The Puerto Rico Aqueduct and Sewer Authority yesterday received its first investment-grade bond ratings in more than 10 years, snagging triple-B ratings from all three agencies in advance of a $1.2 billion tax-exempt deal set to price within the next 30 days.
Citi and Morgan Stanley are co-lead managers. Nixon Peabody LLP is bond counsel and the Government Development Bank for Puerto Rico is the financial adviser. Officials are still deciding whether to insure the bonds.
“We will be talking to insurers and liquidity providers to see if any of that is efficient, whether or not it makes economic sense,” said GDB president Jorge Irizarry.
The $1.2 billion will refund $850 million of short-term notes and give the authority roughly $360 million of new-money proceeds to support capital projects and repay $80 million PRASA owes to the GDB. The debt will go out to 2047 and could include fixed-rate bonds along with a potential variable component as the authority may choose to sell floating-rate debt and use a swap agreement that PRASA owns.
Last year, the authority entered into two floating-to-fixed-rate swap transactions, one for a notional amount of $604.5 million with Morgan Stanley and the other for a notional amount of $325.5 million with Bear, Stearns & Co. In both swaps, PRASA pays a fixed rate of 4.374% and receives from the firms a floating SIFMA rate. Officials are evaluating whether to terminate the swaps, at a cost of $70 million, according to Horacio Aldrete, an analyst at Standard & Poor’s, or sell some variable-rate bonds to match one or both of the swap agreements.
“PRASA has a hedge and we’re going to see how to best use that hedge,” Irizarry said. “That’s something we’re looking at.”
Since 1994, any PRASA bond deals have had a commonwealth guarantee. The authority has implemented changes over the past two years, including increasing rates by 128% to generate enough revenue stream to cover operating costs and cost for capital projects as the central government ended all subsidies to the authority in fiscal 2007.
In addition to the $1.2 billion sale, PRASA will sell roughly $200 million of debt marketed to residents of Puerto Rico. That sale will be backed a commonwealth guarantee.
All three ratings agencies stressed PRASA’s strong management, a key component in the rating. The authority’s management has brought about the changes and will continue to work on an “aggressive” 10-year, $4 billion capital investment plan to bring the agency’s backlog of needed infrastructure improvements up to date. Officials said long-term debt will support that financing plan.
“It is a remarkable story in that it was a utility that was in pretty bad shape not that long ago and has turned around very quickly because they implemented some rate adjustments to the water and sewer fees,” Aldrete said.
Fitch Ratings and Standard & Poor’s rate the authority BBB-minus. Moody’s Investors Service rates the credit Baa3.
