The Puerto Rico Aqueduct and Sewer Authority is set to come to market with $1.25 billion of senior-lien revenue bonds this week, the largest scheduled sale in the long-term market so far this year.
The sale consist of $1 billion of Series 2012A tax-exempt debt and $250 million of Series 2012B taxable debt.
Institutional pricing is set for Wednesday, following a retail order period Tuesday.
The debt has been given a BBB by Fitch Ratings, a BBB-minus by Standard & Poor’s, and a Baa2 with a negative outlook by Moody’s Investors Service.
The authority provides water to 98% of Puerto Rico’s residents and sewer service to 59%.
The tax-exempt bonds are aimed at continental U.S. investors, for whom they offer a triple tax-exemption — city, state, and federal. The taxable bonds are aimed at Puerto Rico residents, said Jose Otero, vice president for financing at the Government Development Bank for Puerto Rico.
The bank is serving as the conduit for the authority’s bonds.
The Series 2012A funds will mainly be used to repay lines of credit provided by the bank to the authority as interim financing for a portion of the capital improvement plan, Otero said. A portion of the funds will be used for the agency’s five-year capital improvement plan and other purposes.
The plan is estimated to cost $1.56 billion, according to the preliminary official statement.
The Series 2012B proceeds will also be used to refinance bond anticipation notes that were issued to repay a syndicated loan maturing in January 2012. Otero said he was unsure how much money this would save the authority.
The sewer authority has total outstanding debt of $3.8 billion, Otero said.
As of Wednesday, it had been decided that the bonds would not be insured, but it had not yet been determined whether call provisions would be put in place, Otero said.
The deal was expected to be fixed-rate, with maturities ranging roughly from 2014 to 2047.
Bank of America Merrill Lynch is the lead underwriter on Series A and shares the role with Santander Securities on Series B. Nixon Peabody LLP is bond counsel.
“The Baa2 rating incorporates [the authority’s] monopoly position as a provider of essential water and sewer services and the experienced senior management team’s plans to improve the operational efficiency and effectiveness of the system,” Moody’s said.
“It also incorporates the financial weaknesses of the authority, which has consistently relied on subsidies and loans from the commonwealth and the GDB rather than raise rates, and the difficulty [the authority] has had reducing the amount of water lost through leaks or for which no payment is received, currently estimated at 63% of total water produced,” the agency said. “The rating also reflects the size and complexity of the system, below-average wealth levels in the commonwealth, and an extended economic recession.”
The Federal Reserve Bank of New York and other sources have detected an economic recovery in Puerto Rico over the last six months.
Fitch says the key drivers for its ratings are “solid management and commonwealth support,” “marginal financial results,” “extensive capital needs,” “weak but extensive service area,” and the fact that the authority provides an “essential utility.”’
On Wednesday, Otero said the deal would be structured with $1.25 billion of bonds in Series A and $350 million of bonds in Series B. However, on Friday several sources indicated the amounts were now set at $1 billion and $250 million, respectively.