WASHINGTON - As the Virginia Resources Authority gears up for its 20th anniversary in afew weeks, officials there are preparing to sell as much as $165 million in clean waterrevenue bonds by negotiation next week.
The debt offering will be the VRA's largest ever, said executive director Darrell V.Hill.It will also be the Richmond-based authority's third leveraging of the federalcapitalization grants provided through the U.S. Environmental Protection Agency's cleanwater state revolving loan fund, Hill said.
The VRA is the federal fund's program administrator and the Virginia Department ofEnvironmental Quality is financial administrator.
Hill said he expects the SRF bonds will garner a natural gilt-edged bond rating, asother VRA SRF bonds have in past sales. The VRA previously sold $106.7 million in bondsbacked by SRF funds in 2000, and $111.6 million in bonds backed by SRF funds in 1999.
The bond sale five years ago was the VRA's largest debt sale to date, Hill said.
The retail order period for the new bonds is tentatively scheduled for May 19, withinstitutional pricing the next day, he said.
Those dates are considered tentative because the EPA has not yet approved the fiscal2004 grant for Virginia, he said. The sums granted to the commonwealth in recent yearshave varied little from year to year and Hill said he expects it will receiveapproximately $27 million in the current fiscal year.
The federal government's SRF programs, which are funded annually out of EPA's budget,provide low-interest loans to local governments and operators of sewer and waterfacilities. In fiscal 2004, Congress appropriated $1.34 billion for the nationwide cleanwater SRF program, which is also referred to as the wastewater SRF. Grants from theprogram are often leveraged with tax-exempt bonds.
Lisa Daniel, a financial adviser with Public Financial Management of Memphis, is workingon the transaction. She was upbeat about the approaching bond sale. "We are optimisticwe will get very good rates for the underlying borrowers," she said.
She noted that more than 25% of the borrowers that will receive bond proceeds from thesale are rated triple-A. The strong expected rating on the bonds also comes in part fromthe fact that Virginia, like all states participating in the SRF program, is required tomatch at least 20% of the federal contribution, Daniel said.
"VRA is very actively servicing all of the localities and providing them all the lowest,most cost-efficient means of financing," she said.
UBS Financial Services Inc. and Morgan Keegan & Co. are co-senior underwriters, but UBSwill run the books on the deal. McGuireWoods LLP of Richmond is serving as bond counselon the transaction. The preliminary offering statement is being drafted by underwriter'scounsel Christian & Barton, and is expected to be released soon, Daniel said.
Bob Kinney, a managing director with UBS, said the VRA has a good track record sellingSRF bonds to retail investors who are comfortable with natural triple-A bonds. Kinneyalso said the coupon on the bonds should come in at around 4.5% "but it could changebecause the market has been volatile in recent weeks given the perception that the[Federal Reserve Board] is going to be raising interest rates."
The VRA is also gearing up to sell a still-undetermined amount of pooled revenue bondsin the summer by competitive bid using only for the second time a senior-subordinatedebt structure to finance a pool of local infrastructure projects. Hill said thestructure gives bondholders greater security to ensure payment of debt service and giveslocalities the flexibility to decide what revenues will back their key infrastructureprojects.
The authority used the debt structure for the first time in November in a $103.2 millionbond offering. The proceeds from that bond sale went to nine borrowers with nine watersewer public safety and solid waste projects.
Under the structure, which is similar to collateralized mortgage obligations in thehousing sector, the VRA splits the credit available to bondholders into senior andsubordinate obligations. About 70% of the issue - the senior bonds - has excess coveragefrom 100% of the debt service payments from the pool of localities. About 30% of theissue - the subordinate bonds - continues to have one-to-one coverage from the remainingrevenues not needed to pay senior bondholders, according to the authority.
Two other entities in the state - the Virginia Housing Development Authority and theVirginia Public School Authority - are legally permitted to issue moral obligation debt,but the VRA is the only body that actually does so.
Although triple-A rated Virginia has never had to call on it, the state's moralobligation pledge significantly enhances the credit quality of its loan programs. Understate law, if a VRA bond issue's capital reserve fund drops below its minimalrequirement, the authority may submit a request to the governor for needed funds.
The governor would then have to request that amount from the legislature, which may ormay not appropriate the money. But the mere fact that the governor is legally bound torequest the appropriation from the legislature strengthens Virginia's moral obligationrelative to other states, according to an analysis by Moody's Investors Service.
Hill said he was not yet at liberty to identify the prospective borrowers or how largethe summer bond offering would be. However, Daniel said she and VRA officials shouldknow by early June how large the debt sale will be.
Meanwhile, the VRA is preparing to celebrate its 20th anniversary on July 1. Theauthority, which the General Assembly established as a bond bank in 1984, can financeinfrastructure related to drinking water, wastewater, solid-waste management andrecycling facilities, airport facilities, law enforcement and emergency-preparednessprojects, brownfields remediation, and petroleum storage tank cleanups.
The VRA received a major boost from the General Assembly in 2001 when it nearly doubledthe agency's debt capacity to $900 million from the previous $550 million level. Since1999, VRA has sold $884.7 million in debt, spread out over 33 bond issues, according toThomson Financial.
"It's a very interesting time for the authority," Hill said. "We have been very busy inrecent years."
The authority has been "rather prolific in terms of the bonds they've sold," UBS' Kinneyagreed. "Investors do sit up and take notice when VRA goes to market."
