AUSTIN, Texas--(Business Wire)--
Fitch Ratings assigns an 'A+' rating on Louisville and Jefferson County
Metropolitan Sewer District, Kentucky's (the district) $180 million sewer and
drainage system revenue bonds, series 2009C (federally taxable - Build America
Bonds - direct payment). The bonds will be sold competitively on Nov. 18, 2009.
At this time, Fitch also affirms its 'A+' rating on the district's $705.4
million of outstanding sewer and drainage system revenue bonds, consisting of
the following series:
--$155 million, series 1998A;
--$291.9 million, series 2001A;
--$100 million, series 2004A;
--$60.1 million, series 2005A;
--$98.4 million, series 2006A.
The Rating Outlook for all bonds is Stable.
The 'A+' rating reflects the district's adequate financial performance,
demonstrated willingness to raise rates, sizeable capital improvement program
(CIP), elevated debt burden, and diverse and growing service area. The district
is in the midst of a major capital investment cycle, driven predominantly by a
regulatory consent decree on the wastewater side. Capital costs, which are
significant over the next three years, are expected to require ongoing
borrowing. This will put increased fixed cost pressure on the system's financial
performance over the near term, but with expected steady increases in the rate
base, margins should improve by the end of the forecast period.
The district provides wastewater collection, treatment, and disposal service as
well as stormwater drainage service to around 720,000 people within the
boundaries of the Louisville/Jefferson County Metro Government (Metro) and
certain outlying areas. Like many large urban wastewater utilities, the
district's wastewater system has encountered periodic sanitary sewer overflows
(SSOs) and combined sewer overflows (CSOs) during wet weather events, which has
led to regulatory action against the district. These actions have culminated
with the district entering into an amended consent decree in 2009 with the U.S.
EPA, which superseded a prior consent decree and which outlines various actions
for the district to accomplish in order to achieve compliance with its discharge
permits.
The consent decree provides the framework of actions by the district over a
20-year period and is estimated to require capital spending of around $843
million. Upon completion of the consent decree milestones, the district expects
to capture and treat 96% of all CSOs and eliminate a significant amount of SSOs.
The bulk of all capital projects associated with the consent decree are expected
to be implemented over the next three to five years. As the district completes
major projects, capital expenditures are expected to decline significantly and
be much more manageable.
For fiscals 2010-2014, the district's CIP calls for capital spending and project
management of around $610 million, most of which is directly related to consent
decree projects. Funding for these outlays is anticipated to be derived
primarily from the current offering and future borrowings ($530 million). This
will increase the district's already high debt levels and necessitate ongoing
rate hikes to offset the rising debt carrying costs.
In an effort to ensure ongoing resources for capital spending, the district's
board has raised both wastewater and drainage charges almost continuously since
1991. In addition, to elevate the wastewater rate base sufficient to fund
required regulatory capital items, the board (with the approval of the Metro
council) implemented a special surcharge in fiscal 2008, effectively boosting
charges by 34%. Since that time the board has adopted additional hikes of 6.5%
for both fiscals 2009 and 2010. Despite the continuous increases in rates,
combined wastewater and drainage charges remain relatively affordable. This
should provide the district sufficient flexibility for future adjustments needed
to service a rising fixed cost structure.
As the district's debt service costs have increased in recent years financial
margins have narrowed. In fiscal 2003 annual debt service (ADS) coverage was
over 1.8 times (x), but by fiscal 2007 ADS coverage had fallen to the district's
1.1x rate covenant. However, with the implementation of the rate surcharge in
fiscal 2008 and subsequent hike in fiscal 2009 ADS coverage has stabilized and
improved somewhat, rising to over 1.3x for fiscal 2009. Liquidity and cash flow
margins similarly have benefited from the board's recent rate actions. The
district's financial margins are expected to remain relatively narrow over the
next few years as the additional planned debt comes online. However, results
should show improvement subsequent to these issuances from steady anticipated
rate adjustments, and Fitch believes that these improvements, coupled with a
reduced level of ongoing capital pressures, ultimately will allow the district
to generate even better financial results over the medium and long term.
The district currently has nine swaps outstanding and initially entered into
swaps in order to hedge its exposure to variable-rate debt and take advantage of
a lower cost of funds. But with the market volatility over the last year and the
rising cost of liquidity, the district has moved towards decreasing its exposure
to variable-rate debt instruments. With this transition in debt structure, the
district has sought effectively to offset its fixed-payor swaps with a series of
fixed-receiver and basis swaps thereby extending the cost of the termination
payments instead of eliminating the original swaps altogether and paying a
termination fee at once. Apart from Fitch's concern related to the ongoing fixed
costs now resulting from the district's mirror swaps, Fitch believes that the
district has mitigated much of its interest-rate exposure and also limited some
of its counterparty risk.
Metro (general obligation bonds rated 'AA+' by Fitch) serves as the major
economic engine of the state. The area's job base has diversified over the last
decade from primarily manufacturing to include a strong service component.
Wealth levels are above the state average but about 10% lower than the nation's.
Unemployment, characteristic of the recession nationwide, has spiked
year-over-year and was 10.5% for September 2009, slightly higher than the
national average of 9.5%.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new
to the municipal market.
Water and Sewer Utility Revenue Bonds:
Municipal water and sewer utilities in the U.S. are enduring natural monopolies
that typically have autonomous rate setting ability and provide highly essential
services. The Bonds are secured by a pledge of net revenues generated by the
water and/or sewer system; and typically include structural legal protections
such as rate covenants, debt service reserve requirements, and anti-dilution
tests. As such, the sector exhibits extremely strong credit characteristics with
minimal defaults. Reflective of this strong performance, the average water and
sewer revenue bond rating is 'A+' with 53% at or above 'AA-',and approximately
6% rated 'BBB+' or below. Those with low investment-grade or
below-investment-grade ratings generally have substantial capital programs, a
high degree of leverage or weak financial flexibility as reflected in low cash
levels, narrow debt service coverage and/or limited rate-raising flexibility.
For additional information on these ratings, see 'Water and Sewer Revenue Bond
Rating Guidelines Aug. 6, 2008'.
Additional information is available at 'www.fitchratings.com'.
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PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
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DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
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Fitch Ratings
Doug Scott, 512-215-3725, Austin
Melanie A.J. Shaker, 312-368-3143, Chicago
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
Copyright Business Wire 2009
