The Puerto Rico Aqueduct and Sewer Authority anticipates paying a roughly 10% interest rate to sell a $750 million bond by the end of August.
PRASA, which had signaled its plans to The Bond Buyer last month, announced the bond in a preliminary official statement on MuniOS.com Monday night.
The bond sale will be the first from a Puerto Rico public sector agency since the March 2014 Puerto Rico general obligation bond. Since then Puerto Rico Gov. Alejandro García Padilla has declared the commonwealth's debt to be unpayable given the commonwealth's current levels of economic growth.
In its POS the authority said that it planned to ultimately get a total of $1.45 billion for its five-year capital plan, of which $790 million will come from borrowing on the debt market at assumed interest rates of 10%. PRASA indicated that the financing would include $350 million in federal funds.
"In recent trading, PRASA has been one of the strongest Puerto Rico names," Janney Montgomery Scott's managing director Alan Schankel wrote in the firm's Daily Fix email Tuesday. "Yesterday, a $1.8 million block of 5.25% maturing in 2042 traded at 70 for a 7.98% yield to maturity." However, he also noted that 26 pages of the POS were devoted to "Risk Factors."
Government Development Bank for Puerto Rico President Melba Acosta Febo said PRASA's plan to borrow just when the commonwealth is developing a plan to restructure debts, "reflects the individual financial circumstances of the various debt issuers across the commonwealth."
She continued, "Based on PRASA's internal cash flow projections, assuming it revises its rates as forecasted and provided the agency is able to access the market on reasonable terms and for sufficient amounts to cover its capital needs while executing its 5-year projection plan, the GDB currently does not contemplate PRASA necessitating a restructuring of its debt."
In its POS, PRASA said that it does not plan to avail itself of possible Chapter 9 or Debt Enforcement and Recovery Act restructurings of its debt.
"Investors should only consider these bonds if they believe they will pay and are attractively priced," said Michael Ginestro, head of municipal credit research at Bel Air Investment Advisors. "PRASA has several credit challenges at the moment: one, a population falling more than 7% over the past 10 years; two, average daily water demand dropping by more than 6% from last year. It will be challenging for them to raise rates on a shrinking customer base." Neither Ginestro nor Bel Air holds PRASA bonds.
PRASA increased its water rates by 60% in mid-2013. In its POS the authority said it plans to raise rates further in fiscal years 2018 and 2019. This spring the authority introduced a procedure to review its rates each year by Dec. 15 for the following fiscal year.
The authority provides water service to 97% of the island's population and sewer service to 57% of the population.
PRASA chief financial officer Efraín Acosta told The Bond Buyer that PRASA's operating revenues provide more than four times senior debt service coverage, even though it only promises 2.5 times. He also said the authority had not yet had discussions with potential investors about its planned tax-exempt bond. He expected these talks to commence in the next few days. PRASA will speak with Bank of America Merrill Lynch on Friday to find out investor attitudes, he said.
B of A Merrill is one of the deal's senior underwriters with JPMorgan. Popular Securities and Santander Securities will be the junior underwriters.
The decline in water use is partly due to a drought affecting the island, Efraín Acosta said. He said he expects the drought to end in two or three months.
PRASA has about $4.95 billion in bonds and notes outstanding and expects to have $5.46 billion after the bond sale, according to the POS.
PRASA's senior lien bond won't be the responsibility of the commonwealth. PRASA's senior debt is now rated Caa3 by Moody's Investors Service and CCC-minus by Standard & Poor's. Both have negative outlooks on the debt.
The bond will be sold with a $100,000 principal amount and at multiples of $100,000.
The bonds will have Banco Popular de Puerto Rico as the trustee.
PRASA hasn't announced the maturity structure.
The bond proceeds will be used to finance a portion of the authority's capital improvement program for the five year period ending June 30, 2019 and reimburse the authority for certain capital expenses paid in fiscal years 2013 to 2015. It will also repay a $90 million bank line of credit to Banco Popular, due on Aug. 31.
In its POS the authority said that disputes about the bonds would be governed by the laws of New York unless it involves the authorization and execution of a receivership, which would be governed by commonwealth laws.
The authority is negotiating with the Puerto Rico Department of Health and the U.S. Environmental Protection Agency for relaxed timetables to comply with the regulatory requirements. While the authority is optimistic about these negotiations, one risk factor is the possibility that they will not be resolved as the authority is hoping.
The U.S. Census Bureau and the Puerto Rico Planning Board project that Puerto Rico's population will continue to decline at an annual rate of 1.3% for the next 10 years. The authority's consulting engineer has said that if this turns out to be true and consumption does not increase, then the authority's projected 0.5% annual billing reduction may be optimistic, the authority said in its POS.
