CHICAGO — The Omaha Public Power District plans to bring $200 million of fixed-rate bonds to market in May while it continues to periodically sell $300 million of separately authorized subordinate bonds in a program that mirrors a corporate medium-term note structure that officials say is the first of its kind in the municipal market.
The district plans to issue $200 million of senior-lien electric revenue bonds with serial and term maturities during the week of May 8. Merrill Lynch & Co., Edward Jones, and Ameritas Investment Corp. will be senior managers. Kutak Rock is bond counsel for the deal and Lehman Brothers is OPPD’s financial adviser.
The district will use the proceeds to fund a new power plant. Last year it issued the first bonds for the $850 million project. It plans to build a 663-megawatt coal-fired plant and will sell half of the capacity to seven utilities that signed 40-year contracts with the district.
The bonds will not be insured. Moody’s Investors Service rates OPPD’s outstanding debt Aa2 and Standard & Poor’s rates the district AA. Fitch Ratings does not rate the credit.
The deal comes as the district has been issuing bonds through a program that mirrors a corporate note program, said John Thurber, manager of finance for the district.
OPPD’s board of directors last year authorized its staff to sell up to $300 million of subordinate bonds with maturities up to 40 years from 2005 through 2009. The subordinate bonds are backed by electric utility revenues.
The bonds, which the district calls “periodically issued bonds,” or PIBs, are sold on a “reverse inquiry” basis, Thurber said. Investors that have an interest in the bonds look to 12 dealers that OPPD has hired to sell the bonds.
“It’s not driven by our need for cash but by the investors’ need for investments,” Thurber said.
So far the district has sold $100 million of the subordinate bonds. In October, it sold two tranches, each for $25 million. It sold another tranche for $25 million in February and another $25 million that was settled last week.
Moody’s rated the subordinate bonds Aa3, and Standard & Poor’s rates them AA-minus.
The board’s approval of the bonds and the quick turnaround of documents after the sale are what make the sales unique, according to Thurber.
The board authorized OPPD’s finance staff to decide when to sell the bonds in order to achieve the best interest rate and match the district’s needs both for cash and for meeting its own debt repayment schedule.
With that authorization, the staff worked to consolidate the documents that can sometimes take up to 60 days to finalize in a traditional tax-exempt bonds sale, Thurber said.
The finance staff must notify the board immediately after accepting the proposal, and the bond purchase agreement and other documents are typically signed the same day, according to Jerry Triche, an attorney with Kutak Rock.
The board authorization sets most of the terms of the bonds, he said, including the revenue that is pledged, the lien priority, the trustee and other parties involved, and the covenants. What is flexible is the size of each tranche, the interest rate, and the maturity, Triche said. In addition, the district has a standing agreement with Financial Guaranty Insurance Co. to insure the bonds, if the investor chooses.“Because we know so much about what the bonds are going to look like, it’s all the same general resolution,” Triche said. “The terms of it are constructed in a way that you’re just taking [into account] interest rate and maturity. You have a set of documents that can be filled out relatively quickly.”
The district maintains a master document for the entire authorized amount, and then with each series creates a supplemental document that describes the series being sold and includes updated information about the district, Triche said.
OPPD has more flexibility under the program than it might have in the open market, according to Thurber. Since the district does not need the cash immediately, it can reject offers that do not fit its criteria, he said.
“We don’t try to force a maturity in the portion of the marketplace where there’s not a big investor demand for that,” Thurber said. “We want demand to be high to accept a lower coupon than what would be in the traditional market.”
The district hopes to have an advantage in matching its need to sell certain maturities and negotiate a better rate, he said. For investors looking for an exact maturity, smaller tranches may offer a better option than in a traditional deal.
“If they want a maturity and a particular year, we will look to be compensated for that instead of going to the market and accepting what the market will bear,” Thurber said.
The most recent issue, $25 million of insured Series 2006B bonds with bullet maturities due Feb. 1, 2036, brought a coupon of 4.75% with a yield to call of 4.55%.
Some of the bonds have been sold at a premium, and others at a discount, one source familiar with the sale said. The district looks at the pricing in comparison to the market around the time of the offering to determine whether the deal is attractive to the district, the source said.
OPPD worked with JP Morgan Chase & Co. to set up the first series for sale. The district now has interest for another $25 million tranche and could sell an additional $25 million tranche toward the end of year, Thurber said.
Those working with the district said that the program has not been done before in the municipal market, but given the right circumstances, could be duplicated.
“With these, you don’t know whether they’ll sell tomorrow or a week from tomorrow or next month. It’s based on the investor demand, not on our demand,” Thurber said.
OPPD has cash available to pay for projects, so the bond proceeds are not needed immediately.
“If you need funds right away, this might not work for you,” he said.
