Wall Street's problem with toxic debt is forcing Lewisburg to face problems for its water and sewer bonds that would require quarterly payments twice their current cost if steps aren't taken soon. That's according to discussion with C.L. Overman, senior vice president of Morgan Keegan & Company's Knoxville office, who met with the Council Tuesday night and reviewed the challenge again on Wednesday afternoon. Kenneth Carr, superintendent of the Water and Wastewater Department, said without action this winter, it would mean that for every dollar spent on water and sewer service, customers would have to pay nearly 33 cents more.
"Debt is more than a third of our rate," Carr said. "We would have to raise rates eventually, if we didn't do something."
When a city sells bonds, it's borrowing money from investors. Bonds are rated based on the seller's ability to guarantee payment. Some of Lewisburg's bonds were insured by American Municipal Bond Assurance Corp. AMBAC's stability was downgraded, according to Overman, because it had too many sub-prime mortgages on its books.
"When the bond insurer was downgraded, it forced the interest rate up," Overman said of a repayment schedule for Lewisburg's Water and Wastewater Department.
State, federal and contract laws require accelerated repayment of insured bonds when the underwriter's rating is downgraded, the Morgan Keegan vice president said.
"Instead of a 17-year bond payoff, you have a seven year payoff, and that's why we're suggesting a bond refinance," Overman said, likening that to a homeowner refinancing a mortgage with lower interest rates.
Moody's Investors Service rated Lewisburg's insured bonds at Aaa, the highest rating by that one of three rating agencies, Overman said. In 2002, when the bonds in question were issued, the city's rating was lower, "in the Baa range."
It's now A3, he said.
Mayor Bob Phillips has been concerned about Marshall County's debt load. It affects the city's bond rating because city taxpayers are also county residents who are also responsible for paying off county debt.
Asked if that's part of the city's problem as explained Tuesday night to the City Council, the mayor replied, "Yes."
To deal with the "challenge" presented by AMBAC's "downgrade," Overman suggested refinancing three water and sewer notes. The idea is to sell one bond issuance of up to $8.5 million.
The three debts are:
$2.7 million in bonds issued in 2002 when the contract allowed a variable rate. The city has successfully avoided higher rates by refinancing when variable rates increase, and the current proposal isn't much different now that interest rates are at historic lows.
$3.46 million in bonds sold for several projects including sewers along Mooresville Highway, Highway 50 and Franklin Pike. These are the bonds that were insured by AMBAC.
$2 million in bond anticipation notes, a loan issued with a plan to repay it all when bonds are sold. This kind of loan can be acquired faster than selling bonds. The debt was incurred when Lewisburg bought the Cornersville water system.
The three debts total some $8.17 million. Refinancing will cost money and the proposed bond sale requires authorization of an amount greater than the cost and refinanced debt. Not all of the $8.5 million in bonds would be sold. It's an issuance that's "not to exceed" that amount.
The water utility has "funds on hand to pay one accelerated payment," Carr said of the increasing debt payment schedule, "but not quarterly payments for the next seven years. "The purpose of refunding is to get it back to one principal payment a year," Carr said. "If we did what we were recommending last night, there would be no significant reason for an increase. This would not cause an increase."
The failure of AMBAC is a chief reason the city must act now before debt payment schedules are accelerated, Overman explained to the Council during its regular meeting on Tuesday. Other reasons include "J.P. Morgan deciding not to refund the liquidity," Overman told the Council during a complicated explanation about the ebb and flow of money in the bond market.
Complexities of the market and the size of the deal appear to be chief reasons for the Council to decide to seek an independent counsel on the bond issue, as well as set a special called meeting to continue deliberations on the situation.
The special meeting is in City Hall at 4:30 p.m. on Feb. 24.