Michigan-based Great Lakes Water Authority is set to return to market with upward of $400 million of a combination of senior and second lien water supply and sewer disposal revenue and refunding bonds with two ratings upgrades and after it took a step toward ending a years-long legal dispute with a city just north of Detroit.
Moody’s Investors Service on Oct. 24 upgraded GLWA’s senior water bonds and senior sewer bonds rating to Aa3 from A1 and its second lien bonds to A1 from A2.
Fitch Ratings on Oct. 25 upgraded ratings on the GLWA’s bonds that were previously issued by Detroit and the Michigan Finance Authority on behalf of the Detroit Water and Sewerage Department and assumed by GLWA —which was established in 2016 — including $1.73 billion senior lien sewage disposal system revenue bonds to AA-minus from A-plus; and $715.8 million of second lien sewage disposal system revenue bonds to A-plus from A.
“GLWA is very pleased that the rating agencies recognize the stability of the regional water authority that was a new organization nearly eight years ago,” GLWA Chief Financial Officer Nicolette Bateson said via email. “These upgrades come at an important time as we prepare for a new-money transaction to fund the capital program as well as launch an invitation to tender and subsequent refunding to seek debt service savings.”
The issuer is expected to price the deal, $152.75 million of new-money senior water supply system senior lien revenue bonds and $100.225 million of sewage disposal system senior lien revenue bonds, via negotiation the week of Nov. 13, according to the preliminary official statement.
According to Moody’s and Fitch, the issuer expects to refund about $60 million of outstanding senior lien revenue water bonds, and $90 million of senior lien sewage disposal system revenue bonds and $12 million of second lien sewage system revenue bonds.
Proceeds will be used to fund capital improvements for the water and sewer systems — including water treatment and transmission, wastewater treatment, interceptor system and pump station improvements — and to reduce combined sewer overflows and pay the costs of issuance.
Moody’s said it upgraded GLWA’s senior water bonds and senior sewer bonds to Aa3 from A1 because the authority has “established a track record of strong management and prudent long-term forecasting, solid operating performance, serviceable debt service coverage and robust liquidity.”
The agency also upgraded the water and sewer systems’ subordinate bond ratings to A1 from A2.
Fitch affirmed its A-plus rating to the new senior lien water revenue bonds and water revenue refunding bonds, and its AA-minus to the senior lien sewage revenue refunding bonds and A-plus to the second lien sewage revenue refunding bonds.
The water revenue bond ratings “consider the system’s strong financial profile within the context of very strong revenue defensibility and operating risk profiles,” while the upgrades to the sewer bonds “are based on sustained improvements in leverage … over the past several years due to amortization of existing debt and savings from bond refinancings” Fitch said.
Fitch also affirmed its stable outlook for the water debt and its positive outlook for the sewer debt, while Moody’s revised the outlook for both to stable from positive.
“We put them on outlook positive last year just because there was a trend of improving leverage,” said Major Parkhurst, Fitch’s primary rating analyst for the sewer debt, adding that leverage is a pretty big driver of the rating assuming operating risk profile and revenue defensibility are in line with criteria, which they were.
“We thought that there was a high degree of certainty that they are going to achieve those benchmarks and stay within this lower leverage category that qualifies them for the upgrade, so we left it on outlook positive as well because there is potential for another upgrade in the future.”
The upgrades come alongside what appears to be a final step in ending a legal debate with the city of Highland Park, Michigan. The GLWA board of directors on Oct. 25 approved a “term sheet” that represents the initial step in a deal between the water authority, Highland Park and the state of Michigan.
Once authorized, the proposed agreement would end a billing dispute between the GLWA and the city, which has said it was overcharged by the authority. Earlier this year, Highland Park’s debt triggered calls for help from the state.
The proposed deal would include payment assurances from Highland Park and Michigan’s investment in capital improvements in Highland Park and the GLWA. The agreement would “support a fresh start with the GLWA-Highland Park relationship,” the water authority said in a written statement.
“I’m proud that GLWA and Highland Park are one step closer to an agreement to ensure that we can protect access to drinking water for every family in the community,” Michigan Gov. Gretchen Whitmer said in a press release. An agreement will help the community move forward, lower costs and implement a “fairer system” for surrounding communities, she added.
While the agreement is a positive achievement, Parkhurst said it’s not material for Fitch when it comes to an impact on the metrics the rating agency analyzes.
Fitch said GLWA has about approximately $1.6 billion senior lien water supply system revenue bonds outstanding, about $708.1 million of second lien water supply system revenue bonds, $1.79 billion senior lien sewage disposal system revenue bonds and $736.4 million second lien sewage disposal system revenue bonds.