SAN FRANCISCO — The San Diego County Water Authority board of directors last week approved the sale of up to $686 million of Build America Bonds and tax-exempt debt in early January.

The bulk of the revenue bonds will be new-money BABs with long maturities, but the authority — California's third-largest urban water agency — also plans to sell tax-exempt bonds for the early years of the term structure and possibly to refund about $51 million of callable debt.

The water agency is creating a joint-powers authority — the San Diego County Water Authority Finance Agency — to sell the water revenue bonds.

It has historically sold certificates of participation to fund capital projects, but officials think they will get better rates with water revenue bonds.

"Our debt has always been, essentially, revenue bonds, but legally, it was certificates of participation," said Eric Sandler, the authority's treasurer and finance director.

"Over the last year and a half, as bond insurance has become less prevalent and less useful, investors are looking a little more at the security structure of the deal, and certificates of participation look a little more like a government lease obligation," he said.

The agency estimates that it would pay a yield penalty of as much as 50 basis points to issue COPs in the current market.

The new revenue bonds will have the same security as the outstanding COPs, which carry ratings of AA-plus from Standard & Poor's, AA from Fitch Ratings, and Aa3 from Moody's Investors Service.

Sandler said the agency has applied for ratings for the revenue bond structure and expects to distribute a preliminary official statement when the ratings are published later this week.

The bonds will be the authority's first BABs. The taxable bonds were authorized under the American Recovery and Reinvestment Act and carry a 35% interest subsidy from the U.S. Treasury in place of the implicit subsidy of tax exemption.

The new-money portion of the debt will largely finance the next phase in construction in the raising of the San Vicente Dam, which is the tallest dam-raising project in the world.

The construction will raise the level of the dam to 337 feet from 220 feet, increasing storage capacity by almost 170%.

The San Vicente Dam is located 25 miles northeast of San Diego. The Water Authority is investing in increasing local storage to protect local supplies in case an earthquake ever cuts off water imports.

About 70% of the authority's water is imported from outside the region, and the authority is spending $3.77 billion on a capital improvement program that aims to both diversify its water supplies and improve reliability.

Citi is the book-running senior manager on the deal. Barclays Capital is the co-senior manager. Bank of America Merrill Lynch, Goldman, Sachs & Co., Jefferies & Co., and JPMorgan are the co-managers.

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