DALLAS -- The Texas Water Development Board today expects to sell a $241 million revenue bond issue to subsidize local sewer projects in a deal that will carry the first-ever uninsured triple-A rating for a state revolving fund program.

Standard & Poor's Corp. has assigned its gilt-edged AAA to the program, and Moody's Investors Service rates it Aa, the highest rating it has placed on such a program.

Both agencies cited the program's strong debt service coverage, which is expected to reach seven times annual debt service by 2013 when the final maturities are scheduled to be retired.

"It's basically an over-collateralized financing," said Steve Levine, assistant vice president at Moody's.

The issue is the first deal by a state agency in Texas to have a stand-alone triple-A rating since the state was downgraded to double-A in 1987.

A syndicate led by Kidder, Peabody & Co. expects to price the serial bonds today. The firm recently completed an investor tour to Boston, Chicago, and New York.

"There's still a lot of supply out there," said Theodore Sobel, vice president at Kidder Peabody. "We still think there is going to be plenty of demand."

One portfolio manager warned that some players are cautious about the direction of the market.

"It's pretty weak out there. The question here is whether this is the bottom or a breather," he said.

Texas officials expect plenty of interest after rating agencies issued reports last week praising the strength the heavily collateralized fund offers investors. Analysts say the water board will have $1.4 billion in loans to local government back $730 million in revenue bonds issued for the program.

Mal Fallon, director for municipal utilities ratings at Standard & Poor's said the equity is a major strength for investors.

"That was somewhat unique to this program," he said yesterday. "They had a large amount of loans outstanding that they don't have any attachment on."

In assigning its top rating, Standard & Poor's noted that the board is pledging approximately $338 million in existing loans that have been funded primarily through federal grants totaling $445 million. Another $120 million in grants is expected through 1994.

Fallon said the agency's criteria for a AAA required coverage of 1.55 times. The Texas program exceeded that with at least two times debt service coverage projected in early years.

He said a key reason the program was rated AAA is the water board's willingness to pledge to issue additional bonds only if proceeds are used to originate loans to borrowers of at least similar credit quality. None of the 14 other programs rated by Standard & Poor's have such provisions.

"One of our concerns has been the open-ended nature of these programs," Fallon said. "That could dilute the credit quality of the program."

At present, Standard & Poor's estimates that AA-rated issuers account for 25% of the portfolio; A, 59%; BBB, 5.6%; and unrated issuers, 9.5%.

"Even if new loans through 1994 are made to non-rated borrowers versus the borrowers that have been identified by the board, cash-flow projections still meet the coverage requirements for triple-A rated [state revolving funds], demonstrating the financial strength of this program," the agency wrote in its rating report.

Levine at Moody's said the strength is derived from the state's initial decision not to leverage federal funds for sewer projects and use the money instead to create a loan pool from the beginning.

"Some states decided to leverage the [federal grant money immediately, others have decided to do that over time," he said.

Today's sale is the first long-term issue for the revolving fund.

The board first issued revenue bonds in March 1992 through a $50 million variable-rate deal that was secured in part by a direct pay letter of credit and reimbursement agreement with the Canadian Imperial Bank of Commerce.

Bond proceeds will be used to purchase municipal bonds issued by local governments across Texas to pay for sewer projects.

The program allows the state to subsidize the financing cost to localities, saving what officials have estimated will be $40 million in interest costs during the 20-year life of the loans.

The subsidy can amount to 70 to 120 basis points for local agencies participating in the program.

The Texas revolving fund began in November 1988 when it closed on the first $19 million installment of a $93.7 million loan to Houston, which will account for 37% of the fund's loan portfolio.

But officials said that most participants in the program are smaller cities. In fact, by next spring the Water Development Board expects to use the bond proceeds and other funds to make an estimated $370 million in loans to localities.

"Every bit of the money will be gone in about five months," said Greg Olin, chief of securities management for the board. The funds will go toward loans of up to $20 million for Beaumont to as little as $175,000 for tiny Bullock, he said.

"Anybody who wants to put in a sewer system can come to us," he added.

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