BRADENTON, Fla. - Louisville, Ky., issuers will bring $360 million of bonds to the market during November as investors continue to search for quality amid uncertain conditions.
The Louisville and Jefferson County Metropolitan Sewer District prices the largest deal, for $306.3 million, on Tuesday.
Louisville-Jefferson County Metro Government plans to price $53.07 million in unlimited tax general obligation bonds Nov. 12.
The Metro Sewer District sale, consisting of high-quality, short- and long-term investment opportunities should easily be absorbed by the market, as should the later GO deal, a trader said.
Tuesday's offering will see the sewer district again roll over $226.3 million in subordinate one-year bond anticipation notes. Officials said the BANs have sold well since MSD first used them as a variable-rate component in 2009.
MSD will also price $80 million of 30-year, senior-lien revenue bonds. Proceeds will be used for new capital, largely to support an $850 million federal consent decree signed in 2005.
Work to fulfill consent decree obligations has successfully reached the halfway point on time and under budget, according to MSD chief financial officer Chad Collier.
A trader said the two Louisville-area offerings should be attractive even though the muni market has seen some investors remain on the sidelines in recent weeks due to "extreme" volatility in rates.
"Kentucky doesn't have a lot of paper so I think the market will handle the deals well," the trader said.
Another trader said some customers have preferred essential service revenue bonds, such as those offered by MSD, since the treatment of GOs first was questioned in Detroit's bankruptcy. Detroit ultimately found GO supporters willing to take 74% recovery on unlimited GOs in that financially stressed city.
MSD's bond anticipation notes have been rated MIG-1 by Moody's Investors Service and SP-1-plus by Standard & Poor's. The 30-year revenue bonds are rated Aa3 and AA, respectively.
Moody's affirmed its Aa3 underlying ratings on the district's $1.6 billion of outstanding parity debt, and said the outlook remains positive. S&P affirmed its ratings on the outstanding debt, and said the outlook on MSD's senior-lien debt is stable.
Louisville and Jefferson County MSD provides wastewater and stormwater collection and disposal for a population of about 750,000. The district has 240,174 customers.
The district has found good support for its program from investors over the years, according to Collier.
"There is a big market out there for short-term, tax-exempt securities," said Collier, who has been MSD's financial officer for just over two years and previously worked for a large insurer. "There has been more demand than product."
Using a BAN, which does not require the expense of outside liquidity support, has worked well for MSD as a cost-saving strategy, he said.
"We've been rolling this particular BAN since 2009, and there have been very strong number of underwriters bidding on it," said Collier.
Last year, the BAN sold at an "unreal" all-in true-interest cost of 38 basis points, he said, adding that he expects to receive lower rates when the 2014 BANs are issued Tuesday.
"It's a significant reduction in interest cost to us, and to our ratepayers, by continuing to issue debt on a short-term basis," said Collier.
He also anticipates that the double-A rated, 30-year, new-money revenue bonds will attract rates as low as 4.3%, he said.
The federal consent decree resolved alleged Clean Water Act violations by requiring certain work to be done to prevent sewer system overflows and combined wastewater and stormwater overflows from discharging into area streams and the Ohio River.
"What we're doing right now is building lot of basins to hold a lot of stormwater," Collier said.
The basins are designed to hold stormwater that can build up during large rain events and can't be immediately handled by sewer systems. The basins capture the overflow until it can be diverted into the sewer systems for treatment.
"The good news for us," Collier said about the consent decree program, "is that we are ahead of schedule and under budget. We're on the downside now but we will continue to have to issue new bonds about five or six more years."
Another supportive factor is MSD's ability to set rates without Metro Council's approval as long as the increases are less than 7% annually, he said. The district has raised rates to support the debt program, and now targets increases around 5.5% a year.
Moody's said its positive outlook on MSD's credit reflects the ongoing financial and debt portfolio revisions implemented by the new management team.
"The outlook further considers our expectation that the district's financial metrics will continue to improve given plans for timely rate increases, conservative budgeting practices, as well as benefits associated with the realization of cost efficiencies and organizational synergies through an intermodal agreement with the Louisville Water Works Board," said analyst Nathan Phelps.
The Water Works Board is a separate entity that has worked with MSD to combined back office functions to achieve savings for both entities, Collier said. The first phase of the program is under way with the joint hiring of an information technology specialist.
Moody's said its positive outlook also incorporates the expectation that MSD's succession planning process will continue to support strong management practices, which are important due to the announced retirement of Greg Heitzman, the executive director, in July 2015.
S&P said while the district has a large amount of debt relative to the size of its capital base, MSD plans to resume funding capital needs with cash and debt after the completion of the current 2015-2019 capital improvement plan.
"If MSD enters that period demonstrating an ability to sustain financial performance either consistent with or better than what current projections indicate, this could lead us to consider a possible higher rating," said S&P analyst Scott Kerrigan.
The district's CIP totals $569 million, which will require $245 million of additional debt through 2019, Kerrigan said.
J.J.B. Hilliard, W.L. Lyons LLC is the financial advisor for MSD. Bond counsel is Dinsmore & Shohl LLP, which merged with Peck Shaffer & Williams earlier this year.
On Nov. 12, Louisville-Jefferson County Metro Government plans to competitively price $53.07 million of unlimited GO bonds in three series.
The deals are structured as $11.3 million of 20-year bonds for the Metro city's capital projects, $21.5 million in five-year notes for projects with shorter life expectancy such as vehicles and fire gear, and $20.23 million of GO refunding bonds within existing maturities.
While ratings for the upcoming bond issue have not been released, Metro's outstanding general obligations bonds are currently rated AAA by Fitch Ratings, Aa1 by Moody's, and AA-plus by Standard & Poor's.
"I think Metro Louisville enjoys excellent credit ratings and the bonds are desirable in the marketplace because of those ratings," said Metro's chief financial officer, Steve Rowland.
The city expects to be back in the market next year and in 2015 to finance other capital needs, he said.
Hilliard Lyons is the city's financial advisor. Rubin & Hays is bond counsel.