The District of Columbia Water and Sewer Authority is pricing nearly a quarter billion dollars' worth of bonds on Tuesday which will test the waters on the appeal of subordinate lien revenue debt.
"Essential purpose bonds form the core holdings for many municipal bond portfolios," said Pat Luby, senior municipal bonds strategist at CreditSights.
"I do not think that investors would be looking at the DC W&S bonds for incremental yields and spreads, I do think that national investors will certainly be taking a look at the deal."
Luby believes a District of Columbia law passed
"Now that D.C. is taxing the interest on out-of-district bonds, that should provide a boost for local demand," said Luby.
The sale is broken into two parts with $55.49 million being designated as Public Utility Subordinate Lien Revenue Refunding Bonds, Series 2025A.
The proceeds will go towards refunding all or certain of the authority's outstanding 2015B bonds and pay the costs of issuing the series 2025A bonds.
The larger portion of $160.85 million are Public Utility Subordinate Lien Revenue and Revenue Refunding Bonds, Series 2025B and labeled as green bonds.
They will finance a portion of the costs of the Clean Rivers project, refund all or certain of the authority's outstanding Series 2015A Bonds (green) and pay the costs of issuing the Series 2025B bonds.
Both double-A rated tranches are exempt from federal and city tax. The sale is negotiated with Siebert Williams Shank as the lead manager.
"We are thrilled to bring this innovative financing to one of the largest infrastructure projects in the district's history," said Derek McNeil, Senior Managing Director and Head of Mid-Atlantic Region at Siebert Williams Shank.
"DC Water's green bonds should attract a diverse group of investors, including environmentally conscious ones, facilitating a Clean Rivers Project that will improve water quality and enhance climate resilience for hundreds of thousands of residents across the region."
"We are eager to access the capital markets with this pristine credit to help DC Water fund its infrastructure needs."
Kestrel labels the bond as green using the International Capital Market Association standards. Kestrel scores the issuance at a level of 4.88 out of 5 using a tiered grading standard measuring environmental, social and transparency elements of the deal.
"DC Water is excited to be back in the market with a transaction that will fund infrastructure investments in Washington D.C.," said Matthew T. Brown, chief financial officer and executive vice president of D.C Water
"We plan to issue green bonds to fund a tunnel that will help reduce combined sewer overflows into Rock Creek as part of our Clean Rivers Project that is currently under construction near the Lincoln and Martin Luther King, Jr. Memorials."
According to the Environmental Protection Agency approximately 700 cities have combined sewer systems and that overflow into waterways during periods of heavy rainfall.
The Clean Rivers Project is attempting to reduce CSOs in an average rainfall year by 96% system wide. Targets are set at 98% for the Anacostia River, 93% for the Potomac River and 90% for Rock Creek.
In addition to cleaning up the rivers the deal is designed to lessen the Authority's debt load.
"We're also refunding existing bonds to lower our debt service costs and pass those savings on to our customers," said Brown. "Our strong credit ratings were recently affirmed, which positions us for favorable interest rates that keep customer bills lower."
Luby expects buyers of the new credit will likely have familiarity with the issuer.
"Holders of the older, soon-to-be-refunded bonds are natural buyers of the new bonds," he said. "They would already be familiar with the issuer, so replacing called or maturing bonds with new bonds from the same issuer does not add to the research burden that managers have in maintaining surveillance of their holdings."
As ESG-rated securities and green bonds appear to have lost some luster, the label may still add panache for a certain class of investor.
"There may not be an immediate cost saving to the issuer," said Luby. "In my view, the conformance to the Kestrel criteria has no downside for the issuer and has potential future benefit for buyers of the bonds, should the market begin to discriminate between bonds with a third-party green label and those without."
The bonds are securitized by a subordinate lien on net revenues supplemented with direct payments from Build America Bonds subsidies.
"Refunding of BABS thru the extraordinary redemption provision leaves a bad taste in investors' mouths for a long time," said John Mousseau, vice-chairman & CIO of
Cumberland Advisors.
"It is a credit that trades extremely well and that is because of the Federal Government."
The District of Columbia Water and Sewer Authority provides retail and wastewater services to about 700,000 district residents and wholesale water conveyance and treatment services for 1.8 million people in the surrounding counties in Virginia and Maryland.
The Authority exists as independent authority. Its board of directors includes six members representing the city of Washington, two from Prince George's County Md., two from Montgomery County Md., and one from Fairfax County Virginia.
The authority debt profile features no interest swaps, derivatives, pensions or Other Post Employment Benefits liabilities.
Co-managers on the deal include Barclays Capital, FHN Financial Capital Markets, Mesirow Financial, Inc., Ramirez & Co., Inc., and Raymond James.
PFM and Sustainable Capital Advisors are serving as co-municipal advisors. Squire Patton Boggs and Bellamy Penn LLC are the co-counsels.
The deal is rated as AA by Fitch Ratings, Aa2 by Moody's Ratings and AA+ by S&P Global Ratings.
"The ratings reflect our view of DC Water's exceptional management policies and strong financial, performance midway through its large and complex capital plan," said S&P.
"The Aa1 and Aa2 senior and subordinate long-term ratings incorporate an excellent rate management record, and revenue growth trends that are expected to continue, supporting strong liquidity and healthy coverage of debt service," said Moody's. "The ratings also reflect a large and healthy service area supported by considerable wealth."
