A bond sale this week by Corpus Christi, Texas, could test investor appetite for a drought-stricken issuer with a looming water supply crisis that has made national headlines and led to rating downgrades and negative outlooks.

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The deal could be helped by strong demand for tax-exempt debt in the municipal market that some say has not been fully pricing in climate risk. 

Texas’ eight-largest city is projecting a Level 1 emergency — indicating the water system is 180 days from supply not meeting demand — for December. Due to recent rainfall, officials have said the potential onset of an emergency will likely be moved into next year. 

The $115 million of general obligation bonds, which are rated AA with negative outlooks by Fitch Ratings and S&P Global Ratings, could come insured, according to the deal’s preliminary official statement.

Bond insurance could be helpful depending on its cost, according to Dan Solender, Lord Abbett’s director of tax free fixed income. 

“Those headlines are clearly not positive for the credit, but it is still well into the investment grade range,” he said in an email. “The deal will need to come with more yield than similarly rated credits due to the credit trend.” 

Tripp Kaiser, executive director of the Center on Municipal Capital Markets at the University of Texas at Austin, said he expects the deal to be well received, “with the caveat that buyers may want some compensation for headline and outlook risk.”

He pointed to a “pretty supportive” broad technical backdrop.

“Fund and (exchange-traded fund) inflows have been consistently positive for weeks, (separately managed accounts) and retail demand for taxable-equivalent yields above 5% remains strong, and we’re entering the heaviest reinvestment period of the year,” he said in an email. 

CreditSights said the water crisis represents “a severe threat” to Corpus Christi’s economy, which benefits from “a diversified and growing industrial tax base with strong petrochemical and energy investment.”

“A prolonged water emergency could suppress industrial activity, depress property values, and constrain the city’s ability to raise revenues — directly threatening the ad valorem tax base that secures the GO bonds,” it said in a report.

CreditSights pointed to other concerns, including an ongoing process aimed at ousting Mayor Paulette Guajardo, who is fighting the move in federal court, a “severely underfunded” firefighters’ pension fund, a fiscal 2025 decline in the debt service coverage ratio for the city’s combined utility system bonds amid increased debt issuance, and a federal consent decree requiring wastewater rate increases for 10 years. 

The city’s finance department declined an interview ahead of the bond sale “to ensure we strictly adhere to market disclosure protocols and safeguard the transaction.”  

To stave off the crisis, Corpus Christi has $1 billion of groundwater, wastewater reuse, and other projects aimed at producing 66 million gallons of water daily underway. Long-term projects being explored involve seawater desalination. 

Earlier this month, the city council postponed until September consideration of an initial $78.6 million contract with Corpus Christi Desal Partners for a controversial Inner Harbor seawater desalination plant, preliminarily estimated to cost $978.77 million. Procrastination over the project, which the city terminated last year as the cost under a different design-build contractor reached about $1.3 billion, has angered Texas Gov. Greg Abbott.

If the plant is not built, the city would remain on the hook for paying off $232 million of revenue bonds sold for the project through a low-cost financing program run by the triple-A-rated Texas Water Development Board, which has agreed to loan the city a total of $757 million.

In its rating report for the GO bonds, Fitch said “a revision to stable will depend on the city securing additional long-term water supply solutions within the next 12-24 months.”

S&P said while water supply scarcity poses an economic risk, “Corpus Christi enters this period of uncertainty with a strong financial position.” It added the negative outlook reflects a one-in-three chance of a rating downgrade over the next two years “if we believe acute drought conditions and water supply pressures will cause financial performance to deteriorate or economic activity to contract.”  

Moody’s Ratings, which downgraded Corpus Christi’s GO rating to A1 from Aa2 and combined utility system rating to A1 from Aa3 in December, launched a review in April for another round of potential downgrades.   

The utility system has been hit with multi-notch downgrades, with Fitch dropping its rating to A-minus with a negative outlook from AA-minus this month and S&P in May downgrading its rating two notches to A and placing it on CreditWatch indicating the potential for another downgrade over the next six months.

The city council last month approved the sale of up to $500 million of utility system senior lien revenue bonds for water and wastewater projects and $113.17 million of refunding bonds. Corpus Christi Water, a city agency, is the primary water supplier for a seven-county region, which is experiencing stage three drought conditions that triggered water-use restrictions.

Other bond-issuing water districts and authorities in the region with ties to Corpus Christi have also been hit with negative rating actions.

Kaiser said there isn’t much evidence the muni market is systematically pricing climate risk into evaluations. 

“Some recent analysis we’ve done comparing spread behavior of high climate-risk credits against the broader market supports that conclusion — those credits have largely moved with the market this year rather than repricing away from it,” he said.

Outside of extreme events impacting an issuer, it is not typical to see pricing reflect climate risk, according to Ruth Ducret, senior research analyst at Breckinridge Capital Advisors. 

“Here at Breckenridge, we do believe that over time our investment thesis is that we will see some pricing differentials from these entities that are really on the outliers of climate, that are facing extreme drought, that have extreme hurricane or flood or wildfire risk,” she said, pointing to driving factors like a changing insurance landscape in terms of cost and coverage in more drought- or wildfire-prone regions and uncertainty over Federal Emergency Management Agency disaster funding.  

Corpus Christi, population 317,000, is the retail and business center of Texas’ 12-county Coastal Bend region and is home to the Port of Corpus Christi, which handles over 55% of U.S. crude oil exports, according to the deal’s investor presentation. The city’s five-year compound annual growth rate of taxable assessed valuation is 5.42%. Nearly $578.6 million of GO debt was outstanding at the end of fiscal 2025.

The new GO bonds are scheduled to be priced Tuesday in a deal led by Siebert Williams Shank with co-managers Jefferies and RBC Capital Markets. Bond counsel is Norton Rose Fulbright and financial advisor is Specialized Public Finance. 

The bonds, which tap voter-approved authorization from 2022 and 2024 elections and will finance public improvements, including streets, parks, and public safety projects, are structured with serial maturities between 2029 and 2046, according to the POS.