LOS ANGELES -- The California State Teachers' Retirement System has agreed to provide credit enhancement on behalf of a corporation in a $24 million issue of solid waste disposal revenue bonds scheduled for pricing Wednesday.
This is the third time the retirement system has provided a letter of credit since launching its unique ongoing credit enhancement program earlier this year.
Next week's issuance will mark the system's first-ever guarantee of tax-exempt bonds in which proceeds will be used for non-municipal purposes.
In the two-step financing, the revenue bonds will be issued by the California Pollution Control Financing Authority, a state agency acting as a conduit for Western Waste Industries.
The Torrance, Calif.-based corporation, whose stock is traded on the New York Stock Exchange, plans to use the proceeds to fund 17 solid waste-related projects throughout California.
The Teachers' Retirement System is responsible for backing 40% of the $24 million issuance, or roughly $10 million, while the Bank of California, as the so-called fronting bank, is committed to backing the rest.
Moody's Investors Service Inc. is expected to assign the financing its A2/VMIG-1 corporate rating -- the same as Bank of California's rating assignment -- when the deal closes, Ellen Biskaduros, an analyst with Moody's structured finance department, said yesterday.
Standard & Poor's Corp. was not asked to provide a rating because a single rating "is sufficient for the market," said Bob Giles, vice president for BA Securities, a wholly owned securities subsidiary of Bank of America, the negotiated deal's senior managing underwriter.
Giles said he expects a favorable market reception for the revenue bonds, which mature in 12 years and will be offered in a variable-rate mode. "We are going to put on an interest-rate swap, which will synthetically convert the variable rate to a fixed-rate security," he said.
While offering documents show Bank of California as the only credit enhancement source for the issue, the Teachers' Retirement System "was absolutely critical to move the deal forward," Giles said.
"The Bank of California was not able to absorb all $24 million of the risk," he said.
William Swiontek, vice president of corporate finance for Bank of California, said he hopes to have a continuing partnership with the Teachers' Retirement System.
The system's credit' enhancement program was launched early this year when it was assigned short-term ratings by two major rating agencies: the Standard & Foor's ratings are SP1-plus/A1-plus, and Moody's ratings are P-1, MIG1, and VMIG 1.
"Because of the Bank of California rating, the Teachers' Retirement System rating is immaterial," said Patrick Mitchell, director of fixed-income and equities for the $50 billion pension fund.
"We went to [Standard & Poor's] and Moody's for the credit ratings to establish our name in the marketplace," Mitchell said.
Providing credit enhancement "is a really good deal" for officials with the retirement system because they receive "fee income and they don't have to reserve against letters of credit," said Nathan Brostrom, executive director of the pollution control financing authority.
Banks, in contrast, now have to reserve against letters of credit, and "that discourages them from doing it as prolifically as they used to," Brostrom said. "Now it is like pulling teeth to get one of these things done."
While solid waste recovery programs are growing, it is an immature industry, "and' one that banks and other financing institutions don't understand that well," Brostrom said. "Having the Teachers' Retirement System participate will enable more of the financings" to occur, he said.
Mitchell said the retirement system "hopes to do hundreds" of credit enhancement deals.
"California is where we have our expertise, but at some point in time, depending on how things go, we may expand" outside the state, he said.
Mitchell said the credit enhancement program "is not meant to replace banks or bond insurers, but we want to facilitate creditworthy transactions that make sense in the marketplace. Our intention is to facilitate, rather than to lead."
He said a typical program would involve providing credit enhancement for "50% or less of the transaction."
