DALLAS - The Texas Water Development Board will bring its first $886 million of revenue bonds to market under an ambitious water supply program approved by voters in 2013.
The State Water Implementation Revenue Fund for Texas bond program lends to local and regional water utilities for projects to increase capacity or efficiency of existing facilities or build new systems.
The top-rated bonds are expected to price Oct. 6 through negotiation with senior manager Citi, led by managing director David Houston.
"The continual growth of the state is a call to communities to offer solutions and plans for maintaining and developing new water supplies," TWDB board member Kathleen Jackson said in a statement.
Anne Burger Entrekin, managing director at First Southwest Co., is co-financial advisor with Paul Jack, managing director at Estrada Hinojosa & Co.
With uncertainty surrounding a Federal Reserve interest rate hike still lingering over the bond market, the TWDB said it could pull the deal off the schedule if conditions change.
"While it is the TWDB's expectation today to move forward with these transactions, they reserve the right to change or modify their plan as they deem appropriate," said a statement from the agency.
Still, "we're more focused on the demand for financing, regardless of any actions the Fed may take," said TWDB chairman Bech Bruun.
"Interest rates are generally low, and demand for this type of financing is very high," he said. "I would think that investors aware of our other credits would appreciate this new paper."
The TWDB revenue bonds are categorized as SWIRFT, which adds an "r" for revenue to the SWIFT fund created by constitutional amendment. SWIFT stands for State Water Implementation Fund for Texas and includes $2 billion diverted from the state rainy day fund.
The bonds are to be structured as two series, with $870 million of tax-exempt and about $16 million of taxable.
Debt service from local and regional utilities backs the bonds, with an extra layer of security from the $2 billion diverted from the state rainy day fund.
That transfer was authorized by voter approval of a constitutional amendment in 2013 during one of the worst droughts in state history. Heavy spring rains have since alleviated the drought in most parts of Texas.
Rating agencies placed the upcoming revenue bonds on par with the state general obligation debt at triple-A.
The SWIRFT loan portfolio is made up of 21 utilities, and about 94% of them are rated investment grade, with 70% rated at or above AA-minus, according to Fitch Ratings. The largest borrower is the Tarrant Regional Water District.
"While pool concentration is viewed by Fitch as being extremely high, from both a single obligor and top 10 standpoint, Fitch views concentration risk as mitigated given the high ratings of the borrowers and the ample program resources," Fitch analyst Major Parkhurst wrote. "Further, concentration should improve over time as the program grows to meet its intended long-term funding goals."
Standard & Poor's emphasized the TWDB's history of operating similar programs successfully since the agency was founded in 1957. Over those 58 years, TWDB has provided more than $15 billion in loans and grants under various water and sewer-related programs.
"The ratings reflect the combination of a very strong enterprise risk profile and an extremely strong financial risk profile," said S&P analyst James Breeding.
The triple-A ratings were critical to the program's plan to lower borrowing costs for local utilities that make up the revolving loan credit pool.
"This is a significant accomplishment as we move forward with the inaugural round of SWIRFT funding," Bruun said in a prepared statement after the ratings were confirmed.
TWDB has $2.2 billion of outstanding general obligation bonds and $670 million of revenue bonds through the State Revolving Fund.
Under the state constitution, the agency can have up to $6 billion of general obligation bonds outstanding. The SWIRFT funding will be issued as revenue bonds and will not carry the general obligation.
Three types of loans are offered through SWIRFT. Fixed rate loans will be offered with up to 30-year maturity dates and rates up to 35% below TWDB's cost of funds. The second type, deferred loans, will defer principal and interest up to eight years or until the end of construction and are also provided at below-market rates. The third type, board participation loans, includes TWDB ownership interest in a facility. The local sponsor of a project repurchases the TWDB's ownership interest under a repayment schedule that allows for the structured deferral of both principal and interest. Financing terms vary but are generally 34 years.
The inaugural round of SWIFT financing will be distributed to 21 applicants for about $1 billion in projects in the first year and approximately $3.9 billion total over the next decade.
The applicants are requesting funding for 32 projects identified in the state water plan. The types of projects approved include transmission pipelines, canal linings, capacity expansions, seawater desalination, leak detection systems, water meter replacements, and reservoirs.
One of the projects approved, Lake Ralph Hall, is the first reservoir permitted by the State of Texas since 1985 and part of the water supply strategy for North Texas.
The largest recipients of the loans are in the Dallas-Fort Worth and Houston areas.
The bond cash flows are structured to match coverage of annual bond debt service due. Each bond series is supported by a specific revenue stream.
The TWDB expects to open the application process for the second round of SWIRFT in December.
Prospects for a slowdown in the Texas economy have not affected the state's credit ratings. Most analyses of the state economy emphasizes the diversity of key industries, leaving state revenues less vulnerable to falling oil prices than in the past.
Even as prices have fallen by more than half, oil production in Texas is on track for a record this year, and the nation is headed toward its highest output since 1972, according to industry reports.
Despite a series of bankruptcies, layoffs and mothballings of operations among oil produces, Texas is pumping 15% more oil than it did the same time last year. At the current pace, Texas could break its 1972 record for crude output, according to the Texas Alliance of Energy Producers.
One aspect of oil and gas production, a process known as hydraulic fracturing or "fracking", could affect water supplies in the state, according to a study by the Environmental Protection Agency.
In a June report, the EPA reported that "while hydraulic fracturing activities in the U.S. are carried out in a way that have not led to widespread, systemic impacts on drinking water resources, there are potential vulnerabilities in the water lifecycle that could impact drinking water."
However, the types of projects funded with the bonds are designed for the long run as the Texas population growth shows no signs of slowing. According to projections used by the TWDB, the state population is expected to grow from the current 27 million to nearly 34 million people by 2030.
