DALLAS — Phoenix will continue its policy of issuing short-term notes backed by a letter of credit to match construction costs on major utility projects with next week’s sale of a still-undetermined amount of wastewater system revenue bond anticipation notes.
The letter of credit from Bank of America NA that supports the notes is sized at $150 million plus 270 days of interest at the maximum rate on the notes.
Jeff DeWitt, assistant finance director for the city, said notes will be sold over the next six to eight months as work progresses on the wastewater projects.
“We sell commercial paper as we need the cash for payments to contractors, and then wait until the projects are completed before we issue fixed-rate bonds,” DeWitt said. “It is less expensive, and it helps us maintain a good level of short-term debt in our portfolio.”
The Bans will be issued by the Phoenix Civic Improvement Corp., which is responsible for almost all city debt except for general obligation bonds. The sale of the first tranche is set for Oct. 25.
Banc of America Securities LLC will be the dealer for the notes.
Phoenix has been using commercial paper to finance wastewater projects since 2003 and for water projects since 2001, DeWitt said.“It’s a very good tool when you are paying for large capital projects and have some significant cash flow needs,” he said. “It gives you more flexibility than bonds, because it allows you to issue the notes only when the proceeds are needed. I think we’ll always have a short-term commercial paper aspect of our finances because of the advantages it gives us.”
Because the full $150 million is not needed at this time, DeWitt said, the Bans will be sold in as many as three tranches. The notes are scheduled to mature no later than 270 days after being issued.
“We have an open letter of credit, which lets us issue the debt as we need the proceeds,” he said. “We expect to issue it in at least three tranches. It will probably be $50 million now, and $25 million to $50 million in three months, and the remainder in the early spring.”
Phoenix’s short-term commercial paper is rated A-1-plus by Standard & Poor’s and P-1 by Moody’s Investors Service. Fitch Ratings does not rate the credit.
DeWitt said the short-term debt would be repaid in the late spring or early summer of 2007, when the city plans to issues utility system revenue bonds to finance the wastewater system’s capital improvement program.
“The numbers are still preliminary, but we’ll issue $150 million in bonds to take out the short-term notes and maybe another $150 million for capital needs,” he said.
“We have some pretty large cash-flow needs for wastewater,” DeWitt added. “We’re expanding a treatment plant, which is expensive, but mostly it is just routine upgrading and expansion projects.”
