WPPSS Plans New $450-Million Bond Offering : Utility Will Replace High-Interest Instruments Before Defaulted Issues Settled

Whoops. It’s back.

WPPSS--the Washington Public Power Supply System, biggest municipal bond defaulter in history--plans to return to the bond market for the first time since it failed to make good on $2.25 billion in bonds in 1983.

Next week it expects to sell $450 million in bonds that will replace high-interest bonds used to fund construction of two incomplete nuclear power plants.

Some investors burned by the bad WPPSS bonds are a bit miffed that WPPSS, which gained the pronunciation “whoops” after its infamous default--is refinancing bonds before it settles all claims over the defaulted issues.

“I just think it’s a foolish move,” said C. Richard Lehmann, who founded the Bond Investors Assn. in Miami to provide advice to holders of WPPSS bonds and other defaulted issues.

“The whole purpose of the refinancing is to save interest. It seems to me that it would behoove them to clear the air” on the old bonds first, he said. “I think it’s going to have a financial effect on the interest rates they’re going to have to pay” on the new bonds, he added.

Big Savings Estimated

WPPSS officials say, however, that it would be foolish to continue paying double-digit interest rates on the existing bonds for WPPSS nuclear units 1 and 3. They say they hope to float the new bonds in the 7% range.

WPPSS, a consortium of utilities formed to build five nuclear plants, estimates that it will save an average of $70 million to $80 million a year over the next 30 years through the refinancing.

Bond experts predict that WPPSS will have to pay a penalty in the form of higher interest on the bonds because of the default. They say the bonds may yield about a quarter basis point more than similarly rated bonds, according to the Bond Buyer, which called the bond sale the deal of the year. A basis point is one-hundredth of a percentage point.

Last week, Moody’s Investors Service gave a rating of “A” to the new bonds, which it considers an upper medium-grade rating on a scale that runs from Aaa to D.

Moody’s said its rating is based on the fact that the bonds are backed by the Bonneville Power Administration, a federal agency that sells power in the Northwest. The BPA will finance the bonds through revenue that it receives from selling power generated by hydroelectric plants in the Northwest.

In addition, a change in the federal bankruptcy code last year clarified that WPPSS’ units 1 and 3 are insulated from any legal claims against units 4 and 5, the ones that defaulted, in the event of a WPPSS bankruptcy filing.

Standard & Poor’s Corp., the other major credit rating concern, last year reinstated its AA-minus rating on units 1 and 3 as well as unit 2, which is operating. The rating is a degree higher than Moody’s.

250-Page Statement

Heather L. Ruth, president of the Public Securities Assn., the main trade group for the municipal bond industry, said the fact that WPPSS is returning to the bond market indicates that its advisers feel enough time has passed since the default for the supply system’s bad reputation to have faded.

“If they weren’t WPPSS they would have refunded much sooner,” she said.

Despite WPPSS’ history, expectations are that the bond issue will have no trouble finding buyers.

“I suspect it’s going to be a good deal,” Ruth said.