Texas pumps up the volume with $800 million deal
DALLAS – After the state's leanest first quarter for bond volume in seven years, Texas primary market supply will be boosted with more than $800 million of top-rated revenue bonds, including funding for the state’s first new reservoir in nearly three decades.
The revenue bonds from the Texas Water Development Board are expected to price April 24 with triple-A ratings from S&P Global Ratings and Fitch Ratings. The serial bonds reach final maturity in 2048.
The bonds are issued under TWDB’s State Water Implementation Revenue Fund for Texas, known as SWIRFT, which was created in 2013 by a voter-approved constitutional amendment authorizing a $2 billion transfer from the state’s Economic Stabilization Fund.
The series 2018A bonds are the sixth series of bonds issued under the SWIRFT program.
JPMorgan is book runner on the deal with eight co-managers. Hilltop Securities is financial advisor.
“The 2018 sale represents the first spring transaction for SWIRFT,” said TWDB Chairman Peter Lake. “All the others have occurred in the fall.”
The timing of the issue was designed to meet the needs of two large borrowers that have major projects in the works. The proceeds of the bond sale will finance the Northeast Water Purification Plant expansion in Houston and the construction of the Lower Bois d’Arc Creek Reservoir in North Texas.
That reservoir, in Fannin County north of Dallas, would be the first reservoir to be built in Texas in nearly 30 years. The North Texas Municipal Water District received a permit for the reservoir from the U.S. Army Corps of Engineers in February.
The project includes an earthen dam, spillway and discharge structures, a 236-million-gallon- per-day water intake structure, and a 30-mile transmission system.
The $1.35 billion Houston project consists of two design-build phases to expand the Northeast Water Purification Plant’s capacity from 80 million gallons per day to 400 mgd by 2024. The expansion project will help water authorities meet water demands, and meet requirements by the Harris-Galveston and Fort Bend Subsidence Districts that restrict groundwater usage.
The North Harris County Regional Water Authority, Central Harris County Regional Water Authority, West Harris County Regional Water Authority and North Fort Bend Water Authority are partnering in the project.
“The Lower Bois d’Arc Creek Reservoir and the Northeast Water Purification Plant are critical infrastructure projects that will serve millions of Texans,” Lake said. “SWIRFT is ensuring that the state water plan is implemented and that communities around the state have sufficient water supply for decades to come.”
Because the TWDB is allowing multiyear funding through SWIRFT, the agency has now committed $6.2 billion over the next decade for state water plan projects in Texas.
SWIRFT was designed to fund water utilities that are working on projects to enlarge or conserve water supplies.
With the state's population projected to increase 70% by the year 2070, Texas lawmakers began formulating plans for the SWIRFT after near-record drought from 2011 to 2015. The program is built around the State Water Plan that sets objectives for water needs over the next 50 years in a drought. Full implementation of the 2017 water plan is projected to cost approximately $63 billion, with SWIRFT covering $27 billion of those costs.
Since creation of the TWDB in 1957, the board has provided more than $25.1 billion in obligations and grants. The TWDB has never experienced a permanent default in its nearly 60-year history.
“The ‘AAA’ rating is vital for Texas programs like SWIRFT to continue to thrive and succeed,” said Texas Comptroller Glenn Hegar, who serves on an advisory committee for the program. “With SWIRFT continuing to receive the highest credit rating, the program can pass important savings to local governments and taxpayers for necessary water infrastructure projects.”
Fitch analysts described the SWIRFT pool of 36 borrowers as highly rated but highly concentrated.
“The pool's top-10 concentration is approximately 88% versus Fitch's 'AAA' rating category median equivalent of 55%,” lead analyst Julie Garcia Seebach said. “Fitch believes that ample program resources exist to provide loss protection to bondholders, thereby tempering concentration risk. Additionally, concentration is expected to improve over time to coincide with the growth of the SWIRFT program.”
The SWIRFT deal will be Texas' largest of the year so far and may provide some momentum for a market that has fallen dramatically under the new federal tax law.
In the first quarter of 2018, all issuers in Texas accounted for only $5.7 billion of bonds and notes, a 36% drop from the first quarter of 2017. This year’s first-quarter volume was the lowest for the state since 2011, when volume hit an 11-year low.
“I don’t know if the decline was predicted to this magnitude, but with the loss of advance refundings, everyone knew that volume was going to be down significantly,” said Drew Masterson, managing director of Masterson Advisors in Houston.
In recent years, many transactions would contain both a new money and refunding component, he said. "But now the refunding is going away.”
The TWDB appears to be supplanting the Texas Transportation Commission as the state’s high-volume issuer. The TTC, which in past years had issued billions of dollars of new money and refunding debt, issued Texas Mobility Fund refunding bonds in January 2017 and has not scheduled or sized its next issue.
“Due to low rates and opportunities for savings, TxDOT had in recent years refinanced much of its debt by January 2017,” said spokesman Mark Cross. “Additionally, as of late 2016 most of the TxDOT bonding programs had been issued to their full authorized limits leaving no capacity to issue new money bonds. Those two factors have caused the lack of issuance in 2017 through the present.”
In the first quarter of this year, new money issues accounted for $4.16 billion of volume, while straight refunding deals provided only $197 million. Deals that combined new money and refunding totaled $1.378 billion, according to data from Thomson Reuters.
Tax-exempt issuance in Texas for the first quarter came to $5.368 billion in the first quarter, a 29% drop from the same quarter in 2017.
Texas taxable issuance of $94 million in the first quarter of 2018 represented a 93% drop from the first quarter 2017.
“Our take is that a lot of transactions that would have been done in 2018 were pulled into December of 2017 due to the tax law changes,” said Douglas Benton, vice president of Cavanal Hill Investment Strategies. “While many understood that this was occurring it appears that a couple sell side firms have reduced their already modest issuance forecast for 2018 downward. It seems that the anemic issuance volume of the first quarter was even lower than forecasted.”