Mar 28, 2013 by Dr. Chris Wood
Just as homeowners look to refinance mortgages to take advantage of historically low interest rates, so too does the Peachtree City Water and Sewerage Authority (PCWASA), which has turned to the current bond market to refinance its long-term debt.
PCWASA recently closed on its Series 2013 Bonds, rated “Aa1” by Moody’s and “AAA” by Standard & Poor’s thanks to the backing of the city of Peachtree City. The Authority has refinanced nearly $28 million – its entire outstanding long-term debt – which was the result of necessary construction and upgrades to the city’s sewer system during the past decade.
The Series 2013 Bonds took advantage of a most favorable interest rate due primarily to the credit rating of Peachtree City Government. However, the Authority obtained its own favorable credit rating – the first time the utility had been rated in its 25-year history – a month prior to the closing. As a result of the City-Authority partnership in the issuance, PCWASA and its ratepayers will benefit from a total debt service savings of $3.06 million – which equates to a net present value savings of $2.86 million – over the course of the 14-year term of the bonds, for an average annual savings of $220,000 per year.
In addition, another key benefit of the refinancing is that the Authority will be able to eliminate the requirement to maintain a debt service reserve fund for the bonds, which will enable PCWASA officials to “free up” approximately $1.15 million that had been restricted as a debt service reserve for the 2002 Bonds, says Stephen Hogan, PCWASA General Manager.
The PCWASA Series 2013 Bond Issue includes a little more than $7.1 million in Refunding Revenue Bonds (Series 2013A) and approximately $20.8 million in Taxable Refunding Revenue Bonds (Series 2013B). The 2013A Bonds are refunding the Authority’s previously issued Series 2002 Bonds, while the 2013B Bonds likewise are refinancing the Series 2005 Bonds. As a result, the Authority’s entire outstanding debt is now consolidated through the Series 2013 Bonds.
The Series 2013 Bond Resolution was passed by the PCWASA Board of Directors during a special called meeting on Jan. 30, with the City Council of Peachtree City approval coming that same day. The bond sales were immediate and successful, say Authority officials, with the bond closing on Feb. 27.
“There was strong investor demand for the bonds due to the excellent credit ratings and the scarcity of other Georgia issues in the market at that time,” says Todd Barnes, bond underwriter for the Authority from Robert W. Baird & Co., Inc.
Barnes adds that because of the good timing of the bond issue, the Authority yielded even better savings than originally projected. At the time PCWASA officials first began preparations for the bond issue last fall, the refinancing would have originally saved approximately $50,000 per year, rather than the $220,000 in actual savings from the closing at the end of February. The Authority was able to reduce the average interest rate on its debt from around 4.4% on the prior bonds to roughly 2.2% on the new bonds, notes Barnes.
During the credit ratings process completed in January, PCWASA officials learned the good news that Standard & Poor’s had issued a credit rating of “AA-” to the Authority. Barnes says that this is a high investment grade rating, reflecting the “financial strength and economic vitality” of PCWASA.
The Standard & Poor’s issuer credit rating (ICR) for PCWASA was based on several factors, including the utility’s system resources and ability to accommodate future growth, its strong liquidity (cash) position, and its strong coverage margins, which was 1.58x for the 2012 fiscal year. Bond covenants require a minimum coverage ratio of 1.10x, or 110%. Authority officials note the rate increase implemented in late 2010 was necessary in part to assure the minimum debt coverage ratios for PCWASA bonds complied with bond covenants.
With the Series 2013 Bond Issue closed, PCWASA officials now can look to the future maintenance and improvements to its sewer system for the residential, commercial, and industrial customers in Peachtree City, says Hogan. According to the Ratings Analysis provided by Standard & Poor’s, the Authority’s financial future appears to be a bright one. The report noted that the stable future outlook of the Authority reflects the expectation that PCWASA will sustain a solid financial and operating profile, while formulating and managing its capital improvement plan for the future.
Chris Wood, Ph.D.
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