BRADENTON, Fla. - North Carolina's Fayetteville Public Works Commission plans to price $110 million in revenue bonds in a rare competitive deal from a Tar Heel State issuer.
Bids will be taken Aug. 26 via Parity, and the bonds will be awarded to the firm offering to purchase the bonds at the lowest interest cost.
Proceeds will finance a number of projects, including water and sewer system mains, electric and water advanced metering infrastructure, and LED street lighting as well as service and main extensions in annexed areas.
The double-A rated PWC, a combined electric, water and wastewater utility system, was last in the bond market in 2009, and was an infrequent issuer prior to that.
But its previous revenue bond deals were sold as negotiated offerings, in line with how most other issuers continue to sell revenue-backed debt in North Carolina.
In the first half of this year, only one local government issuer sold a revenue bond deal by auction - a $34.7 million transaction by Appalachian State University in April. By contrast, seven general obligation offerings sold competitively.
Between 2009 and 2013, North Carolina issuers sold only four revenue bond transactions totaling $597.8 million competitively, according to data from Thomson Reuters.
Over the same five year period, 333 revenue bond deals totaling $21.2 billion were issued through negotiated sales.
Nationwide, more issuers are tending to sell by competition, particularly utilities, said the PWC's financial advisor Walter Goldsmith, a managing director with First Tryon Advisors.
"We do think as a firm when you are in a market where there's little volume and you're selling bonds with a fixed rate, plain vanilla structure, that a competitive sale makes sense to consider," said Goldsmith, whose firm was also the FA on the Appalachian State deal.
Using negotiation might make sense in a different market environment where there's more volume for sale, there's volatility, a credit is lower rated, and when an issuer is selling "story bonds" where more marketing is necessary to explain certain conditions, he said.
Goldsmith also offered one theory about why many issuers in North Carolina don't sell by auction.
He said it may harken back to a time when there were fewer financial advisors and some issuers relied on underwriters to structure their deals.
The Fayetteville Public Works Commission fit the profile of a credit that would sell bonds competitively in the current market, he said, adding that the utility wanted to use a transparent, competitive process "to get the lowest all-in true interest cost."
"Low issuance volume nationwide, combined with low interest rates and our strong Aa2/AA/AA credit ratings were all factors that we took into consideration," PWC chief financial officer J. Dwight Miller said about the utility determined how the $110 million of bonds would be issued in the upcoming transaction.
"We looked at the nationwide trends showing increasing numbers of competitive bond sales over the last five years, and also the number of firms bidding on those transactions, and decided that in the current market environment we would benefit from a competitive sale," he said.
The North Carolina Local Government Commission, which approves debt issuance, and the PWC's financial advisor were also consulted on the approach to use for selling the bonds, Miller said.
The state requires general obligation bonds to be sold by competition, but there has been significant interest in that type of sale for other deals because of an increasing number of bidders and the current low-volume market conditions, said Brad Young, spokesman for the LGC.
"These conditions led to a request from the city of Fayetteville to competitively sell its upcoming $106 million revenue bonds for the city's Public Works Commission," Young said. "The state of North Carolina has been successfully, competitively selling its general and special obligation bonds for the last several years."
The Fayetteville Public Works Commission provides electricity, water and wastewater services to Fayetteville and surrounding areas.
The Commission is the largest municipal electric provider in North Carolina and the 36th largest in the United States with more than 80,000 electric customers. The PWC serves more than 84,000 water customers and 82,000 wastewater customers.
Fayetteville is about 60 miles south of Raleigh, the state capital, and approximately 140 miles west of Charlotte. The city had an estimated population of 204,408, according to the U.S. Census Bureau.
The city is home to Fort Bragg, the largest U.S. Army installation in the country in terms of population, and the U.S. Air Force's Pope Field. Combined, the two military installations have 51,000 soldiers and employ more than 10,000 civilians.
For the upcoming transaction, the Fayetteville Public Works Commission's bonds are preliminarily structured with serial maturities from 2016 to 2039.
Bidders can designate up to two term bonds in consecutive annual principal amounts beginning in 2025, according to the notice of sale.
The bonds will be secured by a pledge and a lien on net system revenues.
Womble Carlyle Sandridge & Rice LLP is bond counsel.
In assigning its first rating, AA, to the PWC's bonds, Fitch Ratings said the outlook is stable.
Moody's and Standard & Poor's affirmed their Aa2 and AA ratings on the utility's $157 million in outstanding debt.
Fitch said key rating drivers include historically strong operating cash flow, low leverage and ample liquidity, which support the PWC's "solid financial position."
"Rate stabilization fund balances have been bolstered over the past five years as a result of meaningful rate increases designed to align rates with higher purchased power costs under the PWC's new power contract," said Fitch analyst Stacey Mawson. "Funds accumulated in recent years will be used to offset higher power costs until additional planned rate increases take effect."
Net revenues continue to provide healthy coverage of annual debt service, well above management's minimum target of 1.74 times despite the increase in purchase power cost in fiscal 2013, according to Moody's analyst Edna Marinelarena.
Senior lien debt service coverage based on the PWC's bond ordinance declined to a "still strong" 3.71 times in fiscal 2013 from 5.84 times in fiscal 2012, Marinelarena said.
Preliminary fiscal 2014 estimates indicate that net revenues are expected to provide coverage of 3.16 times on senior lien debt.
Moody's also said liquidity is ample with available cash reserves of $211.5 million or 349 days cash on hand, and the combined system's debt ratio in fiscal 2013 was low at 15.6%.
The commission's $169.2 million five-year capital improvement program is funded primarily through future borrowing plans in 2017 and 2019.
Standard & Poor's said its rating reflects a number of factors, including management's ability to maintain competitive utility rates, very good system reliability and management, and modest leverage even after funding the CIP.
The PWC's electric rates are below the average of utilities in North Carolina, and water and wastewater rates are in the lower tier, according to S&P analyst Judith Waite.
