$180M San Antonio Water Deal Has Varied Features

DALLAS — The San Antonio Water System will issue $180.5 million of debt next month, including $100 million of variable-rate bonds, officials said.

Senior manager on the negotiated deal, expected to price through negotiation Oct. 9, is Siebert Brandford Shank, with senior vice president Erlinda Cortez as lead banker.

Co-managers are San Antonio-based Frost Capital Markets, Bank of Tokyo Mitsubishi and Raymond James.

Dan Hartman, managing director at Public Financial Management Inc., shares duties as financial advisor with Don Gonzales, managing director at Estrada Hinojosa & Co.

Doug Evanson, chief financial officer for SAWS, says the upcoming issue is slightly larger than the system's $163 million issued last year.

"We're utilizing a combination of fixed- and variable-rate," Evanson said. "It's new money for our capital improvement program."

The variable rate will be based on the SIFMA weekly index over three years, he said.

"The short end of the yield curve continues to be attractive," Evanson said. "We have virtually no variable-rate exposure."

Variable rate bond bondholders are subject to mandatory tender in three years. In a failed remarketing, bondholders retain the bonds and receive a higher interest rate. A failed remarketing does not result in an acceleration of the bonds or a cross-default to any of SAWS' other outstanding debt.

Evanson, who has been CFO at SAWS for eight years, has a long background in energy and finance. Also working on the deal for SAWS is Treasurer Phyllis Garcia.

In addition to the two series of bonds SAWS plans to issue directly, the system is addressing its capital requirements by borrowing $80.5 million through the Texas Water Development Board.

Garcia said that the bonds going through the state water board will tap $26.3 million from the TWDB's Drinking Water State Revolving Fund and $60.1 million from the Clean Water State Revolving Fund.

Rates on 20-year bonds issued by the TWDB under the Drinking Water Fund are 2.43% or 125 basis points below market rates, according to the TWDB. Clean Water rates for double-A-rated issuers are 2.13% on 20-year bonds or 155 basis points below market rates.

The SAWS negotiated deals come amid a drop-off in new issues nationally after a period of rising rates that curtailed some refunding plans.

For issuers, the diminishing supply could work in their favor.

At the end of last week, the generic, benchmark triple-A GO in 2043 ended down three basis points at a 4.20% yield — 13 basis points below where it began the week, according to Municipal Market Data.

"The market is not what it was six months ago," Evanson said. "But it's still relatively attractive from a long-term perspective."

Because they are junior-lien bonds, the upcoming issue carries ratings of AA from both Standard & Poor's and Fitch Ratings and Aa2 from Moody's Investors Service. Outlooks are stable.

Earlier this year, S&P upgraded SAWS' senior-lien water system bonds one notch to AA-plus, citing strong management and planning, along with a trend of favorable debt service coverage and system liquidity.

"We've been very pleased with the ratings," Evanson said.

Analysts noted that the ratings incorporate challenges facing SAWS, including a consent decree with the Environmental Protection Agency to provide $1.1 billion of upgrades to the city's aged sewer system over the next decade and its integration of the former Bexar Metropolitan Water District into its system.

SAWS officially took over Bexar Met last year, although the smaller utility's $175 million of debt remained off the SAWS books.

The former Bexar Met is now known as San Antonio Water System District Special Project.

In a separate ratings report last week, Moody's analyst Adebola Kushimo affirmed the A1 senior and A2 subordinate-lien ratings on the former Bexar Met bonds.

"Moody's will continue to monitor the integration process but ultimately expect financial operations will improve under SAWS management," Kushimo noted.

Evanson said that the former Bexar Met bonds will remain separate until their call dates come sometime in the next decade.

"We're trying not to issue any additional bonds through the Special District," Evanson said. "Ultimately, when we put these two entities together, we're going to take out their debt entirely."

SAWS plans to add about $492 million to its capital plans over the next decade to upgrade leaky sewers under a $1.1 billion settlement with the EPA, officials said.

SAWS in July agreed to pay a $2.6 million civil penalty to resolve Clean Water Act violations stemming from illegal discharges of raw sewage, according to a consent decree.

While federal officials said that SAWS is expected to spend about $1.1 billion to repair and replace sewers, SAWS spokesman Greg Flores said that most of that is already included in long-term financing plans.

SAWS is the major water utility in Bexar County, serving about 365,000 water and 412,000 wastewater retail and wholesale customers. The waterworks system extends about 627 square miles and 93% of customers are residential.

The wastewater treatment boundaries cover 504 square miles and provide service to 1.3 million people.

"SAWS' main challenge continues to be the development of supplemental water resources, given the projected doubling of population for the area by the year 2050 and the ongoing sewer system maintenance program," said Fitch Ratings analyst Gabriela Gutierrez.

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