Bloomberg News

New York Sells Water Bonds as Returns Outperform: Muni Credit

June 01, 2011

June 1 (Bloomberg) -- New York state plans to sell $510 million of revenue-backed debt today to help finance water projects in New York City, as water and sewer bonds generate better returns for investors than typical municipal bonds.

State and local water and sewer bonds have returned 4.59 percent this year, 0.36 percentage point better than a broad gauge of municipal debt, according to the Bank of America Merrill Lynch indexes. Many institutional investors, including AllianceBernstein Holding LP, have increased their allocations to so-called essential service bonds, municipal debt issued for projects such as sewers and electric power plants.

“People tend to pay their water bills even when the economy is bad,” said Michael Brooks, a senior portfolio manager at AllianceBernstein who oversees $30 billion of municipal bonds, in a telephone interview. Essential service bonds now make up about 31 percent of the firm’s portfolios compared with 19 percent in 2008, Brooks said.

The debt issued by the state’s Environmental Facilities Corp. will be payable from revenue generated from nine million water and sewer customers in New York City and its northern suburbs. The sale comes two weeks after the city raised water and sewer rates by 7.5 percent. Since 2006, combined rates have increased by more than 90 percent, according to the city’s Department of Environmental Protection.

Headline Risk

“There’s a lot less headline risk when you’re dealing with a thing like New York City water,” said Brooks. “You don’t have to listen to talk about financing budget gaps and fiscal difficulties. To raise rates, they raise the rates.”

New York is issuing debt as interest rates on top-ranked state and local government general-obligation bonds maturing in 10 years have declined to 2.63 percent, levels last seen in November. Yields, which move opposite to price, fell as fears of widespread default have subsided and issuance has trickled to 42 percent below average for the last eight years, according to data compiled by Bloomberg.

The securities carry Aa1 from Moody’s Investors Service, its second-highest investment-grade rating. Standard & Poor’s assigns a comparable AA+ rating to the debt. The proceeds will be used to finance water and sewer projects and refund previously issued, higher-cost debt.

Generic utility bonds ranked AA that mature in 10 years yield 3.18 percent, according to Bloomberg data.

Previous Sale

When New York state last issued bonds on behalf of New York City’s water and sewer program in February 2010, debt maturing in 10 years was priced to yield 3.3 percent, or 0.21 percentage point, lower than similarly rated utility bonds, according to Bloomberg data. On May 17, the bonds traded at 0.19 percentage point less.

The city committed $20.8 billion to its water and sewer capital program from fiscal 2002 to fiscal 2010 and plans to spend $2.4 billion in the current year.

Some institutional investors believe the decline in interest rates may spur more state and local government borrowing.

“There are still people out there who need capital,” said Joseph Deane, a portfolio manager for Pasadena, California-based Western Asset Management in a podcast interview on Bloomberg On the Economy. “It’s just a much more attractive market for them to access right now.”

The additional supply may be met by buyers who receive cash from bonds that mature in June, July and August, which are three of the biggest months for redemptions, Deane said. “You’ll see a balance here for a while,” he said.

Following is a description of a pending sale of U.S. municipal debt:

MASSACHUSETTS PORT AUTHORITY, which manages Boston’s Logan International Airport, plans to sell $153 million in taxable debt and $58.5 million in tax-exempts as soon as this week to finance a new car-rental facility at Logan. The revenue-backed bonds are rated A- by Fitch Ratings and A3 by Moody’s, both fourth-lowest of 10 investment grades, and A by Standard & Poor’s, one level higher. Banks led by Citigroup Inc. will market the securities. (Updated May 31)

--With assistance from Sarah Eisen and Michael McKee in New York. Editors: Walid El-Gabry, Pete Young

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net;

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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