The Metropolitan St. Louis Sewer District hits the market Tuesday with a $323 million new money and refunding sale as it prepares to return to the voters for an additional $500 million in borrowing authority to cover projects under a 28-year, $5 billion federal consent decree.
MSD began taking retail orders Monday on the wastewater system revenue bonds and the pricing is set for Tuesday. The deal offers $53 million of tax-exempt new money paper and $270 million of taxable advance refunding bonds.
The deal marks the district’s first taxable transaction since it tapped the federal government’s Build America Bond program a decade ago, said treasurer Tim Snoke.
The district decided to go with a taxable advance refunding as it was “looking to identify ways we could take advantage of the low interest rates,” Snoke said. The district is refunding outstanding debt with a 10% net present value savings target.
The bonds are rated AAA by S&P Global Ratings and AA-plus by Fitch Ratings. Both assign a stable outlook.
Citi and Barclays are co-senior managers with Citi running the books. PFM Financial Advisors LLC and Independent Public Advisors LLC are co-financial advisors. Gilmore & Bell PC and White Coleman & Associates LLC are co-bond counsel.
The new money matures from 2021 to 2049 and the refunding bonds mature from 2021 to 2044.
The deal is the district’s first since 2017 and additional borrowing of about $150 million is expected next year as it continues to chip away at the mandates in the 2012 agreement with federal authorities to reduce sanitary sewer overflows and building backups.
In 2018, a federal judge signed off on an amendment that extended to 28 years the original 23-year term of the agreement. “The extension should allow the district to better manage costs and therefore help to temper year-over-year rate increases,” Fitch said in its new report.
The district last went to voters in 2016 when $900 million in borrowing capacity was approved. The referendum process allows voters a say in the level of rate increases needed to support the program.
The board voted last week to begin the referendum process.
“We will go to voters on the April ballot for $500 million in authorization,” Snoke said. The district still has about $600 million in capacity from the 2016 referendum but going on the April ballot is driven by the rate setting cycle and helps spread out the election costs based on the election calendar.
The 2020 ballot is a routine election so there’s more measures on the ballot which means election costs are divided among more entities, Snoke said. A simple majority is required for the bonding authorization to pass.
“The continued support of voters for additional debt and rate increases tied to the carrying cost of the debt are key to maintaining the district's rating. Additionally, any expansion of the capital improvement and replacement program requiring more debt will likely pressure the rating,” Fitch said.
The district, which has $1.3 billion of outstanding debt, provides wastewater treatment and storm-water management to 1.3 million residents.
Capital spending over the next five years is about $1.7 billion. Through fiscal 2019, MSD had funded the the capital program with 73% of debt and the remainder in cash. Management plans to increase pay-as-you-go cash funding by 38% and 45% in fiscal 2020 and 2021, respectively, S&P said.
S&P said its rating reflects a service area that is broad and diverse, the essential service it provides, current rate affordability, strong management and financial performance.
The stable outlook reflects analysts’ opinion that “MSD will likely continue to adjust rates and expenses, as necessary, to maintain financial performance consistent with historical trends, particularly because it continues to fund CIRP projects with additional debt and pay-as-you-go funding,” S&P said.
