PHILADELPHIA — The City of Philadelphia issued approximately $565 million of Water and Wastewater Revenue and Revenue Refunding Bonds on Tuesday, September 19. Along with below-market rate federally subsidized loans and pay-as-you-go capital dollars, the bonds are a key component of low-cost funding of crucial system-wide investments in water and wastewater infrastructure in accordance with the Philadelphia Water Department’s (PWD) capital program. A portion of the proceeds of the issuance were also used to refund prior bonds for savings in excess of $3 million.
The City was able to take advantage of strong demand to lock in a total borrowing cost of just over 4.50 percent for the bonds, which have a 30-year final maturity. Approximately $1.6 billion in total orders were placed during the order period by 77 institutional and retail investors. This 2.6 times oversubscription led to a further lowering of interest rates by as much as 0.08 percent per maturity. As a result, the total debt service on the bonds is approximately $1.3 million lower than pre-pricing estimates.
As part of the transaction, the City took advantage of current interest rate dynamics to refund approximately $107 million of previously issued Water bonds. Approximately $72 million of the refunding bonds were non-callable which means the City would not have another opportunity to generate savings through a current refunding. This refunding achieved net present value savings of over $3.2 million (3.03 percent of refunded par), which translates to annual savings of around $270,000 to PWD’s ratepayers over the next 15 years.
“The Philadelphia Water Department continues to do everything that it can to seize cost-saving opportunities including tax-exempt bonds, government subsidized-interest loans, refinancings, and state and federal grant opportunities to help minimize the burden on our rate payers and provide financial flexibility to invest in our infrastructure. We will also continue to focus on strategic, long-term planning that will help the Philadelphia Water Department maintain a strong financial position and operational efficiencies while also taking care of our citizens,” said Water Commissioner Randy E. Hayman, Esq.
“We were pleased to achieve such strong results, especially in light of the recent volatile market conditions,” stated City Treasurer Jacqueline Dunn. “The pricing outcome reflects the strong financial management by PWD and the attractiveness of their credit.”
In advance of the sale, the City received confirmation of its existing bond ratings from each of the three rating agencies. Moody’s Investors Service affirmed its ‘A1’ rating and stable outlook on the City of Philadelphia’s Water & Wastewater Revenue Bonds. Fitch Ratings and S&P Global Ratings also maintained their stable outlooks and ‘A+’ ratings. Water and Wastewater Revenue is the City’s highest-rated credit.
All three agencies cited PWD’s strong financial and operational management, broad and diverse service base, and robust system capacity while cautioning that PWD has significant long-term capital needs that will require continued future rate increases.
The 2023B bonds were sold by an underwriting syndicate led by Goldman Sachs, with Ramirez & Co. serving as co-senior manager. Acacia Financial Group, Inc. and PFM Financial Advisors LLC served as financial advisors on the transaction. The sale closed on Thursday, September 28, 2023.