LOS ANGELES -- A San Diego authority plans today to price the city's first major wastewater financing in a quarter-century amid signs of strong investor interest.
Preliminary maturities for the estimated $250 million sewer revenue bond financing include term bonds due in 2013 and 2023, along with serials maturing from 1994 to 2008.
The bonds might be partly insured if the city sees the option as economically attractive, officials at senior manager Morgan Stanley & Co. said yesterday.
San Diego received attractive insurance bids, they said, but some investors also have expressed a desire for uninsured bonds, based on the creditworthiness of the issuer.
Morgan Stanley said the deal might include derivatives if they provide added savings.
Today's pricing culminates a multiyear effort by San Diego to launch a large wastewater capital improvement program.
The eventual scale of that program is still subject to some uncertainty because of continuing litigation between the federal government and San Diego.
Partly in response to these unsettled variables, rating agency officials ended up with split opinions on the deal. Moody's Investors Service rates the issue A1, while Standard & Poor's Corp. rates it A-minus.
The United States, acting through the Justice Department and the Environmental Protection Agency, sued the city five years ago, alleging it had fallen to comply with the Federal Clean Water Act of 1972.
The litigation produced a proposed consent decree agreed upon by the parties in January 1990 that envisioned a $2.5 billion capital improvement plan. Last year, however, the city sought to modify the proposed consent decree to accommodate a less costly capital plan, known as the Consumers' Alternative, with an estimated cost of $1.3 billion as stated in 1992 dollars.
In July 1992, U.S. District Court Judge Rudi M. Brewster issued an interim order that freed the city for 19 months from meeting various milestones in implementing previous court-ordered improvements.
The court also committed to subordinate any judicial remedies to payments owed to bondholders, which gave San Diego comfort in proceeding with its financing program.
The United State has filed an appeal seeking to reverse Brewster's interim order, citing "abuse of discretion" by the court. Legal briefs have been filed and oral argument is set for next month.
"While the city expects that the federal court ruling concerning the Consumers' Alternative will be upheld, it can give no assurance in that regard," the financing's preliminary official statement says.
If the city has to construct the more ambitious plan, "the city's capital costs and financing program would be substantially greater than is presently contemplated," the statement says.
The City Council decided to modify the more ambitious plan for several reasons, including a decrease in sewer revenues from reduced building activity, the economic recession, and anticipated changes in growth and wastewater flows.
In a recent report, Standard & Poor's noted the council has "demonstrated considerable support for this financing and recent rate hikes." The agency said, however, that there has been sensitivity over the cost to residents if the more expensive plan must be adopted.
"Consequently, there is concern about political support should the consent decree be finalized , requiring the larger capital improvement program," Standard & Poor's said.
Moody's cited the strength of the issuer's service area as a reason "the system should be able to support the additional debt" if the more expensive plan has to be implemented.
But Moody's cautioned that a program "could deter credit quality" if costs ended up exceeding the $2.5 billion envisioned in the proposed consent decree that is in dispute.
Traders and portfolio managers yesterday expressed confidence in the system's creditworthiness, despite the litigation. Some of them said they tended to view the rating more as a strong single-A, in line with the Moody's assessment, because of San Diego's extensive service area.
Others, however, were more cautious, but they expressed confidence in the ability of city officials to maintain strict cost controls that avoid serious cost overruns under either alternative.
They also said that projected debt service coverage ratios should be high in early years, exceeding two times during this decade.
The San Diego Public Facilities Financing Authority is issuing the bonds. At some point the San Diego Area Wastewater Management District is expected to assume both operating and capital requirements of the Metropolitan Sewerage System, which processes wastewater from both San Diego's system and 15 other participating agencies.
In an investor road show last week, financing participants noted that investors' interest would be protected if the wastewater district eventually assumes financial obligations issued for the Consumers' Alternative plan.
Regarding the litigation, participants in the financing also stressed that the penalty phase of the EPA action already is settled, which removes a potential source of uncertainty.
