SAN FRANCISCO - Portland, Ore. found strong demand this week when it brought nearly $300 million of sewer system revenue bonds to a market starved for supply.
The bonds priced competitively in two series on Tuesday: $86.2 million of refunding bonds and $204.2 million of new money revenue bonds.
TD Securities won the bid for the Series A refunding portion, with a true interest cost of 1.8258%, according to Thomson Reuters. Yields on the bonds ranged from 0.15% with a 5% coupon in 2015 to 2.37% with a 5% coupon in 2024.
"The refunding produced total [present value] savings of $16.3 million, saving ratepayers over $1.8 million per year," said Jonas Biery, the city's debt manager. That amounts to savings of around 16.1%.
The refunding bonds take out first lien 2004 Series A bonds, which were originally issued to finance capital improvements of the sewer system.
The Series A bonds are secured by a first lien on revenues from the city's sewer and stormwater system. The Series B bonds are also secured by a pledge of net revenues, but are subordinate to the first-lien bonds.
BofA Merrill Lynch won the bid on the $204 million of Series B bonds, with a true interest cost of 3.4305%.
Yields on the Series B bonds ranged from 0.20% with a 5% coupon in 2015 to 3.74% with a 4% coupon in 2039.
"The competitive sale was very successful with a good pool of bidders," Biery said. "Spreads to [Municipal Market Data] were tighter than we anticipated going into the morning, especially on the shorter-term first lien refunding bonds."
New money proceeds will fund the capital improvement program of Portland's Bureau of Environmental Services, with the majority being spent on system maintenance and reliable projects, Biery said.
The bureau provides Portland with clean river programs, including water quality protection, watershed planning, wastewater treatment, sewer installation, and stormwater management.
In the first-lien deal, which carried a Aa2 rating from Moody's Investors Service and a AA rating from Standard & Poor's, five-year bonds priced eight basis points above Municipal Market Data's generic triple-A municipal bond. Ten year bonds priced 11 basis points above the triple-A benchmark.
The second-lien deal, rated one notch lower by both credit rating agencies, priced with wider spreads.
In the five and ten-year maturities, bonds priced 9 and 14 basis points, respectively, above the MMD triple-A bond. In the 15 and 20-year maturities, bonds priced 53 points above the triple-A benchmark.
"It priced around plus 25 basis points in the ten-year range, which is very, very expensive," said Michael Ginestro, head of municipal research at Bel Air Investment Advisors in Los Angeles. He said he didn't participate in the deal because it's a higher quality deal than what he typically looks at.
The deal was the largest to price in a very light primary market on Tuesday, as overall new issue supply has been minimal.
Volume for the entire week was up slightly from last week, but was still low at nearly $6 billion.
"It's been quiet," Ginestro said. "We're still searching for supply to come back. Fund flows still remain positive, but we're looking at a slowdown in the summer."
Among the sectors, water and sewer bonds saw the steepest decline of 6% in the 30-day visible supply outlook, according to a municipal credit research report from Barclays, released on Aug. 1.
The option-adjusted spread on the water and sewer bond sector also tightened the most for the week ending July 30, but remained one of the least tight sectors, according to the report.
Ginestro said the water and sewer sector is a very "rich space" due to the essentiality of the service and the tendency to not be susceptible to economic sensitivity.
"Compared to other sectors, it's a sector that we view as expensive," he said. "Not enough of the paper is out there, and a very large share of it is high quality."
The first-lien refunding bonds received double-A ratings, based on prudent operating policies, a sizable, but manageable debt burden, and the large and stable metropolitan area of Portland.
With a population of about 600,000, Portland is the largest city in Oregon and second largest in the Pacific Northwest, after Seattle.
The city has completed major capital improvements on its sewer system during the past two decades, and has a history of raising rates annually to support its increasing expenses.
All of the bond ratings were given a stable outlook by both credit rating agencies.
"The stable outlook reflects our expectations that the sewer enterprise will continue to benefit from a large and healthy economy that is in expansion mode," Moody's analysts said in a report. "Management is also expected to maintain satisfactory performance over the medium term, including continued adoption of annual rate increases sufficient to meet operating and capital needs."
Analysts also said they expect operating results will continue to comply with planning standards for 1.5 times coverage of first lien debt service and 1.3 times combined debt service.
The city currently has around $766 million of first lien sewer system revenue bonds outstanding, and around $824 million of second lien revenue bonds outstanding.
Biery said the city plans to sell its next sewer revenue bond issuance in fiscal year 2016-17.
Hawkins Delafield & Wood LLP was bond counsel on this week's deal and Public Financial Management, Inc. was financial advisor.
