DALLAS -- Public infrastructure issuers need to weigh the credit risks of extended maturity bonds against the immediate rewards before issuing century bonds, Moody's Investors Service cautions in a new report.
"U.S. public sector infrastructure agencies create near-term opportunities and long-term credit challenges when issuing bonds with maturities as long as 100 years," said senior credit officer Nick Samuels, chief analyst on the century bond report.
Compared to a traditional 30- to 35-year amortization for an infrastructure issuer, a 100-year structure more than triples the total debt service costs, Samuels said.
By issuing century bonds, issuers can defer rate increases and avoid budget cuts while generating large sums needed to fund major water or transportation projects, he said. However, the longer-term debt can curtail an issuer's ability and willingness in later years to generate the revenue needed to meet operating expense and make system investments.
Any negative credit impacts of century bonds on an issuer likely would be modest if the longer-term debt is a small portion of its overall portfolio, Samuels said.
Issuers as well as investors have renewed interest in the ultra-long-term bonds after District of Columbia Water and Sewer Authority had more than $1 billion of offers this summer for a planned $300 million tranche of taxable 100-year bonds, he said.
The negotiated issue was so attractive to the market that DC Water moved up the sale date and kicked up the total to $350 million, selling the bonds at a lower-than-expected 4.81%.
DC Water chief financial officer Mark Kim said in July that he was delighted with the results from the utility's century bond sale.
"I think this was a phenomenal transaction," he said. "It was just remarkable to lock in sub-5% money for 100 years."
The utility's senior lien debt is rated Aa2 by Moody's, AA-plus by Standard & Poor's, and AA by Fitch.
Proceeds from DC Water's century bonds will help fund a $2.6 billion capital program that will bring the utility into compliance with a federal clean-water consent decree.
DC Water's century bonds were the first to be issued by an infrastructure agency since a tax-exempt deal in 1994 from the Port Authority of New York and New Jersey and the first ever sold by a U.S. public utility.
"Only a few infrastructure issuers have borrowed at such long maturities, but historically low long-term interest rates provide opportunity for more to do so," Samuels said.
Samuels said century bonds could be attractive to other utilities and agencies facing decisions on how to fund similar mandated projects with a big price tag.
"From an operating perspective, a century bond issuer gains flexibility by deferring debt service costs far into the future," he said. "Delaying or reducing the size of rate increases also provides political relief from rate payers weary of consecutive years of higher charges."
The extended debt has an appeal for infrastructure bond issuers because the long-term maturities of the 100-year bonds more closely matches the service life of the large projects being financed, Samuels said.
"By issuing century bonds they can spread the cost of long-lived assets over a much longer period," Samuels said. "This has near-term benefits for debt service coverage but increases overall debt costs and skews other credit measures such as debt-to-revenue and debt payout ratio."
U.S. colleges and universities have long been active in the century bond market, with $3.8 billion of the longer-term debt issued since 1996, Moody's said. Cleveland Clinic Health System's recent sale of $400 million of 100-year bonds was the first for a non-profit healthcare issuer.
