The Great Lakes Water Authority saw upgrades from three major rating agencies ahead of plans to sell over $1 billion of taxable refunding water and sewer revenue revenue bonds — a deal facing a new challenge as COVID-19 roils the markets.
Nicolette Bateson, GLWA chief financial officer and Treasurer said the plan is to price the bonds on Thursday but ultimately timing will depend on market conditions and whether markets have recovered enough to meet the authority’s savings target.
“While we would like to provide more information related to the timing of this transaction, the reality is that the COVID-19 situation requires that we be adaptable to consider changing market conditions and timing,” Bateson said. “Like many other refinancing transactions, GLWA will monitor the market and look to execute the transaction when conditions are favorable, and GLWA's savings objectives are met.”
GLWA would join a growing list of issuers postponing bond sales as a result of the COVID-19 impact on the financial markets. The municipal finance industry is dealing with minute-by-minute news of statewide school closures, shuttered restaurants, curfews and canceled events. New issues are increasingly being put on the day-to-day calendar.
Municipal market participants have said that it’s hard to assess what is transpiring in the larger world economy in simply a muni vacuum.
The good news is that the COVID-19 isn’t expected to result in materially delayed collection or significant revenue volatility for the authority, said S&P Global Markets credit analyst Scott Garrigan.
“While we continue to monitor these events, we do not currently expect it to affect GLWA's ability to maintain budgetary balance and pay debt service costs,” Garrigan said.
Ahead of the bond sale, S&P upgraded the sewer senior bonds to AA-minus from A-plus and second-lien bonds to A-plus from A. The outlook is stable.
S&P affirmed its AA-minus ratings on the authority's water supply system revenue senior-lien bonds and its A-plus rating on the second-lien bonds.
Fitch Ratings upgraded the senior bonds to A-plus from A and the second lien bonds to A from A-minus. The rating outlook is stable. Moody’s Investors Service upgraded the bonds to A1 from A2. The second lien revenue debt of each system was raised to A2 from A3. The outlook on both systems is stable.
The authority — which absorbed Detroit Water and Sewerage Department debt that had been cut to junk during the city's Chapter 9 bankruptcy — believes the bond refunding will boost its savings.
“These upgrades reflect the ongoing efforts of GLWA, and is a recognition of the strength of the Water and Sewer financial enterprises,” Nicolette Bateson, GLWA CFO and treasurer, said.
Citi and Siebert William Shank & Co., LLC are co-senior managers. Goldman Sachs, J.P. Morgan, Morgan Stanley, Ramirez & Co. and Wells Fargo Securities are the co-managers. PFM is advising the authority and Dickinson Wright Pllc is bond counsel.
GLWA plans to sell $454 million of new money and refunding taxable water system revenue bonds and $706 million of taxable sewer system refunding bonds.
The water supply revenue bonds on offer include about $329 million of refunding senior-lien refunding bonds and $46 million of second-lien refunding bonds.
The authority also plans to price $39 million of tax-exempt, new-money first-lien bonds and $40 million of tax-exempt, new-money second-lien bonds. The new-money bonds will finance upgrades to DSWD and are structured for level annual debt service through final maturity of July, 1 2049.
The authority helps to finance capital projects undertaken in the local systems by issuing bonds on behalf of DWSD. The DWSD-owed debt is accounted for as a contractual obligation receivable due to GLWA.
GLWA also plans to price $540 million sewage disposal system revenue refunding taxable senior bonds and $166 million second-lien bonds.
The bonds are secured by a pledge of system revenues as well as a statutory lien on the pledged accounts.
The authority said in an investor presentation that it anticipated significant annual debt service savings on the refunding and in turn improve future net revenue coverage of annual debt service.
“In addition to savings the refunding bonds are structured to lower overall maximum annual debt service,” the authority said. “Some senior-lien bonds are being refunded with second-lien bonds to optimize the overall plan of finance.”
Including the upcoming revenue bond sales, GLWA will have $1.6 billion of senior-lien water revenue bonds, $712 million of second-lien water revenue bonds, and $79.5 million of junior-lien state revolving fund loans outstanding.
The sewer system is responsible for $1.8 billion of senior-lien sewer revenue bonds, $745 million of second-lien sewer revenue bonds, and $494 million junior-lien state revolving fund loans.
All three rating agencies noted that that upgrade reflected sustained improvements to the authority's financial profile that has resulted in healthy annual debt service coverage and liquidity.
GLWA provides essential services to a broad area. The water system covers almost 40% of Michigan's population, while the sewer system includes about 30% of Michigan's population. The majority of GLWA's revenues come from suburban customers. Since 2008, 80 of GLWA's wholesale customers signed new model contracts with 30-year terms and automatic 10-year renewal.
The water system serves the city of Detroit via DWSD on a retail basis. The city is collectively the authority’s largest customer. DWSD owns and operates the local sewer system and serves as an agent for the GLWA for setting retail rates, billing collecting and enforcing collection of amounts due.
Moody’s noted in a report that delinquent Detroit retail accounts have remained high, though DWSD has enhanced both collection efforts and customer assistance programs, including participating in GLWA’s water residential assistance program (WRAP). The significant portion of annual revenue derived from Detroit retail operations remains a key credit challenge that could affect debt service coverage and liquidity.
"The upgrade reflects resolution of negative revenue variances from the DWSD local sewer system during the 2018 fiscal year that totaled about $19.8 million," said Garrigan.
Garrigan noted that future budget shortfalls are mitigated through a GLWA and DWSD Memorandum of Understanding agreed to in 2018 — a process to cure any DWSD cumulative negative budgetary variance of more than 2% by repaying the shortfall to GLWA in annual installments over a period not to exceed three years with an additional surcharge based off the U.S. Treasury rate plus 150 basis points.
“We view this as an important credit factor because GLWA's overall sewage disposal revenue requirements for all of its customer classes are designed to be fixed,” Garrigan said. “Resolving this negative variance, in our view, provides additional certainty that revenue variances from the Detroit retail customer class will be made up in a timely manner.”
Fitch stated in a report that changes in rate-setting practices in recent years as well as accumulation of reserves under the master bond ordinances have enhanced prospects for achieving or beating forecast expectations and help to adequately insulate GLWA from high city of Detroit retail delinquencies.
“The governing bodies have instituted annual rate hikes in support of financial and capital needs,” Fitch said. “Continued annual adjustments are included in the forecast and will be needed to meet rising debt service and sustain financial performance.”
GLWA’s additional capital needs through 2025 include roughly $1 billion in projects for the water system and $870 million for the sewer system. The authority plans to finance these improvements with about $450 million in water system revenue bonds and $255 million in sewer system revenue bonds over the next five years, along with reserves and surplus revenue. GLWA's capital improvement plan also projects taking on roughly $275 million in state revolving fund loans.
