Los Angeles, owner of the largest wastewater collection system in the U.S., is selling $451 million in taxable and tax-exempt bonds to pay for improvements to sewage facilities and refinance existing debt as user fees climb.
The system, which includes Los Angeles and 29 other cities and agencies, serves more than 4 million residents in a 600 square-mile (155,000-hectare) area. Repairs and replacements are part of the 10-Year LA Sewers Construction Program, according to the system’s website.
The city is selling $187 million in taxable Build America Bonds, $80 million in taxable recovery-zone economic development bonds and $184 million in tax-exempt debt. A portion of the proceeds will be used to retire the system’s $300 million in short-term notes as they become due, according to the offering statement.
“We like this kind of deal because this is a classic case of essential services, which gives it added appeal for many investors,” Neil Klein, senior managing director at New York- based Carret Asset Management, said in an interview. “There will be a significant amount of demand. If you are an investor in a higher tax bracket looking for tax-exempts, this fills the need on many levels.”
Recession, Conservation
Recession and conservation efforts have reduced the number of customers and their wastewater usage, according to the offering statement. The number of clients has declined about 0.7 percent to 640,700 this year from 645,111 in 2006. The volume of water processed has fallen about 9 percent to 383 million gallons a day (1.45 billion liters) from 422 million gallons a day during the same period.
“The decline in water usage is something we’re seeing out on the West Coast as a whole,” Klein said. “If utility usage declines more than projections it may allow usage rates to drift higher.”
Los Angeles increased customer fees 7 percent annually from 2005 to 2009, sending the average residential bill to just under $30 a month this year from $24.47 five years ago. The system plans to increase rates an additional 9 percent annually from 2011 to 2014, according to the offering statement.
The city’s Bureau of Sanitation didn’t immediately comment.
High Debt Level
The issue is rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s, both the companies’ third-highest ratings and one level below the AA+ investment grade from Fitch Ratings. In a note, Fitch analysts Doug Scott and Kathy Masterson attributed the system’s rating to its large service area, competitive rates and declining capital expenditures, coupled with a high debt level and the risk that the desired rate increases won’t be granted.
“In 2009, it was envisioned that the city would adopt a multiyear rate package for fiscals 2010-2013,” the Fitch report said. “However, as economic conditions remained weak in the city, staff refrained from recommending rate adjustments to the city council in order to limit pressure on the rate base.”
The wastewater system sold $455 million in tax-exempt revenue bonds in March 2009, with 25-year bonds priced to yield 5.49 percent, or 33 basis points above comparable maturity top- rated debt, according to data from Municipal Market Advisors, an independent research firm based in Concord, Massachusetts.
The securities last traded on Oct. 7 at an average yield of 3.99 percent, one basis point above MMA yields for debt due in 2034. A basis point is 0.01 percentage point.
Yields on top-rated 10-year debt closed at 2.6 percent yesterday, the lowest this month, according to MMA.
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The system, which includes Los Angeles and 29 other cities and agencies, serves more than 4 million residents in a 600 square-mile (155,000-hectare) area. Repairs and replacements are part of the 10-Year LA Sewers Construction Program, according to the system’s website.
The city is selling $187 million in taxable Build America Bonds, $80 million in taxable recovery-zone economic development bonds and $184 million in tax-exempt debt. A portion of the proceeds will be used to retire the system’s $300 million in short-term notes as they become due, according to the offering statement.
“We like this kind of deal because this is a classic case of essential services, which gives it added appeal for many investors,” Neil Klein, senior managing director at New York- based Carret Asset Management, said in an interview. “There will be a significant amount of demand. If you are an investor in a higher tax bracket looking for tax-exempts, this fills the need on many levels.”
Recession, Conservation
Recession and conservation efforts have reduced the number of customers and their wastewater usage, according to the offering statement. The number of clients has declined about 0.7 percent to 640,700 this year from 645,111 in 2006. The volume of water processed has fallen about 9 percent to 383 million gallons a day (1.45 billion liters) from 422 million gallons a day during the same period.
“The decline in water usage is something we’re seeing out on the West Coast as a whole,” Klein said. “If utility usage declines more than projections it may allow usage rates to drift higher.”
Los Angeles increased customer fees 7 percent annually from 2005 to 2009, sending the average residential bill to just under $30 a month this year from $24.47 five years ago. The system plans to increase rates an additional 9 percent annually from 2011 to 2014, according to the offering statement.
The city’s Bureau of Sanitation didn’t immediately comment.
High Debt Level
The issue is rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s, both the companies’ third-highest ratings and one level below the AA+ investment grade from Fitch Ratings. In a note, Fitch analysts Doug Scott and Kathy Masterson attributed the system’s rating to its large service area, competitive rates and declining capital expenditures, coupled with a high debt level and the risk that the desired rate increases won’t be granted.
“In 2009, it was envisioned that the city would adopt a multiyear rate package for fiscals 2010-2013,” the Fitch report said. “However, as economic conditions remained weak in the city, staff refrained from recommending rate adjustments to the city council in order to limit pressure on the rate base.”
The wastewater system sold $455 million in tax-exempt revenue bonds in March 2009, with 25-year bonds priced to yield 5.49 percent, or 33 basis points above comparable maturity top- rated debt, according to data from Municipal Market Advisors, an independent research firm based in Concord, Massachusetts.
The securities last traded on Oct. 7 at an average yield of 3.99 percent, one basis point above MMA yields for debt due in 2034. A basis point is 0.01 percentage point.
Yields on top-rated 10-year debt closed at 2.6 percent yesterday, the lowest this month, according to MMA.
http://jodnet.blogspot.com
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