DALLAS — Despite a sharp drop in refunding opportunities for many issuers, Phoenix expects to see present-value savings of 9.8% or $14.2 million from a $132 million water and sewer refunding Tuesday.
"The savings are fairly dramatic and will help the city and the customers," said Randy Piotrowski, city treasurer for Phoenix. "Interest rates have turned in our favor. So, we're looking forward to a successful sale."
Nationwide, refunding volume through February is down 68% from the same period of 2013 when the issues totaled $24.3 billion, according to Thomson Reuters data. Overall volume is 35% lower.
Refundings in Arizona fell nearly 42% in 2013, surpassing the national decline of 29%. However, refunding issues showed signs of a rebound last week, with $3 billion offered, more than a third of the $8 billion priced in all of January and February.
The financial advisor on the deal, Ken Cushine, principal at Frasca & Associates, said that strong credits such as Phoenix can take advantage of low volume and the need to replenish institutional portfolios. Bearing the name of the Phoenix Civic Improvement Corp., the bonds carry ratings of Aa2 from Moody's Investors Service and AA-plus from Standard & Poor's.
"Given that strong rating and the market appetite for debt, we are hopeful that some of the existing investors would be interested in buying the refunding bonds," Cushine said. "The city of Phoenix has developed a really strong credit with all their investors. It's a really investor-friendly name."
This week's deal will include a retail order period that could attract high net-worth individuals in Arizona looking to take advantage of the double tax-exempt income.
The tax-exempt bonds refund a 2004 issue with a 10-year call. The serial bonds mature through 2029.
Goldman Sachs, led by vice president Terry Thornton, is senior manager on the deal. Co-managers are Baird, Siebert Brandford Shank & Co., Cabrera Capital Markets, Fidelity Capital Markets and Raymond James.
Attorney William R. DeHaan of Greenberg Traurig serves as bond counsel.
With this deal the city will have $718 million of wastewater system bonds outstanding, according to Moody's.
As junior-lien bonds, this week's current refunding is rated one notch lower than the senior-lien bonds by S&P. Moody's issues the same rating for junior and senior-lien bonds.
"The lack of rating distinction between senior and junior lien debt is reflective of the relatively small percentage of senior lien debt to junior lien debt of the system and the still adequate projected debt service coverage of between 1.7 times and 2 times for senior and junior lien debt service combined," Moody's analyst Dan Steed wrote.
The city said it plans to use the senior lien only for refunding or during especially turbulent market conditions.
On the junior-lien bonds, the debt service schedule indicates a slightly increasing annual requirement through 2022, from $46.9 million to $53.1 million, so similar operating margins should produce similar coverage levels, Standard & Poor's analyst James Breeding wrote.
"As the annual debt service requirement declines from that point, coverage levels should be even stronger," he wrote in his March 4 ratings report.
The city's wastewater treatment system serves about 1.5 million people within a 540-square-mile area. About 90% of the accounts are single family residential.
The wastewater system includes two wastewater plants, almost 5,000 miles of sewer mains and 78,000 manholes. The system treats more than 250 million gallons of wastewater per day, and more than 90% of the wastewater is treated and reused for crops, power generation and irrigation, according to the city.
As the largest population center in Arizona, Phoenix is acutely conscious of the value of water. The city averages more than 330 days of annual sunshine and only seven inches of annual rainfall.
The number of days with a high of at least 100 degrees ranges from 143 in 1989 to 48 in 1913, according to the National Weather Service. Highs surpass 110 degrees on 18 days of the year on average.
A statewide drought has now surpassed the worst in the last 110 years of recordkeeping, according to Phoenix officials.
"During this current drought, Phoenix has been able to manage its available water supplies to meet the community's water demands," city officials advised residents on its Web site. "However, this record-setting drought is a warning. Given that we could experience another 10 or more years of drought, we all need to become more aware about the facts of drought and what the future possibilities and impacts from drought could be."
The nation's sixth-most-populous city is rebounding from a deep recession that hit the metro area's housing market particularly hard in 2008. Foreclosures, which were rampant in 2009 and 2010, continue to fall.
In January 2014, the median sales price of a home in the Phoenix area was $196,900, representing a 21% increase from January 2013, according to Arizona State University's W.P. Carey School of Business.
However, researchers found that housing sales slipped 4% between December 2013 and January 2014 as active listings grew 11%. The housing supply in January was 47% higher than the same month in 2013, according to the study.
"Demand has been weakening since July, especially demand from investors," noted Michael Orr, director of the Carey school's Center for Real Estate Theory and Practice. "January is usually the quietest month of the year for sales, but this January was far weaker than January 2013 and 2012."
Despite the dip, long-term trends look favorable for the Valley of the Sun, analysts said.
"The city continues to generate strong job and population growth given a historically favorable mix of diverse employment opportunities, affordable housing and low costs for those businesses choosing to relocate from Southern California," wrote Moody's Steed. "Over the forecast horizon we expect the city's economic recovery will continue, driven by an expectation of steady hiring in professional services, healthcare and tourism, as well as further expansion of high-tech industries and an increase in research-related hiring from Arizona State University."
