Puerto Rico water utility looks to refund $1.8B

The Puerto Rico Aqueduct and Sewer Authority plans to refund $1.8 billion of outstanding 2012 debt in an August deal, coming into a market that is starved for high-yield paper.

For several months the authority and the Puerto Rico Oversight Board has mentioned the possibility of refunding the authority’s Series 2012A bonds. On Friday it posted an offer along with a Preliminary Limited Offering Memorandum on the Municipal Securities Rulemaking Board’s EMMA site.

There is $1.8 billion in par outstanding of the 2012A and 2012B bonds. The new bonds would be issued as Series 2021A, 2021B, 2021C, and 2022A bonds.

The bond purchase and exchange are available to, at most, 35 institutional bond purchasers. All current holders of the Series 2012A bonds are eligible to accept a cash tender.

All holders will have the option of holding onto the current bonds, whose terms would be unchanged. However, “the authority expects, but is under no obligation, to redeem on or about July 1, 2022, any Target 2012A bonds not purchased or exchanged under the terms of this offer,” the authority said in its tender and exchange offer.

The deal follows the authority’s successful refunding of $1.4 billion in December. There were $3.1 billion of orders for that deal.

Given absolute low yields in the tax-exempt market, high-yield credits have dramatically outperformed high-grades in 2021 as investors seek any paper with yield. The Bloomberg High-Yield index has returned 7.27% so far this year, outperforming even corporate high-yield debt, and well outperforming high-grade municipals that have returned 1.85% year to date.

This bodes well for PRASA.

Preliminary numbers for the bonds show an expected yield of 1.17% for a 2022 maturity, or 112 basis points higher than triple-A benchmarks, to 2.22% for a 2029 maturity, 154 basis points above triple-As at current levels. The long bond, 4s of 2047, would yield 3%, or 169 basis points over high-grade scales. These spreads are tighter than the 239 to 305 basis points it saw on its nonrated deal in December.

Board Executive Director Natalie Jaresko said the August transaction is expected to generate $275 million in present value savings through fiscal year 2047 and average annual debt service savings of $16.7 million.

The deal is scheduled for Aug. 25. The bonds, all senior lien, are structured as: Series 2021A bonds to be sold to raise money to purchase Series 2012A bonds tendered for purchase; Series 2021B bonds will exchange bonds for the 2012A bonds; Series 2021C are to be taxable bonds to raise money for tendered Series 2012B bonds. Finally, Series 2022A bonds are forward delivery bonds, the issue date for which has not yet been set.

The deal is headed by Barclays Capital, along with co-managers BofA Securities, Jefferies LLC, and J.P. Morgan Securities.

Those accepting the tender offers would be paid prices as a percentage of par extending from 103.312% for the July 1, 2022, maturity to 105.011% for the July 1, 2047, maturity.

For those opting to exchange their bonds for the 2012A bonds, there will be an exchange factor, which is “the percentage by which the principal amount of tendered Target 2012A Bonds will be multiplied to determine the principal amount of Series 2021B bond that will be issued in exchange.” The exchange factor goes from 100.081% for the 2012A bonds maturing in 2022 down to 85.703% for the 2012A bonds maturing in 2033 and then up to 96.811% for the 2012A bonds maturing in 2047.

The authority hasn’t provided any estimates of yields on the taxable 2021C bonds that mature in 2023, 2026-2027 and 2022A forward-delivery bonds, that are structured as serials from 2022-2027.

The existing 2012A and 2012B bonds are rated CCC by Fitch Ratings. They were rated Ca by Moody’s Investors Service until earlier this month when Moody’s withdrew all of its Puerto Rico government ratings.