DALLAS — Pearland received an upgrade on its water and sewer revenue debt to AA-minus from A by Standard & Poor’s, as the rapidly growing Houston suburb prepares to bring a new-money issue to market.
The city plans to offer $12.8 million of water and sewer system revenue bonds soon through a negotiated sale with First Southwest Co. and Wells Fargo Brokerage Services LLC as co-managers. RBC Capital Markets is the financial adviser to the city and Andrews Kurth LLP is bond counsel.
Director of finance Claire Bogard said officials initially hoped to sell the bonds Monday, but will wait as “the market and the rates we’re seeing just aren’t favorable right now.”
She also said the bonds, which are structured as serials reaching final maturity in 2034, most likely will be insured as the city tends to wrap all its debt.
Standard & Poor’s analysts assigned the higher rating to the coming sale and said the outlook is stable.
“The upgrade is based on consistently strong coverage of debt service and a growing customer base,” credit analyst Horacio Aldrete-Sanchez said.
Upgrades indicate the credit quality of an issuer is improving, often lead to lower costs of borrowing for future debt issuances, and may negate the need for bond insurance due to the underlying strength of the credit.
Bogard said the city is “extremely pleased” with the upgrade.
“We’ve worked hard on projecting a five-year forecast of our utility fund to make sure we keep the fund balance healthy and meet all the covenants,” she said. “We’ve been good at setting rates as necessary and plan another rate increase of about 13% on average this year. We’re also changing to an inclining structure with our rates to promote conservation.”
Proceeds from the coming sale will fund a connection to Houston’s treatment facilities and reimburse developers for construction of system. Officials anticipate additional bond sales totaling about $38.9 million over the next three years for continued expansion of the system.
The current population of Pearland is close to 80,000 and more than double the 2000 Census tally of 37,640. Officials estimate the population of the affluent suburb could reach 150,000 to 200,000 by 2020 if development continues at its current pace.
The city’s fiscal 2007 taxable assessed value of $5.39 billion is up about 16% from the year earlier and represents a fivefold increase from $1.01 billion a decade ago. City officials expect continued double-digit assessed-value growth annually for the near future, according to analysts.
Moody’s Investors Service assigned its A2 rating to the water and sewer bond sale and affirmed the rating on the nearly $106 million of parity debt outstanding.
Analysts said the rating reflects the system’s rapidly growing customer base, adequate debt-service coverage, and satisfactory legal covenants, as well as the “considerable ongoing borrowing needs and leveraged debt position.”
Moody’s said the customer base has spiked by 73% over the past five years, as the city’s residential sector blossomed. The city also has become a center for commercial activity in Brazoria County.
Officials expect the residental growth to abate somewhat over the short term due to “the national housing slowdown trends evident in reduced levels of building permits in 2007 and 2008,” according to Moody’s.
Bogard said the growth has slowed, but officials still budgeted for 1,600 new single-family homes in fiscal 2009.
