Puerto Rico Aqueduct & Sewer Authority's $750 million revenue bond sale, the largest deal on the coming week's primary calendar, promises to test the market's appetite for the island's high-yield debt.
"There's a lot of open-ended questions and that's a little concerning to me," a New York trader said on Friday morning.
The PRASA deal will be part of the estimated $6.47 billion of new volume expected to price in the coming week, according to Ipreo LLC and The Bond Buyer. Volume expectations compare to the revised $4.68 billion that came to market in the past week, according to Thomson Reuters.
PRASA's speculative-grade bond sale will be the first from a Puerto Rico public sector agency since the March 2014 Puerto Rico general obligation bond sale. Since then, Puerto Rico Gov. Alejandro García Padilla has declared the commonwealth's debt to be unpayable given the commonwealth's current levels of economic growth and the Puerto Rico Public Finance Corp. defaulted on 99% of a $58 million debt payment due Aug. 1.
PRASA said it expects to pay about 10% on the Series 2015 A senior lien bonds, which is 1.4 percentage point more than the secondary market yield on its senior bonds maturing in 30 years. The authority's pricing will be led by Bank of America Merrill Lynch and is tentatively set for Tuesday, with JPMorgan, Popular Securities, and Santander Securities as junior underwriters. The structure was unavailable at press time Friday.
While some existing long holders of PRASA debt may flock to the double-digit returns, traditional retail investors will have limited access to the deal because of its speculative ratings and a minimum $100,000 denomination investment threshold, the New York trader said.
"The minimums are 100, so they are trying to knock out that retail investor," which is understandable given its credit nature and the island's fiscal debacle, he said.
"I don't know where the demand is really going to come from," he said. "I have a hard time grappling [with] why you would buy that when the P.R. Public Finance Corp. didn't pay."
PRASA's water rates already are among the highest in the country and the authority has a shrinking customer base.
"It will be interesting to watch, and it's going to be a difficult situation," the trader said. "The timing is a little funny, especially after the PFC put a bad taste in people's mouth."
A year ago when the island's GOs sold "it was like a food fight to get bonds," the trader said, calling demand sketchy for the new PRASA bonds.
His firm will not be involved in the new issue, but he said he would monitor it in the aftermarket.
"Overall the bonds will do OK and I think eventually PRASA as a whole will continue to pay, but it's going to be a big roller coaster in between," he said.
The bonds are rated Caa3 by Moody's Investors Service, and were downgraded by Standard & Poor's to CCC-minus with a negative outlook as of July 2, at which time it was removed from CreditWatch. The bonds are also rated CC by Fitch Ratings.
Proceeds will finance a portion of the authority's capital improvement program for the five-year period ending June 30, 2019 and reimburse the authority for certain capital expenses paid in fiscal years 2013 and 2015. It will also repay a $90 million bank line of credit to Banco Popular due on Aug. 31.
PRASA has generally been exceeding its budget forecasts for net revenue and debt service coverage.
Also on the calendar is Detroit's first post-bankruptcy bond sale. Scheduled for sale on Wednesday, Barclays Capital will price $245 million of local government loan program revenue bonds, which are being issued through the Michigan Finance Authority.
The bonds are enhanced with a statutory lien and intercept feature on Detroit's income tax, which will pay off the bonds. The protections, combined with debt-service coverage levels of 6.5 times, helped the deal win an A rating from Standard & Poor's.
The New York Convention Center Development Corporation will sell $650 million of refunding revenue bonds backed by hotel unit fees. Citigroup Global Markets will underwrite the deal on Aug. 18 in a structure of serial bonds maturing from 2016 to 2035 and a term in 2045. The bonds are rated A1 by Moody's Investors Service, and A-plus by Standard & Poor's.
A $400 million sale of revenue bonds will also come to market from the Illinois Finance Authority on behalf of the University of Chicago. Barclays Capital Inc. is pricing the deal on Aug. 19. The bonds are rated Aa2 by Moody's, AA by Standard & Poor's and AA-plus by Fitch.
Elsewhere in New York, the Metropolitan Transportation Authority will issue $398 million of revenue bonds in a negotiated deal led by Goldman, Sachs & Co. The deal will be priced for retail investors on Aug. 19, and priced for institutions on Thursday.
The Hillsborough County, Fla., Aviation Authority, meanwhile, will bring $386 million of Tampa International Airport revenue bonds to market on Aug. 18 in a deal priced by Citigroup.
The bonds will consist of $296 million of taxable debt and $90 million tax-exempt and are rated A3 by Moody's, and A-minus by the two other major rating agencies.
In addition, there is a two-pronged sewer system revenue refunding from Portland, Ore. slated for the competitive market on Tuesday.
The larger, $341.52 million series is rated Aa2 by Moody's and AA by Standard & Poor's, while the $62.39 million series is rated Aa3 by Moody's and AA-minus by Standard & Poor's.
Both series are structured to mature serially from 2016 to 2031.
Meanwhile, District of Columbia will sell $143.36 million of taxable revenue bonds in the negotiated market.
Wells Fargo Securities is preparing the deal, which is rated Aa3 by Moody's, A-plus by Standard & Poor's, and AA-minus by Fitch.
