Milwaukee heads into the market Tuesday with its first green-designated bonds and will return next week with a general obligation issue as the city plots how to use $406 million of looming federal relief.
The city will use a negotiated transaction with BofA Securities in the lead spot for the $56 million green sewerage system revenue bonds, given the program’s rating in the single-A category and the need to update the market on the program it has not borrowed under since 2016.
“We thought is the single-A category lends itself better to a negotiated sale,” given increased investor scrutiny and having an underwriting team in place gives allows for a “sales force to take a more hands-on approach,” said Richard Li, public debt specialist for Comptroller Aycha Sawa’s office, which manages city bond issues. The city also posted its
The city returns on May 6 with a competitive sale of about $185 million of general obligation notes and bonds in four series with two offering tax-exempt paper — $118 million and $31 million — and two taxable — for $22 million and $13.6 million.
Proceeds of the sewerage system bonds will refund some outstanding debt, convert short-term financing to long-term debt, and finance new projects. The bonds carry an A1 rating and negative outlook from Moody’s Investors Service, which lowered the rating last year, and an A-plus and stable outlook from Fitch Ratings, which also lowered the rating by one notch.
The city is self-designating the sewerage system bonds as “green” as the projects all fall under sustainable wastewater management eligible for the designation. The refunding piece will pay down debt that also funded eligible projects.
“There’s four points” to hit and the city agrees to meet those requirements on project eligibility, reporting, project tracking, and the separate investment of proceeds until they are used, based on International Capital Market Association Green Bonds Principles, Li said.
The system’s primary purpose is to collect and deliver sanitary sewer flows to intercepting sewers managed by the Milwaukee Metropolitan Sewerage District. Projects include the relining and replacement of sewer mains, equipment upgrades, and flood prevention.
“These green projects reduce sanitary sewer overflows and other untreated polluted surface water from reaching rivers and ultimately Lake Michigan,” reads the offering statement.
The system serves 140,000 primarily residential sewer customers and the bonds are secured by system revenues and a mortgage lien. The city also pledges any legally available funds, subject to annual appropriation, to subsidize any revenue shortfall.
The city acknowledges it’s hard to quantify the potential cost savings, but it believes, based on underwriting input, that the designation might attract new investors. “Any new investor is helpful,” Li said.
“The A1 rating reflects the system's sound debt service coverage, adequate liquidity, independent rate setting authority, and satisfactory legal covenants,” Moody’s said.
Fitch lowered the rating one notch to A-plus to reflect the rating agency’s “evolved approach to assessing the system's financial leverage, and in particular, calculating its leverage ratio, which is measured by net adjusted debt to adjusted funds available for debt service.” It assigns a stable outlook.
The city returns with the GO sale next week as Mayor Tom Barrett and a group of city officials named to a “leadership team” weigh how to
The looming infusion of $406 million from the American Rescue Plan signed by President Biden last month gives the city time to resolve its structural woes.
The comptroller’s office is in discussions with the administration to replenish fund balances going forward and limit future use. Reserve draws in recent years drew downgrades last year from Moody’s and S&P Global Ratings.
Ahead of the new GO issue, Fitch affirmed the city’s AA-minus and negative outlook and S&P affirmed the city’s A rating and negative outlook. S&P and Moody's, which was not asked to rate the new GO issue,
“Stimulus funds through the American Rescue Plan Act may additionally enable the city to restore revenue declines due to the pandemic and lead to the development of plans to maintain higher reserve levels over the long-term,” Fitch said.
"In our view, a return to positive operations and an improvement in the city's available reserves, either through significant expenditure reductions or adjustments leading to enhanced revenue, is necessary to avoid further deterioration in credit quality," said S&P analyst David Smith, warning that a multiple-notch downgrade could loom.
The city estimated a $20 million shortfall last year due to the pandemic but now expects a positive result after implementing furloughs, using $10 million of reserves from its tax-stabilization fund, and covering eligible expenses with the city’s share of funds from the CARES Act signed in March 2020.
The city eliminated a projected $60 million 2021 budget gap with cuts, an increase in the vehicle registration fee, a tax levy hike of 2.8%, and a $6.5 million draw from the tax stabilization fund. If the fund is not replenished this year, the balance would drop to $8 million.
Pending federal guidance, the city intends to use $40 million to replace 2020 revenue and to cover lost revenue and eligible expenses through 2024.
A portion of the GO sale will provide funding for an expansion of the city’s streetcar system that opened in 2018 and $6 million will cover the city’s share of funding for an agricultural commodity trans-load facility for bulk shipments being developed on a Port Milwaukee property by The DeLong Co. It’s expected to be the first on the Great Lakes-St. Lawrence Seaway system.
