Deluge of Southwest water-related debt is on tap

The municipal bond market will be showered this week with nearly $2 billion of triple-A-rated debt from water agencies in Southwest states facing drought and other climate issues.

The Texas Water Development Board tops the week's issuance calendar with $1.6 billion of State Water Implementation Revenue Fund for Texas master trust bonds to finance local water projects, including seawater desalination in Corpus Christi and a project in Brazoria County that will largely benefit a private company. 

Denver's Board of Water Commissioners has a nearly $264 million water revenue refunding bond issue and the Oklahoma Water Resources Board is selling about $109 million of state loan program revenue bonds for local water and wastewater projects. They follow a recent debt refinancing from Arizona's Water Infrastructure Finance Authority, which marked its first trip to the muni market in nearly a decade.

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The deals come from naturally arid regions that are facing increased strain due to climate change and in most cases significant economic and population growth, according to Howard Cure, director of municipal bond research at Evercore Wealth Management.

"Loan programs through state revolving funds, such as in Texas, Arizona, and Oklahoma, allows these states to leverage federal grants and keep borrowing costs low," he said. "States are also better equipped to oversee conservation and development of new water sources."

The Denver deal was alone in providing extensive disclosure of climate risk in its preliminary official statement, which included a section on unprecedented drought conditions in the Colorado River Basin, the source of half of Denver Water's supply over the last five years.

"Denver Water is perhaps the most sophisticated borrower in our market as far as considering and planning for the impacts of climate change," said Matt Fabian, a partner at Municipal Market Analytics, which has been monitoring climate change risk disclosure by issuers. "An exceptionally long view by management should be rewarded by investors."

A triple-A-rated, $109.7 million water quality revenue bond refunding Sept. 10 by WIFA included no climate disclosures in its POS.

WIFA contended that Arizona's water situation made little difference to investors who snapped up the debt, resulting in $4.6 million in total savings from the refinancing of its outstanding 2014 bonds.

"Despite media reports over the last year of investors questioning Arizona's water future, WIFA was able to attract investors in a very crowded market that included large, well-known entities like Washington D.C., Texas Transportation, the New York Transitional Finance Authority, and the State of Illinois," the authority said in a statement last week. "This strong showing reflects the ability of WIFA's borrowers to effectively manage water resources and Arizona's strong economic outlook."

The authority was empowered by the Arizona Legislature in 2022 to find new water sources for the parched state with the help of a $1 billion appropriation over three years that has been largely delayed and reduced. Gov. Katie Hobbs last year put the brakes on new housing construction that relies on groundwater in the Phoenix metropolitan area, citing a projection that over a 100-year period, about 4% of demand for groundwater in the region will not be met without further action.

The Texas issue, scheduled to be offered to retail investors on Wednesday, followed by institutional pricing on Thursday, consists of nearly $1.26 billion of tax-exempt bonds with biannual serial maturities in 2025 through 2042 and $362.46 million of taxable bonds with annual serial maturities in 2025 through 2039, according to the preliminary official statement.

It's the latest financing for a program established in 2013 when $2 billion from state reserve funds were set aside to create a State Water Implementation Fund for Texas, according to the Texas Water Development Board. The State Water Implementation Revenue Fund for Texas, or SWIRFT, was also created to issue revenue bonds for SWIFT.

The deal's tax-exempt portion includes $221 million for Corpus Christi, which is seeking to build the state's first seawater desalination plant for municipal use.

The majority of the taxable debt is for the Brazosport Water Supply Corporation, which was created in October 2022 to provide water supply service to certain entities in Brazoria County, particularly The Dow Chemical Company. Proceeds will help fund a project to expand a reservoir and pump station.

When $747.5 million in multi-year financing was approved for the project in July, Texas Water Development Board Member George Payton said it could open up the door for other private entities needing industrial-scale water to apply for financing.

Fitch Ratings said while the bonds are primarily backed by payments from the governments, the water board could transfer funds from its State Water Implementation Fund for Texas' approximately $1.8 billion balance to protect against debt service shortfalls.  

The SWIRFT program's top ratings and interest rate subsidy incentivize local governments to move forward with projects, subject to a rigorous application process, that are recommended in the state water plan, which the deal's POS said is aimed at ensuring Texas' water future amid a growing population at an estimated cost through 2070 of about $80 billion.

In July, the board unveiled an implementation plan for a $1 billion Texas Water Fund approved by voters last November. While $250 million is allocated to a new water supply fund, the plan earmarks $195 million for rural water assistance, $300 million for the SWIFT,  and $150 million for potential bond leveraged funding through existing programs.

BofA Securities is leading the latest bond offering with an underwriting team consisting of Estrada Hinojosa, FHN Financial Capital Markets, Jefferies, JP Morgan, Morgan Stanley, Ramirez & Co., Raymond James, RBC Capital Markets, Siebert Williams Shank & Co., Stern Brothers, UMB Bank, and Wells Fargo Securities. 

The board, which has issued 15 series of master trust bonds since 2015, had $8.18 billion of the debt outstanding as of June 30, according to the POS. The largest sale was $1.7 billion of Series B and C bonds in 2018.

The Oklahoma deal, scheduled to price Wednesday through BOK Financial Securities and Stifel, is structured with serial maturities in 2025 through 2039, as well as term bonds, according to the preliminary official statement.

"The AAA long-term rating reflects our view of OWRB's credit strengths, including a solid market position, no defaults in program history, as well as generally strong financial policies and practices," S&P analyst Autumn Mascio said in a statement. 

The rating agency also noted the program's credit support to cure any potential defaults by borrowers and extremely strong loss coverage score. 

"The loss coverage score reflects the combination of ample program reserves and annual coverage generated from borrowers that we believe substantially mitigates credit risk even under a default scenario," according to the rating report.

Denver Water is refunding series 2023A commercial paper notes and series 2012A, 2012B, and 2014A bonds in a deal structured with serial maturities from 2025 through 2044, along with two term maturities, according to the deal's investor presentation. 

S&P, which highlighted Denver Water's large liquidity position and all-in two times historical debt service coverage, also pointed to its efforts to reduce water usage through efficiencies and conservation and manage almost 700,000 acre feet of storage capacity to meet customer demand. 

BofA Securities leads the underwriting team consisting of co-senior manager Jefferies and co-managers Stifel and Truist Securities scheduled to price the bonds Tuesday.