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MOODY'S COMMENTS ON DELAY IN PHILADELPHIA WATER AND SEWER REVENUE BOND SALE AND CONFIRMATION OF Baa RATING

MOODY'S COMMENTS ON DELAY IN PHILADELPHIA WATER AND SEWER REVENUE BOND
 SALE AND CONFIRMATION OF Baa RATING
 NEW YORK, Feb. 27 /PRNewswire/ -- Moody's Investors Service has been informed that the Philadelphia water and sewer revenue bond sale originally scheduled for the week of Feb. 24 has been postponed until the week of March 2. The change in schedule reflects a delay in city council approval of the authorization necessary to issue the bonds; the delay resulted from inadequate public notice which has now been corrected.
 The first public reading of the resolution authorizing the sale occurred this morning in city council and final approval is now scheduled for Thursday, March 5. While the city does not anticipate further delays or obstacles to the consummation of the $123,900,000 sale, the delay in approval has created a timing problem with regards to the repayment of outstanding bond anticipation notes which were to be refunded by this issue. The variable rate notes, which are rated Aa1/VMIG 1 and backed by a letter of credit from Sanwa Bank, are subject to mandatory tender on March 2, three days prior to the currently scheduled close. The indenture requires the trustee to draw on the letter of credit to pay the purchase price to note holders on March 2. It is Moody's understanding that the remarketing agent for the notes has agreed to purchase and hold the notes, which will be remarketed on March 2, until the proceeds of the refunding bond issue become available on March 5. Proceeds of the purchase by the remarketing agent will be used to reimburse the bank.
 It is anticipated that the Sanwa letter of credit will be drawn upon to repay the remarketing agent on the morning of March 5, that the council will approve the refunding sale, and that the 10th and 13th Series bonds will sell and close before the LOC expires at 5 p.m. that day. While the city does not anticipate further delays or any significant obstacles to the requisite approval by city council, the current schedule leaves no margin for error. If this process fails and the Water Department is unable to close on the bonds, the letter of credit will be drawn on to repay the remarketing agent, the letter of credit will then expire and the Water Department will attempt to remarket the notes. The reimbursement obligation to the bank accrues interest at the bank's prime rate plus 3 percent. If the bank is not reimbursed within 15 days of the termination of the letter of credit, interest will accrue at 18 percent per annum.
 Despite the concerns over the delay of the sale, Moody's has confirmed the Baa rating on the city's Water and Sewer revenue bonds in conjunction with the sale. In general, in the nine months since the segregation of the water and sewer system from the city's general consolidated cash accounts, the financial performance of the water and sewer enterprise has deteriorated. The Water Department was in violation of its relatively conservative 1.5 times debt service coverage requirement for fiscal year 1991, however, actual debt service coverage was greater than one times that year.
 Given the recent track record of financial projections and actual results, Moody's cannot be assured that compliance will be achieved during the current fiscal year 1992. Actions currently being undertaken by the new administration to enhance revenues and improve budgetary control reflect a renewed effort to restore system financial stability. Furthermore, it now appears likely that the city will need to implement another sizable rate increase in the next fiscal year to ensure compliance with its pledged rate covenant to bondholders. If the proposed 10th and 13th series bond sale does not take place, and the Water Department is forced to service the obligation to the letter of credit bond at the higher rate, it would place additional pressure on the system's already narrow revenue base. The ability of management to successfully implement actions outlined in the financial stability plan, including the full and timely approval of necessary rate increases, remains critical to the integrity of the revenue system and to the maintenance long-term credit quality.
 -0- 2/27/92
 /CONTACT: Michael Johnston, vice president-manager, mid-atlantic regional ratings, 212-553-7810; Dina W. Kennedy, vice president- assistant director, regional ratings, 212-553-7738; or Cathy Krust, assistant vice president, mid-atlantic regional ratings, 212-553-7706, all of Moody's Public Finance Department/ CO: Philadelphia Water Department ST: Pennsylvania IN: UTI SU: RTG


AH-KW -- NY089 -- 3497 02/27/92 17:39 EST
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