Texas Water Development Board readies record $1.08 billion bond sale
DALLAS – The Texas Water Development Board is preparing to price $1.08 billion of revenue bonds, the largest single debt issue in the board’s history.
With the bonds carrying top ratings in a period of low interest rates, the board expects to add to the savings of $177 million achieved for local utilities in two previous bond sales.
“It seems like a really good time to be in the market,” said TWDB Chairman Bech Bruun. “We have embarked on an aggressive investor outreach.”
The sale scheduled for Sept. 26 is the third from TWDB’s State Water Implementation Revenue Fund for Texas, known familiarly as SWIRFT.
Authorized by the Legislature and Texas voters in In November 2013, the constitutional amendment that created the SWIRFT came after a severe drought across most of the state and was designed to develop and conserve water supplies for a growing population regardless of weather conditions.
The amendment allowed a $2 billion transfer from the state's rainy day fund to establish the new water program. The $2 billion will be leveraged with revenue bonds over the next 50 years to finance approximately $27 billion in water supply projects.
The water board sold its first issue of $810 million of SWIRFT bonds in October 2015. The bonds were more than 2.5 times oversubscribed, Bruun said, with heavy demand from institutional investors. The planning and success of that transaction earned The Bond Buyer’s “Deal of the Year” honors for the Southwest Region.
The second issue of $711 million in September 2016 was two-times oversubscribed.
The upcoming issue includes $1.057 billion of tax-exempt Series A bonds maturing serially through 2052. Another $18.95 million of Series B debt maturing through 2047 will be taxable because a project on the Sabine River will serve some commercial interests, Bruun said.
Morgan Stanley is senior manager on the negotiated deal, led by executive director Richard Weiss and vice president Blaine Brunson.
Anne Burger Entriken, managing director for First Southwest/Hilltop Securities, is the board’s municipal advisor.
In August, S&P Global Ratings and Fitch Ratings reaffirmed their top marks for the upcoming bonds.
“SWIRFT’s ‘AAA’ ratings once again demonstrate the solid fiscal management and stability of the Texas economy,” said Texas Comptroller Glenn Hegar. “High ratings are critical for saving the state and taxpayers money when it comes to developing water infrastructure.”
Fitch said the essentiality of the SWIRFT, given its role in implementing the Texas State Water Plan, was demonstrated by strong state and voter support that led to the enabling legislation and creation of a constitutionally dedicated fund to capitalize the program.
The combined loan pool of 36 local utilities across the entire SWIRFT program is highly rated but also highly concentrated, according to Fitch analyst Julie Garcia Seebach.
About 95% of the utilities in the pool are investment grade and 54% are rated at or above AA-minus. The single largest borrower, the North Harris County Regional Water Authority is rated A-plus by Fitch with a stable outlook. The authority makes up 24% of the pool total and the top-10 obligors represent 85% of the total.
“Fitch believes that ample program resources exist to provide loss protection to bondholders, thereby tempering concentration risk,” Seebach said. “Additionally, concentration is expected to improve over time to coincide with the growth of the SWIRFT program.”
As of May 31, the market value of the investment pool including funds to be transferred to the SWIRFT assistance account was approximately $1.98 billion.
The state of Texas’ triple-A general obligation rating from four rating agencies appears to be in no peril, despite the recent blow from Hurricane Harvey.
At the end of the state’s fiscal year Aug. 31, Hegar reported that revenues for the state fell 1.4% below those of the previous fiscal year to $111.2 billion. State sales tax – the largest source of revenue – rose 0.3% to $28.9 billion, despite continued weakness in the energy markets. General revenue-related revenue was $52.3 billion, 1.2% ahead of the projections of $51.7 billion, Hegar said.
“Revenues in fiscal 2017, especially general revenue-related collections, were right in line with our projections in the Biennial Revenue Estimate released in January,” Hegar said. “As we projected, the Texas economy continued to improve in 2017, which in turn resulted in improved tax collections.”
For the month of August, sales tax revenue totaled $2.48 billion, 0.9% less than in August 2016.
“The slight decline in August state sales tax revenue was principally due to refunds resulting from our regular auditing process,” Hegar said. “Receipts from most economic sectors grew significantly, but receipts from retail trade remained only at about last year’s level.”
The fiscal impact of Harvey, which made landfall in Texas at the end of August, is likely to be more than $150 billion in terms of U.S. gross domestic product, according to economist Ray Perryman, founder of The Perryman Group.
“Replacing personal items, vehicles, furniture, and everything else will increase retail activity in the region,” Perryman noted. “These benefits partially offset the overall losses.”
Bruun said the TWDB will play a key role in recovery from Harvey. Several water and sewage treatment plants were damaged or shut down by the storm.
The board, which administers an Environmental Protection Agency low-interest loan program for the state, asked the federal agency in a Sept. 1 letter to expedite loan distribution procedures. In the letter, the board said loan money could serve as a bridge to meet immediate recovery needs for damaged water systems while local governments wait for other federal aid.
“I’m hopeful we start seeing requests any day now,” Bruun said.
Meanwhile, TWDB is assisting in long-term projects designed to increase water supplies in hurricane-stricken Houston.
Bruun last week joined Houston Mayor Sylvester Turner at a groundbreaking for the $1.35 billion City of Houston’s Northeast Water Purification Plant expansion project. The project consists of two design-build phases to expand the plant’s capacity from 80 million gallons per day to 400 MGD by 2024.
The project is among 18 that will receive funding from the upcoming issue, Bruun said.
Strong demand for SWIRFT funding “speaks of the success of a relatively new program,” Bruun said. “It’s the only program of its kind in the country. Looking ahead, we’ve already committed $5.6 billion.”