Birmingham Sells Water Bonds Trailing Market Return: Muni Deals

By Romy Varghese

The Water Works Board of Birmingham, the seat of bankrupt Jefferson County, Alabama, is selling $154 million of bonds as such revenue debt delivers the year’s worst returns.

Most of the tax-exempt debt will refund 2006 water and sewer bonds, said Moody’s Investors Service, which rates the securities Aa2, third-highest. About $72 million will pay for water-system improvements, deal documents show. The offer, set for this week, is the issuer’s largest since May 2009.

The system serves municipalities in Jefferson County and adjacent counties, bond documents say. About 59 percent of its customers are served by the sewer system in Jefferson County, which in 2011 filed the nation’s biggest municipal bankruptcy because of $3.1 billion in sewer debt

Because of questions about payments on the county debt going forward, “there is and may continue to be limited liquidity” in the bonds of the city water board and other municipalities in Jefferson County, the deal documents say.

In March 2012, the water works sold 10-year tax-exempt bonds yielding 2.84 percent and paid 0.53 percentage point more than similarly rated utility revenue bonds, according to a Bloomberg Fair Value index.

“We’ve shown we’re very prudent, and it’s a great investment,” Michael Johnson, the board’s assistant general manager for finance and administration, said by phone. The board would like to receive interest rates below 4.5 percent, he said.

Standard & Poor’s last month raised its rating of the water works to AA, third-highest, because of its “strong financial profile” and ample funds to cover debt service, it said.

Water and sewer bonds are earning 0.6 percent this year through April 11, the lowest among revenue-bond areas, according to Barclays Plc indexes. Debt from Alabama is returning 1.1 percent, beating the broader market at 0.8 percent.

To contact the reporter on this story: Romy Varghese in Philadelphia atrvarghese8@bloomberg.net

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