CHICAGO — The Iowa Finance Authority will compete for investor interest in a crowded market Tuesday with the sale of $293 million of triple-A rated, new-money and refunding state revolving fund revenue bonds that tap the Build America Bond program.
The transaction is the first state revolving fund deal being issued under an amended trust indenture that is expected to strengthen the already top-rated SRF program. The program carries triple-A ratings from all three rating agencies.
Piper Jaffray & Co. is the book-runner and JPMorgan is the co-senior manager. Public Financial Management Inc. is the financial adviser.
The authority took retail orders on Monday.
About $90 million of the sale will refund outstanding debt for savings, said program coordinator Lori Beary.
The remainder of the sale will reimburse the SRF program for wastewater and drinking water loans made to program participants and provide funding for additional loans.
Ahead of the sale, all three rating agencies affirmed the top credit marks assigned to the bonds and $480.4 million of SRF bonds.
As part of the transaction, the authority amended its Master Trust Agreement that benefits all prior and new bonds. Loan repayments, reserves, and BAB interest subsidy payments from the federal governments are pledged to bondholders.
The amended trust shifts the program to a cash-flow structure from its existing hybrid structure, in which both program reserves and excess loan repayments secure the bonds.
As part of the change, the program pledges an existing equity fund to bondholders.
The equity fund holds excess loan repayments, reserve funds freed from prior pledges, and invested funds not needed to cure any loan deficiencies. It will significantly enhance bondholder security, Fitch Ratings wrote. The clean water and drinking water funds are cross-collateralized.
Under the new structure, bonds will no longer be separately secured within closed trusts but will be secured by an open Master Trust Estate.
Annual debt-service coverage from loan repayments ranges from 1.23 times in 2010 to 2.29 times in future years. Reserves hold $89 million, or 18.4% of total bonds outstanding.
The program can withstand 89.8% and 100% loan defaults during the middle and last four years, respectively, of the bonds’ life, Fitch wrote.
More than 500 borrowers use either of the pool programs, with Sioux City being the largest.
Fitch estimates at least 26% of the pledged loan portfolio has investment-grade credit characteristics.
Moody’s Investors Service said the average credit quality of pool borrowers is A3.
“The stable outlook is based on the expectation that the sizable reserves and cash flows, and average credit quality and substantial diversity of borrowers will be maintained,” Moody’s wrote.