D.C. Water Bonds Ride Best Long-Debt Gain Since ’12: Muni CreditElizabeth Campbell
The water authority that serves the White House is taking advantage of a rally in the longest-dated debt to join universities and the owner of the World Trade Center site in borrowing 100 years into the future.
The sale last week rode demand for longer maturities as interest rates close to generational lows push investors to take on more risk. State and city bonds maturing in more than 22 years are on pace to beat the $3.7 trillion municipal market for the first time in two years. They’re earning 11 percent in 2014 to the broader market’s 6.1 percent, Bank of America Merrill Lynch data show.
The offering from the District of Columbia Water & Sewer Authority was a first for a U.S. public utility. It issued $350 million of taxable debt, with proceeds going toward a $2.6 billion project to curb sewer overflows. With the U.S. facing a $3.6 trillion bill for infrastructure work, more municipalities may consider using the securities to finance projects affecting generations of taxpayers, said George Hawkins, general manager of the agency.
“The project is a once-in-several-lifetimes project that fundamentally expands the capacity of the entire system,” he said before the sale.
Century bonds are rare. Other municipal issuers have typically been in higher education, according to Mark Kim, the authority’s chief financial officer.
The University of California in 2012 issued $860 million of federally taxable 100-year munis, at the time the largest for a college. The Port Authority of New York and New Jersey sold tax-exempt century debt in 1994. Schools including the Massachusetts Institute of Technology have sold centuries into the corporate market. So has the railroad Norfolk Southern Corp.
Buyers last week included pension funds, insurers and investors who typically purchase corporate bonds, Kim said.
Longer bonds typically offer more yield to compensate for the added risk of the lengthier holding period, though the gap fluctuates according to the outlook for inflation and interest rates.
The water provider serves about 640,000 residents and provides wastewater treatment to about 1.6 million people in Maryland’s Prince George and Montgomery counties and Virginia’s Fairfax and Loudoun counties, bond documents show. The water system also supplies the White House, Congress, the Supreme Court and the International Monetary Fund.
The authority is borrowing to build tunnels about 10 stories deep as part of a project to reduce overflow into rivers and neighborhoods.
The expected lifetime of the tunnel system is at least 100 years, Hawkins said, citing engineering analysis. The bonds mature in October 2114.
While the project was eligible for tax-exempt financing, DC Water chose taxable securities given the “significant taxable century-bond market,” said Jeff Scruggs, managing director at Goldman Sachs Group Inc., which underwrote the deal with Barlcays Plc.
The bonds, with the third-highest credit mark of Aa2 from Moody’s Investors Service, priced to yield 4.81 percent, according to data compiled by Bloomberg. In comparison, benchmark 30-year Treasuries yielded about 3.37 percent that day.
Century bonds don’t work for some utilities. Under New York state public-authorities law, bonds issued by New York City Municipal Water Finance Authority must mature within 40 years, said Amy Spitalnick, spokeswoman for the mayor’s budget office.
JEA, which provides water and electricity to Jacksonville, Florida, is working on having shorter, rather than longer, maturities, said Paul McElroy, the authority’s chief executive officer, because of the changing regulatory environment and potential climate-change risk.
The maturity appeals mostly to buyers with longer horizons, according to Gary Pollack, New York-based head of fixed-income trading at Deutsche Bank AG’s private-wealth management unit, which oversees $12 billion.
This kind of bond is for a “rather unique investor with very specific investment needs,” he said.
Before this sale, the longest bond DC Water had sold was 35 years, Kim said. The 100-year life could limit future flexibility, Fitch Ratings said in a June 26 report.
The notes are considered “green bonds” because proceeds are for environmental projects. This is the first bond “certified” with that label in the U.S., according to DC Water. The designation helped attract almost $100 million in orders, Kim said.
Investors placed bids for about $1.1 billion of debt, and the authority upped the deal by $50 million.
The higher yield on the bonds made them “very attractive,” according to Scruggs, co-head of the public sector and infrastructure group at Goldman.
Investors trying to pad returns have pushed down yields on longer-dated debt more than those on shorter maturities.
Investors last week demanded as little as 2.98 percentage points of extra yield to own munis maturing in 2044 rather than those due in two years, data compiled by Bloomberg show. That gap was close to a one-year low.
Hawkins said he has received calls from other authorities about the financing, though he declined to name them.
“There’s just a lot of need for longer-term, high-quality bonds that have an attractive spread, and this certainly fits that model,” said Dan Heckman, a Kansas City, Missouri-based senior fixed-income strategist at U.S. Bank Wealth Management, which oversees $120 billion.