LOS ANGELES -- Sunshine broke through the storm clouds that were gathering yesterday over the largest-ever financing for rainy Portland, Ore. -- $250 million of sewer system revenue bonds scheduled for pricing Tuesday.
Two rating agencies assigned above-average credit ratings to the bonds, despite apprehension over Measure 5, an initiative on the Nov. 8 statewide ballot that could require voter approval for rate increases/needed to pay bond debt service.
The sewer revenue bonds were rated A-plus by Standard & Poor's Corp. and A1 by Moody's Investors Service. Those are the same ratings the agencies have assigned to Portland's $158 million of sewer revenue bonds outstanding.
In addition, Standard & Poor's removed a negative outlook assigned in September 1992 to Portland's sewer revenue bonds, said Brad Driver, a Standard & Poor's associate director.
The outlook is now stable, a reflection of the Portland sewer system's better-defined 17-year combined sewer overflow program, and its five-year, $622 million capital planning program, Driver said.
Buoyed by the rating agency assignments, Portland may not seek credit enhancement for the bonds, said Timothy A. Rattigan, a Smith Barney Inc. vice president in the firm's Seattle office. Smith Barney is senior manager of the negotiated issue.
"Standard & Poor's change from a negative outlook to stable goes a long way toward allowing us to price without insurance," Rattigan said yesterday.
"We're looking forward to a strong market acceptance" of the sewer revenue bonds, Rattigan said.
Whether uncertainty over the implications of Measure 5 will mean higher interest rates for the bonds is not yet known. However, the rating agencies cautioned that their ratings do not reflect a comfort level with Measure 5.
"Measure 5 is an issue" that Standard & Poor's continues to monitor, said Bill Cox, a Standard & Poor's director. But, "it's too premature at this point for the ballot initiative to directly affect the rating" on Portland's sewer revenue bonds, he said.
Moody's analysts weighed in with a similar Measure 5 assessment. The agency took "some comfort" from a bond counsel's opinion in the preliminary official statement, Karen S. Krop, a Moody's assistant vice president, said.
The opinion, by Portland-based Stoel Rives Boley Jones & Grey, said Measure 5 might not apply to the sewer revenue bonds because of the U.S. Constitution's prohibition against impairment of contracts.
Purchasers of the current offering -- as well as holders of outstanding sewer revenue bonds -- "would be protected in a worst-case scenario," Krop said. The Moody's rating also reflects Portland's "very well managed" sewer system, Krop said.
If Measure 5 is approved, "it would have severe negative implications" for Portland's sewer revenue bond ratings, Moody's vice president Barbara Flickinger said.
Measure 5 is informally known as Son of 5, a reference to a constitutional amendment on the November 1990 state ballot -- also listed as Measure 5. The earlier measure gradually decreases property tax bills over several years, and requires the state to replace revenues lost by schools.
The new Measure 5, which qualified for the state ballot last December, has stimulated intense discussion among market participants. Many believe that the language is imprecise enough to make the measure subject to judicial interpretation.
The legal uncertainties prompted Portland finance officials to size the sewer revenue bonds to cover two years of capital needs, said Kenneth L. Rust, debt manager for the Portland office of finance and administration.
"It will take time for Son of 5 to work through the court process and get a determination" concerning its legality, Rust said.
The ballot initiative broadly defines the term "taxes." It requires voter approval for all state or local tax increases. According to local press reports, polls taken in June showed two-thirds of Oregon's voters support the initiative.
Stoel Rives' partner Patrick Boylston said he believes Portland will be able to increase rates in the future without a popular vote to pay for debt service on bond proceeds issued next week.
"If you find that a rate increase is necessary to avoid a default on these outstanding bonds, then existing case law under the federal Constitution supports the argument that the city could make this rate increase without going to the voters," Boylston said.
Moreover, Boylston said, Measure 5 contains "several ways to qualify for an exception" to the voter approval requirement for fee increases. He believes Portland's sewer program would "qualify for these exceptions, which would be effective for bonds issued before Son of 5 and after."
In the future, if "there are court interpretations that nobody foresees at this point" requiring voter approval for rate increases, those rulings would not apply to next week's sale because the bonds are reaching the market "prior to the effective date" of Measure 5, he said.
Next week's sale marks the sixth series of new-money revenue bonds for wastewater-related purposes that Portland has issued in the past decade, Rust said. The next issuance is scheduled in 1997.
Some of the proceeds will be used to finish installation of a sewer system in a large metropolitan area that was annexed to the city.
Other proceeds will be used to start a project to reduce overflows. The overflows occur during stormy periods when combined lines that carry storm water runoff and sanitary waste exceed the capacity of an interceptor system. When this happens, Rust said, untreated sewage flows from the system directly into the Willamette River and the Columbia Slough, a slow-moving body of water.
Bond proceeds will also be used to repay about $40 million of bond anticipation notes issued in May as an interim financing. The notes mature Sept. 1.