SAN FRANCISCO — The San Diego County Water Authority, California’s third-largest urban water agency, this week plans to price $639 million of water revenue bonds, including its first Build America Bonds.
The deal is one of several outsized deals hitting the municipal market as issuers seek to take advantage of historic low interest rates and the subsidies of the BAB program, created by the American Recovery and Reinvestment Act of 2009.
“We are moving financing up — that’s for sure,” said Eric L. Sandler, the authority’s treasurer and director of finance. “We had originally intended to issue $110 million in variable-rate debt.”
Instead, the authority expects to sell $537 million of fixed-rate BABs with maturities as long as 40 years, its longest-dated debt ever. The money will finance raising the San Vicente Dam in San Diego County.
The authority also plans to sell $102 million of new-money tax-exempt debt that includes early maturities, as well as about $51 million for refundings.
Citi is the book-running senior manager on the deal. Barclays Capital is the co-senior manager.
The agency is trying to take maximum advantage of long-term interest rates that are near historic lows and the BAB program, which allows municipal issuers to sell taxable debt, tapping a broader pool of investors, while collecting a 35% interest rate subsidy from the U.S. Treasury.
Issuers like the SDCWA and the East Bay Municipal Utility District in the San Francisco Bay Area are moving up several years worth of capital financing to this year to lock in low rates and the government subsidy. The BAB program subsidies continue for the life of the bonds, but the program will expire at the end of this year if Congress doesn’t extend its life.
With the Federal Reserve holding the benchmark federal funds rate at 0% to 0.25% and risk spreads narrowing since the worst days of the credit crisis, The Bond Buyer revenue bond index, which measures 30-year revenue bond yields, has dropped almost 80 basis points in the past year and is near historic lows. The index declined three basis points to 4.93% last week.
The San Diego authority moved pricing up to Wednesday and Thursday of this week to take advantage of the market conditions with a fairly light BAB supply expected this week. It had been considering coming to market next week.
The disadvantage of pulling issuance forward to 2010 is that issuers have to pay higher interest on the new bonds than they can earn on investments in Treasury notes that remain rock bottom yields, but issuers are betting its worth their while to garner long-term financing and subsidies at today’s rates.
“There is some negative arbitrage,” Sandler said. “But you have to weigh that negative arbitrage for the period of a couple of years versus the savings on 30- or 40-year debt.”
The SDCWA is trying to minimize the amount of negative arbitrage on the deal by forgoing the usual debt-service reserve fund. The deal still garnered ratings of AA-plus from Standard & Poor’s, AA from Fitch Ratings, and Aa3 from Moody’s Investors Service.
To enhance the marketability of the new debt, the SDCWA created a joint-powers authority — the San Diego County Water Authority Finance Agency — that will sell the debt as water revenue bonds rather than the certificates of participation the agency has historically relied on for capital financing. The authority estimates that investors would penalize the weaker COP structure by as much as 50 basis points.
The San Vicente Dam is located about 25 miles northeast of San Diego. The 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 it is spending $3.77 billion on a capital program to both diversify water supplies and improve reliability. q
The new-money portion of the debt will largely finance the next phase in construction in the raising of the San Vicente Dam, in 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%.
