CHICAGO — The Metropolitan Sewer District of St. Louis will sell $85 million of revenue bonds today, tapping the Build America Bond program to raise funds for its long-term $6 billion capital improvement program.

Bank of America Merrill Lynch is senior manager and Piper Jaffray & Co. and Siebert Brandford Shank & Co. are co-managers. Public Financial Management Inc. is the financial adviser and Valdes & Moreno Inc. is co-financial adviser.

The bonds mature between 2035 to 2039 and the transaction is expected to carry a make-whole call provision. MSD will apply for a direct-pay interest subsidy. The deal was structured to take advantage of the federal stimulus borrowing program.

“We have definite cash needs now, so we needed to issue and wanted to take advantage of the BAB program’s interest rate savings,” said MSD treasurer Karl ­Tyminski. The longer maturities — where BABs provide the most savings over tax-exempt bonds — fit well into the system’s debt portfolio as its issuance through the state revolving fund typically has shorter maturities, he said, adding: “It complements the structure on the SRF bonds.”

Tyminski said he was willing to swap the refunding flexibility of a traditional municipal call feature for a make-whole call given the size of the system’s program and the flexibility afforded by its outstanding and planned tax-exempt issuance.

He said concerns over the volatile spreads on some BAB issues and profit-taking by primary market investors in secondary market trading prompted him and his financial advisory team to conduct interviews with the 10 firms on MSD’s pre-qualified list of banks before naming a team late last fall.

Officials sought prospective pricing figures and quizzed the firms on their BAB experience. Bank of America and Piper offered up the lowest interest rates. “It was helpful to have their experience up front and who was committed to being aggressive in the pricing,” Tyminski said.

“We saw some pretty divergent pricing views from the firms,” said PFM’s Jeanne Vanda.

The sewer district is especially sensitive to public criticism as its bonding must be approved by voters and its rate hikes by a commission. “How we manage the voters’ money is very critical to our multi-billion, multi-decade capital program,” Tyminski said.

MSD’s counterpart in Chicago — the Metropolitan Water Reclamation District of Greater Chicago — has faced criticism in articles by Bloomberg on the pricing of its sale of $600 million of bonds last year that included BABs. The articles assert the district overpaid by $8 million based on a comparison to similarly rated credits and profit-taking in the secondary market.

MSD won approval in August 2008 from voters for $275 million of bonding. It promoted the borrowing as the best means to manage rate hikes to fund its $3.7 billion capital improvement program to expand and rehabilitate the utility’s entire wastewater collection and treatment capabilities.

The plan calls for upgrades to treatment plants, the construction of new plants, repairs, and new sewer-line construction. The district previously won approval from voters for $500 million in borrowing in 2002.

MSD has proposed a series of rate increases into fiscal 2012 that would result in a 24% increase for residential and business users. System official expect to spend $446 million between 2010 and 2012 on capital projects with half being financed with debt and the remainder with cash.

The district will return to the rate commission next year for its next rate hike and expects its next significant debt issue won’t be needed until fiscal 2011, with additional bonding authorization needed from voters as soon as 2012, Tyminski said.

Ahead of the sale all three rating agencies affirmed MSD’s ratings on the deal and $259 million of parity debt. Fitch Ratings and Standard & Poor’s rates MSD’s bonds AA-plus while Moody’s Investors Service rates them Aa2. The bonds are secured by a pledge of net wastewater system revenue.

Fitch said MSD’s rating is supported by solid operating performance, consistently generating high annual debt service coverage of 3.1 times, and strong reserves and user rates that are competitive with other systems.

One challenge is the district’s negotiations with regulators regarding alleged discharge violations. “It is unclear when a settlement will be reached and what, if any, impact such a settlement will have on the district’s capital program,” Fitch wrote.

Moody’s wrote that it expects the “district’s sound financial operations will continue due to management’s demonstrated willingness and ability to adjust rates as needed to provide for strong debt-service coverage.”

The 56-year-old district provides wastewater treatment and stormwater services to 1.4 million residents in St. Louis and St. Louis County.

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