SAN FRANCISCO - Fitch Ratings upgraded San Diego's sewer revenue bonds to AA-minus from BBB-plus as the city prepares to sell about $900 million of debt.
The upgrade applies to $893.7 million of outstanding debt, sold by the San Diego Public Facilities Financing Authority, much of which will be refunded in two deals the city plans to price in May.
The four-notch upgrade follows four years of financial reforms, prompted by a 2004 pension and municipal disclosure scandal that led to deep downgrades of the city's debt and a five-year absence from the public municipal bond market. The city returned to the public bond market in January with a $157.2 million water revenue bond deal.
The sewer system upgrade reflects "the sound financial position of the system" and "the progress the city has made to date in addressing disclosure and internal control issues," Fitch analysts Kathy Masterson and Doug Scott said in a report.
San Diego just this week caught up with its financial reporting. The City Council on Tuesday accepted and filed the city's fiscal 2008 comprehensive annual financial report. The city had fallen years behind in preparing CAFRs and was hit with Securities and Exchange Commission sanctions for securities fraud after previous management failed to disclose about $2 billion of unfunded pension and retiree health care liabilities.
The sewer system's portion of these obligations is "manageable," Fitch said, adding that the system's financial performance has been "good" in recent years, with both debt service coverage and liquidity ratios on the rise.
The agency said the rating strengths are somewhat offset by "relatively high" debt levels, which are expected to rise as the city implements its $752 million, five-year capital plan.
Moody's Investors Service and Standard & Poor's had not yet rated the new deals as of press time yesterday, but the city expected ratings to be published shortly. Moody's rates the outstanding sewer revenue bonds A3, while Standard & Poor's rates them A-plus.
San Diego plans to sell two sewer deals in May, said debt manager Lakshmi Kommi. The first deal, Series 2009A, will refund a $224 million private placement sold to Citi in 2007, finance $145 million of new capital spending, and refund $51 million of sewer bonds for economic reasons. With issuance costs and reserve funds, the deal is expected to total about $458 million. The city plans to price the bonds in the first week of May.
Banc of America Securities LLC is the book-runner on the deal. Citi and Siebert Brandford Shank & Co. are co-senior managers. Fidelity Capital Markets and Wedbush Morgan Securities are co-managers.
The new-money portion of the deal will finance construction to comply with a federal court consent decree, under which the city agreed to upgrade its sewer system to prevent raw sewerage spills, and to comply with the Clean Water Act.
The second deal, Series 2009B, is a straight economic refunding, Kommi said. As of the week of April 8, the city had about $430 million of bonds in the money and eligible for refunding. Kommi has City Council authorization to refund up to $900 million of sewer debt.
Citi is the book-runner on Series 2009B. JPMorgan and Banc of America are co-senior managers, with Fidelity and Wedbush again rounding out the syndicate as co-managers.
Kommi said the city's underwriting teams suggested breaking the deal into two tranches because of worries that the market would have trouble absorbing $900 million of San Diego sewer bonds all at once. The second deal is set to price in late May.
Nixon Peabody LLP is bond counsel on both deals, and Hawkins Delafield & Wood LLP is disclosure counsel. Montague DeRose & Associates is the financial adviser.