Gilt-edged Washington Suburban Sanitary District, Maryland, is offering $329 million of revenue bonds via a competitive sale Thursday that may help set the tone for triple-A yield curves that have been contending with U.S. Treasury market volatility in recent sessions.
The consolidated public improvement debt is being issued under the supervision of the Washington Suburban Sanitary Commission as revenue bonds backed by fees, charges, rates, and assessments charged by the district and backed up by ad valorem taxes in the form of property tax collected in Montgomery and Prince George's County.
The proceeds from the bond sales will be used for the construction or reconstruction of water supply facilities, water supply lines, transmission mains, sewage disposal facilities, sewer collection mains and trunk sewers. They will also cover the acquisition of land and equipment used in the construction.
Fitch Ratings rates the bonds AAA, and as of last week bestowed a stable outlook on the district, which is an upgrade from negative.
"The AAA bond rating and upgrade to a stable outlook reflects leadership's ability to make sound decisions to strengthen our fiscal position," said Regina Y. Speed-Bost, WSSD's commission chair. "Securing the highest bond rating is a win for the agency and our customers."
The district was saddled with a negative outlook since September 2021 due to debt leverage exceeding 10.0x for FY 2020. In February of last year, Fitch took another look but was concerned with a rise in taxes that was possible but not assured.
Per Fitch, "ad valorem taxes are not currently levied. If the authority were to do so, it would be subject to a review process that, while serving to prevent default, limits the benefit of this added resource at the current rating level."
S&P Global Ratings currently pegs that paper at AAA showing no concerns about future taxes or the leadership's financial judgement. Per S&P, "WSSD's credit quality is anchored by the extremely strong management team that has historically demonstrated an ability and willingness to reduce expenditures and increase rates to maintain sufficient coverage and liquidity, as well as the large and mostly affluent tax base that ultimately secures the bonds if user fees are insufficient.
Moody's Investors Service rates the debt at Aaa.
The issuance is broken down into two chunks, with $299.3 million comprising the first series and $29.93 of green bonds making up the second series. The bonds are dated June 1, and mature in 2053. They will be issued in denominations of $5,000 or any integral multiples thereof.
McKennon Shelton & Henn LLP is bond counsel on the deal, Public Resources Advisory Group is the financial advisor, and The Bank of New York Mellon Trust Company, NA is the Paying Agent and Bond Registrar.
As interest rates remain high, inflation ebbs, and the job market continues to roar, the results of the offering are being viewed as a peek into what's in store for the muni market in the year
"It's a decent size deal," said Howard Cure, partner and director of municipal bond research at Evercore Wealth Management. "It's not the biggest deal of the week, but it's a very strong system that's very highly rated and the markets are not that volatile right now. It makes a lot of sense for them to issue competitive."
The utility markets in general are still feeling the lingering effects of the pandemic.
"During COVID, there was an effort to make sure that systems didn't turn off service to individuals, because they were out of work and couldn't make their payments," said Cure.
"Now, there's equity ideas in place where we make sure that you have some kind of payment plan set up. Because of these improvements, and additional debt for the system the rates will be going up. But you want to make sure that poor people don't get cut off, there's more sensitivity to that."
According to the Official Statement of the Washington Suburban Sanitary Commission the debt from unpaid utility bills is heading in the right direction.
"During fiscal year 2023, the Commission experienced significant financial recovery from the challenges posed by the COVID-19 pandemic," the document said. "Notably, the delinquent accounts improved from approximately $64 million as of June 30, 2021, down to $46.8 million as of June 30, 2023. As of Oct. 31, 2023, the delinquent accounts receivable stood at $43.5 million, demonstrating a positive fiscal trend."
Less than 10% of the issuance is carrying the green bond label. According to the POS the money will be used for a $20 million water filtration plant and $10 million large-diameter water distribution system.
WSSC Water's Green Financing Framework establishes the district's process for financing projects across eligible green categories. The framework is aligned with the four core components of the International Capital Market Association's (ICMA) Green Bond Principles.
Moody's evaluated the level of green by assigning a Sustainability Quality Score - 2 which is considered "very good." Cure notes that wastewater treatment-based utility projects tend to be green by nature and the label probably won't make a major impact.
"I think it's neutral and I don't think there's going to be any difference in yield between bonds designated as green and bonds that aren't," he said. "The hope is that there'll be greater demand for green bonds, and you may be able to save some cost on issuance, interest rates being lower. I don't think that's been the case yet."
The issuance can also be tied to a lawsuit settled in 2015 that resulted in a consent decree that charged the utility with polluting the Potomac and Anacostia Rivers. The ruling mandates WSSC to reduce sewer spills and improve its filtration systems. Extreme weather events have made the efforts more challenging.
"I think the long-term trend on a lot of these issues, I think it's important to be aware of, number one, climate change issues, and what kind of stress there is,” Cure said. “I think you're just going to see overall, more issuance by utilities to fortify their systems be water, wastewater, or public power."
