Corpus Christi to sell revenue bonds as water crisis abates

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Corpus Christi, Texas, plans to sell $300 million of utility system revenue bonds on Tuesday amid improved drought conditions that helped stabilize the system's ratings, which were hit with multi-notch downgrades earlier this year. 

Ahead of the deal, S&P Global Ratings ended a CreditWatch with negative implications review and Fitch Ratings revised its outlook to stable from negative.

Both affirmed their ratings — A with a negative outlook from S&P and A-minus from Fitch — noting recently improved water supply, while warning of continued credit risks related to the drought-prone city's efforts to boost supply over the longer term.

The rating reprieve puts the onus on the system to execute its "ambitious capital plans," according to Howard Cure, municipal bond research director at Evercore Wealth Management.

"This execution risk is significant and could be compounded by the short terms of elected officials, which might disrupt long-term planning," he said in an email.

All nine city council member seats, including the mayor's, are on the Nov. 3 ballot. 

Summer rainfall, along with $1.1 billion of groundwater, wastewater reuse, and other projects aimed at producing 62 million gallons of water daily by 2028, enabled the city to revise its drought status from Stage 3 to Stage 1 and postpone the onset of a potential Level 1 emergency — indicating the regional water system is 180 days from supply not meeting demand — to September 2028 from as soon as this year.  

The utility system senior lien revenue improvement bonds are structured with serial maturities between 2030 and 2056 and could come to market with insurance, according to the preliminary official statement. 

A portion of the bond proceeds will reimburse prior spending for the water supply projects, the deal's investor presentation said. It showed future debt proceeds totaling nearly $2 billion under the utility system's five-year capital improvement program, including almost $1.025 billion for water with the rest allocated to wastewater, storm water, and gas projects.

The Corpus Christi City Council gave final approval in July to water rate hikes effective Jan. 1 to support current and future debt, as well as water system operations.  

The current council has waffled on a key long-term water supply project. In September it once again voted against a plan for Inner Harbor seawater desalination by rejecting an initial design-build contract for the project. The indecisiveness raised the ire of the Texas governor's office and left the city on the hook to pay off $235.2 million of bonds sold through the Texas Water Development Board for the project. 

If ongoing discussions with the TWDB over the debt's use for other projects are unsuccessful, Corpus Christi "will continue to explore remedial actions, including the option to defease the Inner Harbor bonds," the POS said.

The city has reserved up to 50 million gallons a day from a yet-to-be-built Harbor Island desalination project by the Nueces River Authority. 

Meanwhile, a "Fair Water" charter amendment on the city's Nov. 3 ballot would eliminate and prohibit exemptions from drought surcharges for large industrial water users.

If passed, the measure is estimated to result in loss of about $6 million in annual revenue supporting debt the city issued through TWDB, according to the POS. While budget reserves are available to cover the loss in fiscal 2027 and 2028, a raw water rate hike would be needed beginning in fiscal 2029.

Corpus Christi Water, a city agency, is the primary water supplier for a seven-county region.

Moody's Ratings, which did not rate the upcoming deal, affirmed the utility system's A1 rating with a negative outlook in July, ending a review it launched in April for a possible further downgrade after lowering the rating in December.   

BofA Securities is the senior manager for the utility system bond sale, with Morgan Stanley, Baird, and Ramirez & Co. as co-managers. Specialized Public Finance is the municipal advisor and Norton Rose Fulbright is bond counsel. The system will have $1.7 billion of outstanding senior lien bonds, including the new debt.

The city's last debt sale was $107.57 million of general obligation bonds in June when a potential Level 1 emergency was looming in December. The bonds, which were rated AA with negative outlooks by Fitch and S&P, were priced with yields that ranged from 2.9% in 2029 to 4.37% in 2046.