility of the market. That's not to say we're giving up on the variable-rate market; we're just getting out of the auction-rate market."

Adebo said the authority is considering bond insurance for the deal.

"We're basically going to do the math before closing to see if it's worth getting the insurance," he said. "We're poised to insure them if we get a better a rate."

Adebo said the $44 million of Series B bonds will be backed by a letter of credit from Dexia Bank.

He said WASA is not worried that JPMorgan Chase & Co.'s recent purchase of Bear will have any negative affect on the deal.

"Certainly that is something that we're currently monitoring, but at this point, we believe that we should be fine, considering we're wrapping up the deal Tuesday," Adebo said. "The key point is that we have Citi ... they have been intimately involved in the whole process."

Standard & Poor's raised its underlying rating on the authority's senior-lien debt to AA from AA-minus with a stable outlook. It also raised its long-term rating on the agency's subordinate-lien bonds to AA-minus from A-plus, and affirmed its rating of WASA's Series 2008A public utility subordinate-lien refunding revenue bonds at AA-minus.

Standard & Poor's said the distinction in ratings between the senior and subordinate debt reflects the difference in lien priority between the two. The Series 2008A bonds are being issued to refund the Series 2004 public utility subordinate-lien revenue bonds, and the Series 2004 bonds were auction-rate securities. While there had been no failed auctions, interest rates on these bonds have increased, according to Standard & Poor's.

"The upgrade is based on a demonstrated track record of sound financial operations over time, a strong service area economy, and greater certainty regarding future costs of regulatory compliance," analyst John Sugden-Castillo said in a news release.

Moody's Investors Service rates the deal A1 with a stable outlook and Fitch Ratings gives the $310 million subordinate-lien revenue refunding bonds an A-plus with a stable outlook. Fitch also affirms its A-plus rating on WASA's $748 million of outstanding public utility subordinate-lien revenue bonds and its AA-minus rating on $266.1 million of outstanding public utility senior-lien revenue bonds.

The authority has about $1 billion of outstanding rated debt.

Moody's analyst Tom Paolicelli said WASA's refunding is a prudent and conservative move. "We just don't know what is going to become of the auction-rate market," he said.

Paolicelli said as conversions of ARS take place across the country, WASA has an easier sell.

"One of the advantages here is that these bonds were not swapped to a fixed rate," he said. "One of the complicating factors with other issuers is the fact that they have a swap linked to the auction-rate securities, and a lot of the swaps have a negative mark-to-market, which would mean if they terminated them, they would owe a payment ... So the decision to just take it out as fixed rate is somewhat easier for them compared to other issuers."

The agency's strengths include a strong financial position, characterized by typically better budgeted annual operating results and high liquidity levels, according to Moody's rating affirmation.

The WASA board requires the agency to set rates and charges without external approval and has demonstrated a "commitment to implementing rate increases, when needed," the report. Its annual rate increases range from 8% to 12% and are planned over the next five years.

Its diversified revenue stream comes from a mostly stable economic area.

Also a strength for the credit is that its board requires a 1.4 times net revenue coverage of senior-lien debt service and maintenance of at least six months' operating revenues, which enhance bondholder security, Moody's said.

"The big challenge they're facing is, like a lot of other water and sewer systems throughout the country, they have a very large capital plan," Paolicelli said.

WASA has a $3.1 billion, 10-year capital improvement plan, which includes a mandated 20-year combined sewer overflow control plan and enhanced treatment to remove nitrogen at its Blue Plains wastewater treatment plant.

The authority is likely to be in the market again for new money in the spring of 2009.

Moody's projects that there will be declining debt service coverage margins on the subordinate-lien bonds and a draw-down of rate stabilization reserves.

"Other than that, they've shown themselves to be very well managed," Paolicelli said. "The key to the credit is the continued willingness to set rate increases, to maintain decent financial margins. That's key here and they've shown that historically, and we expect that to continue."

 

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