Water and sewer revenue bonds can be an essential building block of a municipal bond portfolio for most municipal bond investors. The water and sewer segment of the municipal bond market is a coveted one because of its essentiality. These bonds are used to construct or expand water and sewer lines for municipalities. Typically these securities carry strong bond ratings of A or above with many in the AA or AAA category.
The way that they work is that the municipality does not back the bond itself. Rather, the revenue from water bill collections is used to pay the bonds. Even during times of financial stress, ratepayers tend to continue to pay their water and sewer bills since we need water to live and to flush toilets in our modern world. They are considered essential services due to their importance for providing infrastructure and maintaining public health and safety.
The most common type of water revenue bond is a net revenue pledge bond. In such a case, the utility pays its operation and maintenance expenses first and covenants that it will structure its water and sewer rates so that they are sufficient to pay back bond holders their principal and interest. Most often there is just one choice for water and sewer services, a natural monopoly. Users of the system will continue to pay their water bills if rates need to be increased.
Factors to consider when analyzing essential service bonds are the financial health of the issuer, the quality of the utility’s management, the physical infrastructure of the water and sewer system and the characteristics of the ratepayers or customer base. In some instances, the service areas of a water system can extend beyond the boundaries of a city and for that reason some water and sewer bonds can be rated higher than the GO (general obligation) bonds of the municipality in which the water system is located.
The bottom line for investors is to carefully work with a trusted municipal bond portfolio manager that can help assess the financial health and default risk of a particular bond issuer to help make good decisions in building a muni bond portfolio.
Bond Portfolio Manager
About Las Olas Wealth Management
Las Olas Wealth Management of NatAlliance Securities LLC led by Dean Myerow and Sean Vesey provides high-net-worth families and investment professionals with direct access to the municipal bond market. Our approach to portfolio management is to combine customized computer assisted modeling to purchase and ladder kicker bonds, many of which are insured general obligation and essential service bonds. The results for our clients are short duration, high quality municipal bond portfolios which are diversified by sector and region.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.
All bonds and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.
Municipals and tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security’s tax-exempt status (federal and in-state) is obtained from third-parties and Las Olas Wealth Management of Nat Alliance Securities LLC does not guarantee its accuracy. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.