CHICAGO - The Ohio Water Development Authority today will begin taking retail orders on $128 million of fixed-rate revenue refunding bonds to finance its triple-A rated fresh water program.

Institutional pricing will begin Tuesday.

The bonds will be used to refund $105 million of commercial paper and $16 million of 1998 fresh water bonds. This week's transaction will take out all the fresh water program's outstanding commercial paper. It and marks the start of the authority's new policy of financing the program with commercial paper until it hits its volume cap, and then refunding the paper with longer-term debt.

An as-yet undetermined amount of today's bonds will feature eight-year maturities in order to take advantage of relatively low yields on the short end of the curve while saving interest costs over the long term, said Scott Campbell, the water authority's chief operating officer.

Today's sale marks the first time the agency has held a retail order period for its bonds, a move advised by its underwriters to capitalize on increased retail interest in the market since last year's credit crunch quashed much institutional activity.

Morgan Stanley is the senior manager on the transaction, leading a team with Citi, Merrill Lynch & Co., Conners & Co., and Rice Financial Products. Bond counsel is Benesch, Friedlander, Coplan & Aronoff LLP. The authority's financial adviser is RBC Capital Markets.

Moody's Investors Service and Standard & Poor's rate the authority's fresh-water program debt AAA. Chief among the program's strengths is its stable history and its ability to withstand a default of 48% of loan payments and still be able to make debt service payments, according to Moody's.

The bonds are secured by repayments from the borrowers - which are due five months before debt service payments are due - as well as the program's investment earnings, surpluses in the fresh and pure water programs, the authority's cross-collateral fund, and debt service reserve funds.

Since it began in 1968, the program has never suffered a true default, though a few communities have missed payments over the years, Campbell said. The program currently has loans out to 225 borrowers and has financed 591 projects across Ohio.

The interest rates on the program's loans are tied to The Bond Buyer 20-bond index of general obligation yields, said Campbell.

The authority began funding its fresh-water program with commercial paper in 2006, when the Tax Increase Prevention and Reconciliation Act of 2005 became law.

TIPRA imposed a number of new requirements for interest on tax-exempt bonds used in pooled financing programs - including a requirement that 30% of bond proceeds be spent within one year, and 95% spent within three years, Campbell said.

In order to meet those deadlines, the authority began funding its fresh water program with commercial paper until hitting the volume cap of $150 million, and then issuing longer-term debt to refund that paper.

"This is our first time to take it out, and it's what we expect to our usual to practice to be now," said Campbell said.

The authority this year will have an additional $280 million in federal stimulus funds to finance water and wastewater products on top of the $580 million already available, said executive director, Steve Grossman. He noted that the demand for such loans has already reached $4 billion on a state Web site recently created for local governments to request federal money.

"It's hard to gauge real demand, but our expectation is that by May the stimulus money and all the funds will begin to flow if all goes well," Grossman said.

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