CHICAGO - Boosted by an upgrade to top credit marks by Standard & Poor's, Cincinnati this week prices nearly $100 million of new-money and refunding water system revenue bonds that will include taxable Build America Bonds.
Morgan Stanley is the underwriter, Stifel Nicolaus & Co. is financial adviser and Peck Shaffer & Williams LLP is bond counsel. The deal is divided into two series, a tax-exempt piece for nearly $14 million that is tentatively set to mature between 2015 and 2018, with the remainder in the BABs series tentatively structured as term bonds with maturities in 2024 and 2034, according to the preliminary offering statement.
The city will apply for the federal government's direct-pay 35% interest rate subsidy under the BAB program. The system's net revenues secure the bonds.
Under the senior-lien bond covenants, water rates must be set to generate sufficient revenue to provide 1.15 times coverage of debt service. Proceeds will finance various capital projects including an expansion of the system's treatment plant that will allow it to treat an additional 20 million gallons daily.
Ahead of the deal, Standard & Poor's yesterday raised its rating on Cincinnati's senior-lien water system revenue credit to AAA from AA-plus in recognition of its strong liquidity and good financial policies and practices. The system's $30 million of subordinate debt was raised to AA-plus from AA. Standard & Poor's has been reviewing water and sewer systems as part of its revision of some credit standards.
Moody's Investors Service assigned its Aa1 rating to the bonds and affirmed the Aa1 rating on $301 million of parity debt. Moody's rates the subordinate debt Aa2.
The system's strengths include its position as a regional service provider, whose boundaries extend beyond the city and Hamilton County to include portions of northern Kentucky and other counties; its service of an area with a deep and diverse employment base; strong management, and long-term rate stability and good coverage of debt service and liquidity levels, Standard & Poor's analysts wrote.
The largest city in its service area is Cincinnati with a population of 330,000. It accounts for one-third of total system usage. The system has unlimited water rights to pull from the Ohio River.
"We expect that the system will continue to maintain its good debt service coverage and sustain its strong financial operations," Standard & Poor's analyst Helen Samuelson wrote.
Moody's described as credit strengths City Council support for all previously requested rate increases and strong management that includes long-term financial forecasting. The last rate increase, of 5.9%, took effect in January.
Credit challenges include projected debt service coverage ratios that fall short of comparably rated systems and the challenges of managing its capital program and its impact on liquidity. The city is also considering a proposal from a study group to shift management of the water system to a regional-based authority.
"Based on the recommendations of the study group, Moody's believes that operations of the utility are not likely to be significantly affected by the transition to a regional district," analysts wrote.
The system's five-year capital program through 2013 calls for $378 million to be spent on expansion and upkeep of distribution lines and on water treatment facilities. About 80% would be financed with debt, according to Moody's.