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The City of Houston has completed a $3.1 billion restructuring of its water and sewer system debt. The deal is the largest and most complex in the city’s history.
“The utilization of fixed-rate and variable-rate financing as well as an innovative swap agreement will help reduce the city’s annual interest costs and therefore produce significant savings for taxpayers,” said Annise D. Parker, Houston City Controller. “The swap alone is expected to reduce interest payments by more than $9 million a year. The estimated savings are based on what the city would have paid if it had issued traditional long-term bonds versus what it will pay as a result of the swap.”
Under the swap agreement, the city receives a floating interest rate, but pays a fixed-rate. If the city had issued conventional fixed-rate bonds, the rate paid would have been approximately 5.23%, or 1.45% higher than the rate required by the swap. The swap was transacted on a competitive basis with 6 dealers bidding and 3 dealers winning the right to participate.
Because of its complexity, the $3.1 billion restructuring had to be conducted in three phases. The sale of $1.7 billion of fixed-rate debt occurred in May. The swap agreement was executed on June 7 and $1.4 billion of variable rate bonds were sold a day later, with the final paperwork being finalized today. The entire deal is estimated to have present value savings in excess of $80 million. Present value savings amount to the current value of a cash payment to be made in the future.
The refinancing rids the city’s water and sewer department of outmoded bond covenants and completes the creation of a new combined utility system that includes water, sewer and drainage services. The plan provides for up to $50 million a year for the next three years for storm water drainage maintenance and operations. This marks the first time the city has had a dedicated source of funding for drainage work.
The new bonds received an A2 rating from Moody’s Investment Services and A+ ratings from both Standard and Poor’s Investment Services and Fitch Ratings. The rating from Moody’s represents an upgrade.
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