Allegheny, Pa., sewer deal faces an uncertain welcome

Nov. 21, 2000
Portfolio managers don't sound eager to buy into $160 million of Allegheny County Sanitary Authority revenue bonds scheduled to sell next week.

Nov. 20, 2000 (Thomson Financial)—The Pennsylvania market has been mostly made up of small deals for the last three months, and overall issuance for the year is down more than 50%. But despite that, portfolio managers don't sound eager to buy into $160 million of Allegheny County Sanitary Authority revenue bonds scheduled to sell next week.

Many are waiting to see how the MBIA Insurance Corp.-backed deal prices before committing themselves. One portfolio manager said she didn't want to buy the bonds at par.

But Shahn Zanford, a managing director at PNC Capital Markets, which is acting as underwriter for the deal, believes there will be some premiums on the long end of the serials in the issue.

"Right now we are keeping our options open," Zanford said. "We have discussed numerous structures and have done some work on the retail scale, but want to get the best deal for the issuer." He also felt that retail interest, although high, might not reach peak proportions because the bonds are heavily weighted at the back end, beyond retail's typical interest within the 10-year range.

According to Municipal Market Data, Pennsylvania paper is trading at 10 to 15 basis points off the triple-A curve, and a trader who follows the credits feels that that is where this deal will land. But the sale's financial adviser, Tal Heppenstall, a senior vice president at Tucker Anthony Inc., feels that because the amount of issuance is so down in the state, the deal will trade tight to the triple-A curve.

The revenue bonds are the second in a series of issues to bring the issuer, known as ALCOSAN, into compliance with the Environmental Protection Agency's standards for treating so-called wet-weather flows. The estimated cost of compliance over the next 10 years is $1 billion for the authority and $2 billion for the 83 municipalities that it serves, according to Bill Inks, the director of finance for ALCOSAN.

The agency's long-term capital plan includes increasing the treatment plant's capacity and strengthening the interceptor points. To do this, ALCOSAN issued $180 million in debt in 1997 and plans to issue a further $188 million in 2004. After that, the authority will issue debt every three years as needed, Inks said.

The large amount of debt issued to cover the $1 billion price tag has concerned some ratings agencies. However, all three agree that ALCOSAN's ability to set its own rates and hold its municipal clients accountable for all delinquent payments is a credit strength.

"The thing I like best about this credit is its autonomy when it comes to setting rates," said Karl Jacob, a director at Standard & Poor's, which gave the upcoming issue an A rating. "It's also kind of a unique credit from a water-sewer perspective because the towns have the option of having residents pay the bills or paying the authority themselves, but the towns are ultimately held responsible."

Others agree. Michael Johnson, an analyst at Moody's Investors Service, which rates ALCOSAN Baa1, said that the last delinquent payment was five years ago, so the agency's credit strength probably wouldn't be hurt by the surrounding towns.

But though the parts that make up the system seem safe enough, the regional nature of the improvement program does contain some unknowns. "The risk right now is the overall size and scope of the plan, and how much are they going to have to borrow to do this," said Joe Mason, an associate director at Fitch, which rates the deal A.

With an eye on the future capital needs the underwriter, Martin Hanby, a director at PNC, said the firm structured the deal for 30-year level debt service so the authority will know exactly how much is coming and can let the municipalities know in advance of rate hikes. Copyright c 2000 Thomson Financial Municipals Group. All Rights Reserved. http://www.bondbuyer.comThomson Financial is a leading worldwide provider of e-information. To subscribe or see more: www.thomsonfinancial.com.

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