CHICAGO - Missouri officials were watching the market closely yesterday, ready to move as soon as today if interest rates come down to price $72 million of state revolving loan program revenue bonds to finance new water pollution control and drinking water loans.

The largest participant in that borrowing - the Metropolitan Sewer District of St. Louis - is also watching the market in advance of a possible pricing date next week on a $30 million issue that would mark the first borrowing under a $275 million bond authorization approved by voters in August.

The Missouri State Environmental Improvement and Energy Resources Authority, which manages the state revolving fund programs, originally planned to hold a one-day retail order period yesterday with an institutional pricing set for today. If the interest rates for a triple-A credit fall to meet the parameters set by the funds' borrowers, the agency would attempt to complete the sale in one day as soon as today, according to deputy director Karen Massey.

"We are ready to go. Right now we are not behind our original schedule," she said.

The agency is using George K. Baum & Co. and Wachovia Securities LLC as its co-senior managers. The team was initially picked in mid-2007 with the former UBS Securities LLC in a lead role until it shuttered its municipal business later in the year. Lamont Financial Services Corp. is serving as financial adviser.

Fitch Ratings and Moody's Investors Service affirmed the top ratings assigned to the state revolving fund's $1.3 billion of debt in conjunction with the new sale. The bonds are secured by borrowers' loan repayments, reserve fund earnings, and reserves.

The program's credit benefits from strong management and oversight and the program's large and diverse pool of more than 190 borrowers. That pool includes the MSD, which accounts for about 17% of the outstanding loan portfolio, including $40 million in the upcoming sale, and Kansas City, which accounts for 7.5%, Moody's analysts wrote.

The programs' challenges include demand for drinking water loans that are beginning to exceed available funds and could lead a reduction in the generous debt service subsidy provided to borrowers. The sewer district's share of the borrowing is subordinate to its own bond issues, but Moody's said that was not a concern due to credit's strong Aa2 rating.

The state authority provides a generous subsidy to local borrowers through earnings on its sizeable reserves - $880 million - in the form of a credit. The reserves are funded with state and federal capitalization grants. The agency establishes a dedicated reserve for each of its borrowers set at 70% of the loan principal, although in some cases the reserve is set at a lower rate.

The end result is the programs' ability to withstand a loan default rate of 47.7% through bond maturity. "In Moody's opinion, the strong default tolerance provided by the reserves and the master trust structure is a key element to the highest quality rating on the bonds," analysts wrote.

The Missouri authority has typically invested its reserves in guaranteed investment contracts, but the credit crunch and ensuing market turmoil this year has dramatically altered the landscape for such contracts - with some businesses downgraded to levels below the requirements of the state revolving fund and others unwilling to commit the needed liquidity.

Massey said the typical list of past GIC providers included American International Group Inc., MBIA Insurance Corp., Societe Generale Group, West LB, and other monoline insurers. "The ones who have a credit that still meets our requirements are unwilling to tie up their liquidity because of the collateral requirements," she said.

The agency's GICs are collateralized, and many have make-whole provisions for the loss of interest earnings in the event the contracts are terminated. The authority is reviewing all of its GICs and plans to terminate some entered into for reserves on other issues to reinvest in state and local government securities. Columbia Capital Management is serving as broker on the purchases.

The MSD is ready to price its $30 million issue as soon as mid-next week if the market settles and long-term rates fall. While the district's $40 million in the SRF deal comes from an older voter-approved bond authorization, the $30 million is the first under a $275 million authorization in August.

The sewer district had originally planned to price this week, but like many others is now taking a more hesitant approach. Officials believe their deal's timing could be aided by the strong retail demand seen for recent transactions.

The utility had always planned for a strong retail component of about 50%, putting together an underwriting team that includes many local and retail-oriented firms. They include senior manager Stifel Nicolaus & Co. and co-senior Edward Jones.

"We believe we are well-positioned as we were concerned about the softness in the market over the summer and planned then for a large retail component," said MSD treasurer Karl Tyminski.

Public Financial Management Inc. and Valdes & Moreno are financial advisers.

The sewer district also enters the market with upgrades from two credit agencies. Fitch Ratings and Standard & Poor's raised their ratings to AA-plus while Moody's Investors Service affirmed its Aa2. The bonds are secured by net pledged revenues of the system after payment of operations and maintenance expenses. The district will have $230 million of outstanding debt.

Fitch attributed its upgrade to "substantial improvement in the district's liquidity position as a result of a planned reclassification of certain cash and investments, which previously had been excluded from liquidity calculations because the assets were considered restricted and unavailable for operations."

The credit reflects the district's strong financial performance, a stable and diverse service area, competitive user charges, and sizeable capital needs.

One uncertainty is how the utility will resolve a lawsuit filed by the U.S. Environmental Protection Agency charging the MSD with alleged violations of the Clean Water Act stemming from past discharges. The district remains in the negotiation stage with regulators and may enter mediation.

"It is unclear when a settlement will be reached and what, if any, impact such a settlement will have on the district's capital program," Fitch analysts wrote.

The district won approval for bonding as a means to keep rate increases down. Proceeds would go to fund the second phase of projects under a long-term $3.7 billion capital improvement program to expand and rehabilitate the utility's entire wastewater collection, and treatment capabilities. The plan calls for upgrades to treatment plants, the construction of new plants, repairs, and new sewer line construction.

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