Indy Wins Triple-A on Stormwater Debt
CHICAGO - Indianapolis won a coveted triple-A rating from Standard & Poor's on its stormwater system bonds as the city heads into market with a $15 million borrowing and puts the final touches on a new $300 million capital plan.
The deal will fix out a chunk of stormwater bonds the city privately placed in 2011 that are scheduled to shift into a variable-rate mode in 2020. The city has almost all of its $4.1 billion debt portfolio in a fixed-rate mode, with the exception of some airport debt. The stormwater system is a mix of natural and manmade infrastructure managed by the city's public works department. It's one of the city's last publicly managed utilities, after Indianapolis sold its water and sewer departments to a non-profit in a high-profile privatization in 2011.
Indianapolis last December approved an increase in the stormwater rates, which are attached to property tax bills. The measure allows for automatic rate increases through 2034 unless the city-county council halts them. The rate increases are expected to generate enough revenue to support a $320 million capital plan.
The bonds, which have a final maturity of 2041, will no longer feature the city's moral obligation - a pledge they carried until 2013 - and will not have a debt service reserve fund.
"This is a credit that started back in the early 2000s that had the moral obligation of the city behind it," said Greg Clark, director of the Indianapolis Local Improvement Bond Bank, the city's borrowing arm. "We removed the moral obligation [in 2013] and let it stand on its own, and you can see the increase in coverage through the increased rates. It's a good position for the city to start a significant and sophisticated capital program over the next 10 to 15 years."
The deal is set to price July 28.
Stifel, Nicolaus & Company Inc. is senior manager and Ramirez & Co. Inc is co-senior.
Bingham Greenebaum Doll LLP is bond counsel. Sycamore Advisors LLC is financial advisor.
Clark said the city expects to achieve 6% net present value savings on the refunding, but the deal's main purpose is to shift the debt into a long-term fixed-rate mode.
"In the interest-rate environment we're having, and having the optional no-penalty call each year, I said, let's go ahead and lock this in over a long term so you're protecting the district from interest-rate exposure and having a little more predictability with your debt service forecast so we can plan our long-term capital program," said Clark. The city will detail of the capital plan later this year, but it's expected to cover up to the next 15 years and include projects to help comply with environmental stormwater overflow standards.
Ahead of the deal, S&P boosted its rating on the debt to AAA from AA-plus. Fitch Ratings maintained its AA-plus rating on the bonds. Both have stable outlooks.
The S&P upgrade is due largely to the rate increases, analyst Scott Garrigan said in a press release.
"The upgrade is due to additional certainty related to how the city will fund the large $320 million stormwater capital plan," said Garrigan said. "The rating also reflects our assessment of the stormwater system's large and diverse service rate base and low stormwater rates."
In related news, Clark said the city is likely going to hire Kroll Ratings to rate its general obligation and moral obligation debt. Indianapois currently uses all three major ratings to rate the city's general obligation bonds and has no plans yet to drop a firm even with the addition of the fourth firm.
"I wanted to bring in a fresh set of eyes to bring us a new perspective on what our credit looks like," Clark said.