SAN FRANCISCO — The San Francisco Public Utilities Commission will likely sell $523 million of mostly Build America Bonds Wednesday after delaying the deal a week due to a slumping market.

The SFPUC deal — $173 million of tax-exempt and $350 million of revenue BABs — is set to proceed but will still hinge on morning market conditions, debt manager Marc Hughes said Tuesday afternoon.

"The market is in horrible shape," Hughes said. "We may cancel it [Wednesday] morning depending on what the market looks like, but right now our intention is to go ahead."

The utility moved the sale forward to this month to capture the BAB subsidy set to expire Dec. 31, Hughes said. It was originally planned for the first half of 2011, and Hughes has said the utility could delay the deal until next year if conditions are unfavorable.

The turbulent municipal market weakened Monday ahead of more than $10 billion of new issues expected this week, much of them BABs scheduled before the year-end deadline. The average weekly muni issuance is about $8 billion

"We are seeing significant softening in the market," said Alexander Anderson, a portfolio manager with Envision Capital Management in Los Angeles. The taxable BAB program "has been good and bad. It was intended to encourage public building, but [has] given cities and counties more incentive to take on more debt, and that can be seen as a negative."

Tax-exempt yields Monday were six to eight basis points higher overall, with 30-year yields climbing to a 16-month high.

BABs have been left out of a tax overhaul bill moving through Congress that likely will be approved before the end of the year. The program has faced opposition from Republicans who contend that BABs reward the least responsible state and local governments by giving them higher federal subsidy payments.

The SFPUC issue includes tax-exempt paper maturities that would run roughly from 2017 to 2030, and taxable BABs that would run from 2031 to 2050. The utilities' net water revenues back both.

Moody's Investors Service rates the bonds Aa2 and Standard & Poor's rates them AA-minus.

The bonds would be used to finance and refinance capital projects as part of a campaign to improve San Francisco's water system.

The utility's $3.1 billion debt includes the current issue, according to Moody's.

Todd Rydstrom, the commission's chief financial officer, said last week that the SFPUC's water supply is in good shape and capital project bids are coming in under engineering estimates.

Moody's said in a recent note that the utility is facing less water use by Bay Area residents and rising debt service, which the SFPUC plans to tackle by increasing rates.

The utility, which had planned a wholesale water rate hike of 29% in 2012, will now raise rates 34%, according to the rating agency.

"We anticipate that the current levels of debt service coverage represent a low point based on particularly conservative water consumption projections," Moody's said in the note. SFPUC's financial advisers on the deal are Public Financial Management and Backstrom McCarley Berry & Co. The co-bond counsel are Sidley Austin LLP and Amira Jackmon.

In May, the commission brought its wastewater credit to the market for the first time in seven years with a $240 million issue that included $192 million of BABs.

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