Bonds

Guam Waterworks plans refunding, tender offer

Guam Waterworks Authority plans to refund between $134 million and $159 million of revenue bonds and offer a tender on $161.1 million of taxable bonds.

“Guam bonds, the only investment-grade, triple tax-exempt paper on the market, always garner excitement amongst investors,” said Lester Carlson, director of Guam’s Bureau of Budget and Management Research. “We anticipate the same warm reception … Thursday.”

CreditSights’ Head of Municipals Pat Luby said, “Because it’s tax-exempt everywhere, I expect high demand from high-tax state investors.” A recent credit boost should reassure investors, he said.

Guam Waterworks Authority is one of a very few issuers actively selling triple-tax exempt bonds in the United States.

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Moody’s in January raised Guam government’s general obligation rating to Baa3 from Ba1.

Mutual funds and exchange-traded funds would be the bigger buyers while direct retail-focused accounts generally would not be large buyers because of the lower ratings, Luby said.

The deal is comprised of $82 million to $107 million of Series 2024A water and wastewater revenue refunding bonds with serial maturities from 2024 to 2046 and $51 million of Series 2024B water and wastewater revenue refunding bonds with serial maturities from 2025 to 2035. The authority plans to refund all or a portion of outstanding Series 2013 and Series 2014A bonds.

The authority is inviting owners of $13.8 million of Series 2016 bonds, $27.3 million of Series 2017 bonds, and $125 million of Series 2020B bonds to tender bonds. The first two series are tax-exempt and the last is taxable.

The bonds coming to market are rated Baa2 with a stable outlook by Moody’s Investors Service and A-minus with a negative outlook by S&P Global Ratings.

RBC Capital Markets is bond underwriter and, if a tender is completed, will serve as dealer manager.

The payment structure for the taxable Series 2020B bonds, with CUSIPS ending in FDG6, will be offered 95 basis points over the Friday yield on 4% 2029 Treasury, those holding CUSIPS ending in FDH4 will be offered 110 basis points over the 4.00% Treasury due 2034, and those holding CUSIPS ending on FDJ0 will be offered 105 bps over the 4.75% Treasury of 2043.

Those holding the Series 2016 bonds are being offered a purchase price from 103.19% to 105.578% of the par amount. Those holding Series 2017 bonds are being offered a purchase price from 105.167% to 107.722% of the par amount. In all cases, outstanding interest would also be paid.

The authority’s last deal was in 2020 and the sole tax-exempt maturity from that deal, a 5% coupon bond maturing in 2050, callable in 2030, was originally priced at +232 basis points to triple-A scales, traded at +94 basis points on Feb. 21, per CreditSights. The firm also noted that year to date, the Guam Waterworks Authority in the Muni Index has posted a composite total return of 0.64%, the best-performing investment grade Guam credit, which is outperforming the overall muni index.

On Saturday, Carlson said it was too early to gauge the interest in the tender but he spoke with five firms “very interested” in the refunding and expected to talk with others this week. The deadline for responding to the tender is 5 p.m., Eastern Standard Time, Wednesday, with preliminary acceptance at 9 a.m., Thursday.

Orrick, Herrington & Sutcliffe is serving as bond counsel and disclosure counsel for the deal.

Earlier in February, S&P released its ratings report on the Waterworks Authority, highlighting both positives and negatives.

Among the positives are the system’s operational improvements and investments aimed at further efficiencies. The management is experienced in handling the authority’s “unique” climate and regulatory issues. Guam’s strategic value to the U.S. Department of Defense props up the local economy. Finally, the authority has “healthy” reserves.

For negatives, S&P Senior Director Pisei Chen pointed to the authority’s “substantial capital needs, recently narrowing coverage, and management’s use of rate stabilization funds and American Rescue Plan Act funds for coverage sufficiency.” The current rating assumes the authority and the local utility commission “will take the steps necessary to increase rates to meet internal debt service and liquidity targets and replenish rate stabilization funds.”

S&P said the authority had elevated risks, both from physical risks like severe storms and from federal regulatory pressures.

The rating agency considered the authority to be independent of the central government but noted they share pension and other post-employment benefits obligations.

Moody’s pointed to many of the same factors in explaining its Baa2 rating.

As of Sept. 30, the authority had $614 million of revenue bonds outstanding.

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