The Puerto Rico Aqueduct and Sewer Authority saw $3.1 billion of orders for its $1.4 billion refunding deal with a 4.15% high yield Wednesday despite the cloud of other island government bodies still undergoing bankruptcy.
By comparison, triple-A tax-exempt benchmark yields on bonds in 2047 are at 1.40%, a 275 basis point spread.
The unrated deal was structured with $1.356 billion of tax-exempt Series 2020A bonds with yields to maturity at 2.50% for 4% coupon bonds in 2021; 3.70% for 5% coupons in 2030; 3.95% for 5% coupons in 2035; and 4.15% for the long bond, 5s of 2047. The 2020B, an $18.6 million non-callable taxable series, have a 4.50% coupon priced at par.
Less than 2% of the par sold was for Series 2020B taxable bond, which had a yield to maturity of 4.50% for July 1, 2024. Most of the Series 2020A bonds are maturing in further out years. About $106 million of its $1.356 billion are maturing through 2025. In 2030 $250 million will mature and in 2035 $292 million more will mature. Finally, $706 million will mature in 2047.
“I think going forward, we would like to see some improvements on some of the operational issues the system has had over the years that were outlined in consent decrees and elsewhere,” said John Hallacy, founder of John Hallacy Consulting LLC. “The sale is a resounding success but now they have to rebuild and improve from here.”
Given absolute low yields in the tax-exempt market, high-yield has outperformed in recent months as investors seek larger returns.
The deal had a minimum purchase requirement of $250,000 and they may only be resold to similar institutional purchasers.
PRASA officials were pleased with the deal's reception.
"With great joy and satisfaction we announce that, with this issuance, PRASA returned to the capital markets after eight years,” said Puerto Rico Gov. Wanda Vázquez Garced. “This is excellent and hopeful news for PRASA and for Puerto Rico. Our government has worked hard so that the public corporation can return to the market as part of Puerto Rico's economic recovery and today it is a reality."
The Puerto Rico Fiscal Agency and Financial Advisory Authority said the refinancing of its Series 2008A and 2008B bonds will generate $350 million in savings for PRASA.
“By purchasing the 2020 Refunding Bonds, investors are consenting to move to a net revenue pledge once all other senior bonds, including the federal agencies to which PRASA owes approximately $1 billion in loans, consent to such change,” FAFAA said Thursday. “There is currently no specific timeline for when the consent of all remaining senior creditors will be sought or if such consent will be obtained. The change will become effective only if 100% of all holders of senior obligations consent.”
PRASA currently owes about $1.8 billion for Series 2012A and Series 2012B bonds.
“This bond issue is one of the biggest financial achievements since the enactment of [the Puerto Rico Oversight, Management, and Economic Stability Act], as it demonstrates that PRASA has been able to regain market confidence and market access at reasonable rates,” said FAFAA Executive Director Omar Marrero Díaz. “We welcome the receptivity and support from investors and look forward to build in this partnership.”
“Through the successful pricing of the bond deal, PRASA achieves average debt service savings of almost $13 million per year, that will be used to reduce existing operating deficits or funding capital expenditures,” said PRASA President Doriel Pagán Crespo.
"The all-in interest cost, including expenses associated with pricing and selling the new issue, was 4.36%,” Pagán Crespo said.
Hector Del Río, Chairman of PRASA’s Governing Board, added that “although we acknowledge there’s still a long road ahead, this transaction evidences how far we have come over the past several years despite the challenges that we have faced.”
“Considering the benefits from this transaction and the benefits from the modification of PRASA’s federal debt last year, the authority has been able to reduce debt service by a total of $525 million over the next 10 years, and guarantees of the Commonwealth [of Puerto Rico] over PRASA debt [have] been reduced by almost $1.3 billion,” Pagán Crespo added.
“We are encouraged that one of the few issuers on the Island that has honored its contracts and the rule of law, and maintained higher operating standards, has been able to refinance its debt," Robert Tucker, head of investor relations and communications for Assured Guaranty, said in a statement. "When an entity maintains proper governance, it is able to retain its credibility in the market and achieve costs savings, as PRASA did for the people of Puerto Rico. We hope that the FOMB, other issuing entities, and the Commonwealth, which remain embroiled in an expensive bankruptcy, take note and follow this model in other areas.”
