DALLAS -- The Great Lakes Water Authority will make its market debut next week with $1.3 billion of new money and refunding bonds, boosted by new rating upgrades.
The authority opened its doors Jan. 1, assuming Detroit's $5.5 billion water and sewer debt portfolio and taking charge of regional water management. GLWA's tax-exempt pricing, slated for Oct. 13, will provide $284 million of new money for capital projects with the rest refunding outstanding water and sewer bonds at expected savings of more than $151 million.
"As the financing has progressed, the population of refunding candidates has evolved and our financing team has indicated that our actual savings will likely be higher than the preliminary estimates," the system's chief financial officer and treasurer, Nicoletta Bateson, said in an interview
The refunding is expected to generate cash flow savings and substantial present value savings.
"The resulting savings will be used to reduce overall system budgeted revenue requirements and customer charges as well as building up even further the authority's reserve funds and liquidity for pay-as-you-go capital," Bateson said.
Citi is running the books and Goldman Sachs is the co-senior manager with six co-managers. Public Financial Management Inc. is advising the authority and Dickinson Wright Pllc is bond counsel.
The offering includes approximately $536 million of senior lien water supply system revenue bonds in two series and $288 million of second lien water revenue bonds in two series of notes.
The authority is also offering $129.8 million of sewage disposal system revenue refunding senior lien bonds and $286.3 million of refunding second lien bonds.
The bonds are secured by a pledge of system revenues as well as a statutory lien on the pledged accounts.
Ahead of the sale, Moody's Investors Service upgraded the senior lien to A3 from Baa1 and the second lien to Baa1 from Baa2.
Fitch Ratings upgraded the senior lien bonds by three levels to A from BBB and the second lien to A-minus from BBB-minus.
Both rating agencies assign a stable outlook.
S&P affirmed its A-minus rating on the senior lien bonds and the BBB-plus rating on the second lien bonds.
The outlook is positive.
"Our credit fundamentals are very strong," said Sue McCormick, CEO of GLWA, during an investor presentation. "I am very pleased to see continued recognition of our progress through the recent action of rating agencies."
Moody's and Fitch attributed the upgrades to GLWA's improved revenue growth, rate restructuring to enhance collections, and the implementation of operating efficiencies.
The ratings also incorporate the massive scale of water operations in southeast Michigan, a recovering but highly vulnerable regional economic base, very high leverage of pledged revenue, and the large share of revenue sourced from retail operations in the city of Detroit.
The projected savings on the refunding could help ease pressure to raise rates when the authority loses Flint and Genesee County as customers and their $25 million of revenue at the end of fiscal 2017; Bateson said the authority "will determine uses of savings more specifically once the transaction is complete and the exact savings are known."
Genesee County, which includes the city of Flint, is GLWA's third largest wholesale customer, accounting for approximately 4.5% of the GLWA's gross revenue. The county is expected to transition to the Karegnondi Water Authority, which is building its own water supply pipeline, at the end of fiscal 2017.
Bateson said that the structure offers a diverse range of maturities and par amounts that "we hope will be attractive to many investor segments."
In addition to the recorded investor roadshow, GLWA's finance team is hosting a live investor meeting in Detroit Wednesday. It is also scheduling one-on-one investor discussions throughout the coming week and next week through Citi.
The authority, formed from of the ashes of Detroit's bankruptcy, is the regional manager of water and wastewater services with responsibility for the system's assets and rate-setting, all of which had been previously handled by Detroit. The city retains control of water and sewer services within city limits.
Although the authority itself is nine months old, the management team has a four-year track record of financial and operational leadership dating to Detroit ownership. The GLWA board is comprised of six board members: two from the city and one each from Wayne, Oakland and Macomb counties, and one representing the state government.
Bateson said in the investor presentation that total service charge revenues for the former Detroit and current Great Lakes systems increased 23% for sewer and 15% for water over a five-year period.
"Both are a relative modest increase in cost considering the increase in cost in water utility management, which GLWA has been able to control," said Bateson.
Since 2012, the authority and its predecessor have decreased operations and management expense by 22% for sewer operations; similarly water operations costs decreased by 14%.
"Both increase in revenue and steady decrease in operating expenses have resulted in increase in debt service coverage," Bateson said.
The authority intends to incorporate a springing amendment in its water and sewer bond indentures that lays the ground work for the future reduction in debt service reserve fund requirements under certain conditions.
The criteria would require that at least two of the three major rating agencies assign a double-A level rating to its senior-lien debt and that any reduction in debt service reserves not result in a downgrade.
A majority of existing bondholders would need to consent and new bondholders would consent to the provision as part of their purchase.
The recent upgrades move the authority closer to the double-A threshold but it's still a few notches away.
Detroit's old water and sewer debt earlier this year won back across-the-board investment-grade ratings for the first time since the city left bankruptcy in late 2014.
After the authority became the obligor, Moody's lifted $617 million of junior-lien water bonds and $17.3 million of junior-lien state revolving fund water bonds two notches to Baa2, from junk-level Ba1, and raised $908 million of second-lien sewer debt and $465 million of junior-lien SRF sewer bonds to Baa2 from Ba1.
Senior-lien debt, already at investment grade, was also upgraded two notches, to Baa1 from Baa3.
The upgrade recognized GLWA's assumption of all the debt secured by the net revenues of the Detroit Water and Sewerage Department. A 40-year lease with Detroit gave GLWA sole ownership interest in revenue generated by the combined regional and local system.
"All the revenues have been sold by Detroit to the GLWA and this important because it gives a layer of protection for our investors and the utility from the hypothetical situation of a future bankruptcy for the city of Detroit," William Wolfson, GLWA's chief administrative and compliance officer and general counsel, said in the investor presentation.
GLWA has $1.7 billion of senior lien water revenue bonds, $792 million of second lien water revenue bonds and $33.2 million of junior lien state revolving fund water revenue bonds outstanding.
It also has $1.9 billion of senior lien sewer revenue bonds, $902 million of second lien sewer revenue bonds and $558 million of junior lien state revolving fund sewer revenue bonds outstanding.
The water system serves nearly 40% of Michigan's population with 75% of revenue coming from wealthier suburbs, and the sewer system serves 30% of Michigan's population with more than 50% of operating revenues coming from suburban customers.
The system treats water from Lake Huron, Lake St. Clair and the Detroit River and distributes it to a service area population of about 3.8 million. The sewer system treats and disposes of wastewater produced by a service area population of approximately 2.8 million.
