DALLAS - San Antonio hopes to bring $218.6 million of electric and gas system revenue refunding bonds to market in a negotiated sale today, but will keep a close eye on interest rates before deciding whether to issue the debt.
A retail period is set for today, with institutional sales on Wednesday.
This is the Texas city's second effort to sell the debt, which will refund about $200 million of par value 1998 bonds issued for CPS Energy, the municipally owned electric and natural gas utility. San Antonio had intended to issue $319.4 million of bonds in early October to refund some $300 million of the 1998 bonds, but pulled the tranche off the schedule due to uncertain market conditions.
"We're trying to achieve net present-value savings of at least 3%," said David Youngman, senior director of finance for CPS Energy, said on Friday. "That's an absolute minimum, and we'd like to have 3.5%. But if we were to do it today, the savings would not be there. It was there earlier, but the savings have melted away over the last week or two. If we can't get at least 3%, it won't be worth the time and expense to sell them now."
Because the proceeds will be used to refund the 1998 bonds rather than pay for projects that are under way, there is no urgency in taking the debt into an erratic market, according to Youngman.
"This is not something we absolutely have to do at this time," he said. "If we can achieve the savings we want, then we'll issue the bonds. If we can't, we won't."
Youngman said the decision on selling the debt was to have been be made by yesterday afternoon.
"We'll be keeping an eye on several transactions that are planned for sale on Monday to see how the market accepts those," he said. "If it looks like the pricing is strong on Monday, we'll go ahead with the retail period on Tuesday. But we won't go to market until we see what we want to see."
Morgan Stanley is the lead underwriter on the San Antonio issue. The underwriting team includes Merrill Lynch & Co., Banc of America Securities LLC, Depfa First Albany Securities LLC, First Southwest Co., Ramirez & Co., and Siebert, Brandford, Shank & Co.
Co-bond counsels are Fulbright & Jaworski LLP and Escamilla & Poneck Inc. Co-financial advisers are Public Financial Management Inc. and Estrada Hinojosa & Co..
The refunding bonds are rated AA by Standard & Poor's, Aa1 by Moody's Investors Service, and AA-plus by Fitch Ratings.
With the sale, CPS Energy will have about $2.8 billion of outstanding senior-lien revenue bonds, $402 million of junior-lien bonds, and $450 million of subordinate-lien debt in its commercial paper program. About $1.37 billion of the total debt relates to the utility's share in the South Texas Project nuclear generating facility.
Youngman said it is a challenging time for issuers.
"I've never been involved in a market like this," he said. "It used to be pretty easy to sell this type of well-supported debt, but now the market is so volatile, so crazy, that you have to stay flexible. That's what we are trying to do."
The city reduced the tranche by about $100 million from the original proposal because it could not realize the interest savings it was seeking, Youngman said.
"As the interest rates went up, some of the maturities were no longer viable in a refunding," he said. "It just didn't make sense to refund some of the later and larger maturities."
The 1998 bonds being refunded with the current tranche are those that will mature between 2010 and 2018, Youngman said.
Donald J. Gonzalez, managing director and manager of Estrada Hinojosa's office in San Antonio, said the market will be closely monitored before a decision is made on whether to sell the bonds at this time.
"If the market comes our way a little bit, then we'll get it done," he said. "Right now the savings we are looking for would be a little more difficult to achieve than would have been the case earlier. We don't need a great deal of movement, but we're hoping the rate increases we've seen in the market over the last week will reverse themselves."
Gonzalez said the current tranche should be more viable than the larger sale planned for October.
"We hoped to sell these bonds in late September or early October, but the market was pretty much frozen in that time frame," he said. "When we looked at the market in mid-September there were sufficient savings to make financial sense, and then that went away, especially on the later maturities.
"But now I think we're in the sweet spot of the market," Gonzalez added. "The deal is not so large of a size that investors will have trouble digesting it, and CPS Energy is a very well-received issuer."
Youngman said he expects strong interest from retail investors should there be a retail order period today.
"Usually most of our debt is taken by institutional investors, but I think we'll see more involvement than normal from the retail side," he said. "We're not looking beyond 2018 with this sale, and that's often more attractive for retail investors than are the longer maturities."
Insurance for the refunding bonds was not a factor in structuring the deal, according to Youngman.
"I'm not sure bond insurance ever makes sense, and it certainly does not in this current environment," he said. "With our strong ratings we've never paid for bond insurance, although we have qualified some issues for insurance at the request of investors."
Youngman said CPS Energy will probably be in the market in the first quarter of 2009 with a new-money issue to help finance a portion of its five-year, $5.2 billion capital improvement plan that is updated annually.
CPS Energy is one of the largest municipal electric and gas utilities in the country, with about 660,000 retail electric customers and 317,000 retail gas customers.
Electricity revenues account for 81% of total revenue, with 13% coming from gas sales.
The electric system serves all of Bexar County and portions of Comal, Guadalupe, Atascosa, Medina, Bandera, Wilson, and Kendall counties. Almost all the gas customers are in San Antonio.
CPS Energy provides wholesale electric service under long-term contracts to Floresville, Hondo, and Castroville.
