CHICAGO - The North Dakota Rural Water Finance Corp. plans to issue $18.6 million ofnotes tomorrow in a deal that will provide funds for rural water projects and followssimilar transactions that have created a niche market for a group of bond marketprofessionals.
The notes will be issued to provide interim financing for rural governmental entitiesawaiting U.S. Department of Agriculture rural development loans to improve their watersystems.
The 12-month public-project construction notes are backed primarily by a pledge fromlocal governments to repay the corporation when they receive the USDA loans, said NickRoederer, the underwriter and financial adviser for the deal, who is with Morgan Keegan& Co.
This transaction brings to about $700 million the amount of similar debt issuance thatRoederer and a group of bond professionals have managed for entities in several states,primarily in the Midwest. Roederer and his partner, Bob Pennington, first took advantageof the niche market of interim financing when the two worked on an issue for a ruraldevelopment finance agency in Kentucky in 1995.
Roederer and Pennington recently moved to Morgan Keegan from Kirkpatrick Pettis.
Fifth Third Bank will act as trustee on the North Dakota issue, as it has on the otherdeals, Roederer said. Arntson & Stewart will act as bond counsel. Rubin & Hays isunderwriter counsel and has worked on all of the other sales with the team.
"We've got this niche product, and we've been able to take it to each state," Roederersaid.
The USDA's rural development division allows governmental entities with a population ofless than 10,000 to secure loans, grants, and loan guarantees for drinking water,sanitary sewer, solid waste, and storm-drainage projects. The program is just one ofseveral of the department's rural development programs, some of which provide bondingopportunities for local projects.
The USDA bases its loan rates on a structure that allows it to recoup the cost of itsown funds.
Roederer said his team has worked on deals with loan amounts as small as $31,000 and aslarge as $9 million. The average loan amount is $1 million, he said.
In several states - including North Dakota, Illinois, Minnesota, Wisconsin, Texas, andPennsylvania - conduit issuers have been created to borrow short term to fund theconstruction phase of the projects while the rural entities await federal funds. FifthThird, the trustee for all of the transactions, manages loan disbursements andrepayments for the local entities, Roederer said.
In 1999, the Rural Water System Association of North Dakota formed the Rural WaterFinance Corp., according to Stuart Carlson, executive director of the corporation.
"The whole idea was that if we could provide the interim financing at a lesser rate, itwould provide more purchasing power for small communities," Carlson said.
Similar entities have been formed in other states, and in at least one case, the statefunctions as the conduit issuer, Roederer said.
Moody's Investors Service is the only agency that rates the North Dakota deal. Itassigned a MIG-1, a common rating for similar offerings, said analyst Ted Damutz.
In addition to the federal loan security, he said the deal carries a pledge of funds that the corporation would
receive - if needed - from the state-owned Bank of North Dakota, which also providesloans and grants for water projects.
"Strong liquidity for note repayment is provided by these pledged sources of repayment -the strength of which is enhanced by the structure of the note program," Moody'sanalysts wrote in a news release.
The analysts said that they expect the corporation to have favorable market access, ashas been seen in previous issues, in part due to the Bank of North Dakota's commitmentto fund incomplete projects.
"They've got a nice little niche in the market," Damutz said of the group of bondprofessionals, who have several other deals coming in the fall.
Moody's is working on a rating for a deal out of Minnesota, and the Wisconsin RuralWater Construction Commission issued $23 million of notes last Wednesday, according toRoederer.
"This is not for the Detroits and Chicagos," he said. "This is for `ABC' water districtthat has got this rural development money, and they can't go anywhere else to get theinterim financing."
