Quantcast
Regional News

Dallas Area Rapid Transit Deal Boosted By BABs

DALLAS - Dallas Area Rapid Transit expects to make history with its record $1 billion bond issue today. The triple-A rated deal is not only DART's largest ever, but the biggest in the Southwest so far this year.

And at $750 million, the Build America Bond component also represents the largest issue of the federally subsidized taxable debt by a local government agency since the bonds were authorized under the American Recovery and Reinvestment Act in February.

For Siebert Brandford Shank & Co., it's the firm's largest revenue bond issue as book-runner.

"This deal is historic in several senses," said chairman Napoleon Brandford, pointing out that his firm and financial adviser Estrada Hinojosa & Co. are both minority-owned firms.

Co-managers are Goldman, Sachs & Co., JPMorgan, Loop Capital Markets LLC, First Southwest Co., Morgan Keegan & Co., Ramirez & Co. and RBC Capital Markets. JPMorgan will work exclusively on the Series B BABs.

For DART, the availability of such a large financial package allows Texas' largest light-rail network to expand dramatically, bypassing financial roadblocks that threatened to stymie an important new Orange Line that will extend to Dallas-Fort Worth International Airport through the suburb of Irving. The authority also has another new line under construction and is extending an existing line.

Qualifying for such a large volume of BABs "is really a function of how fast you can spend the money," said DART treasurer Nate Hallett. "And with three projects going on right now, we are clearly the most shovel-ready."

The size of the BAB offering is likely to make the bonds more attractive to large institutional investors, as well as retail buyers, according to Hallet.

"It makes it easier for investors to sell in the secondary market," he said.

Jeffrey Timlin, vice president for portfolio management at Sage Advisory Services in Austin, expects the DART BABs to attract endowments and pension funds that "have long-term liabilities that they can match these obligations to." High-net-worth individuals may also take a position, he said.

"With the larger sizes and the newfound popularity of these instruments you may have investors who are using it for a more short-term strategy," Timlin said. "When it becomes more corporate-like in its structure, there's going to be a liquidity premium where investors can get in and out of the issue more easily."

The overall structure of the financing is designed to provide interest cost savings of up to 70 basis points when compared to traditional tax-exempt interest rates, including the 35% federal tax subsidy, Brandford said.

The bonds will carry Standard & Poor's AAA rating, with a Aa3 from Moody's Investors Service. Fitch Ratings does not rate the bonds.

While market conditions will affect the structure, the current plan is to issue about $250 million of tax-exempt Series A revenue bonds and $750 million of taxable BABs as Series B.

"The coupon on the taxable BABs will be set on Tuesday," said Robert Estrada, chairman of Estrada Hinojosa. "We'll do that then because investors rely on that to lock in whatever hedges they chose to put in place for this type of taxable debt."

"Right now we're planning to run Series A tax-exempt bonds with maturities in 2014 out through 2025," said David Thomson, the lead banker on the deal from Siebert Brandford. Longer-term tax-exempts may become BABs, he said.

"Depending on how aggressive the BAB pricing levels are, they may end up flipping into the Series B and become BABs," he said.

The bonds are secured by a pledge of a 1% sales tax collected across a broad area of greater Dallas.

"In our opinion, DART's gradual development from a bus system to light rail and other modes of transportation in the past 10 years has allowed for the adoption of a comprehensive and carefully conceived capital program," wrote Standard & Poor's analysts Horacio Aldrete-Sanchez and James Breeding. "DART operates with a clear set of financial standards, promoting sound reserves and conservative capital plans. The capital program includes projected coverage of no less than 2.4x following the issuance of all the currently authorized sales tax bonds, with no growth in sales tax revenues."

In maintaining their Aa3 rating, Moody's analysts Douglas Benton and Michelle Smithen cited the softening of sales tax collections during the current recession and noted the absence of a debt service reserve.

"The absence of a debt service reserve is a divergence from other similarly rated transit issuers," the analysts wrote. "While Moody's views this as notable, it is not a significant credit risk given the expectation of coverage levels above the legal ordinance mandated levels and codified financial management practices that result in the maintenance of sizeable cash reserves."

Created in 1983, DART is organized to provide public and general transportation services to 13 municipalities in five counties - Dallas, Collin, Ellis, Denton, and Rockwall - for a total population of 2.3 million in a 700-square-mile area. The member cities in which the voters elected to be included in DART consist of Carrollton, Cockrell Hill, Dallas, Farmers Branch, Garland, Glenn Heights, Irving, Plano, Richardson, Rowlett, and University Park and the towns of Addison and Highland Park.

In an April letter to James Oberstar, chairman of the U.S. House Committee on Transportation and Infrastructure, DART chief executive Gary C. Thomas outlined the authority's plans to use $62 million of federal stimulus funds.

"The vast majority of the ARRA funding will support the initial phase of the 14-mile Orange Line that will connect Dallas, the thriving Las Colinas Urban Center in the nearby city of Irving, and ultimately DFW International Airport," Thomas wrote. "This project represents a public transit investment in excess of $817 million. More than 80 contractors, based in 14 states, are bringing this project to fruition."

Thomas added that so-called transit-oriented development, the accumulation of housing and retail along the rail line, was already underway.

"Our Orange Line already has attracted one of the country's largest transit-oriented development programs with a private and municipal investment of $3.7 billion around the first six rail stations," he said. "Together, these modern transit villages are expected to draw nearly 10,500 new residents and 18,000 new employees."

For Irving, the Orange Line could play a critical role in the success of its new bond-financed convention center in Las Colinas. The triple-A rated city has already issued $130 million of certificates of obligation to build the convention center, but plans to issue another $200 million for a related entertainment project depend on when market conditions permit.

Without the backing of Irving's general fund, the entertainment center bonds would carry ratings of A-minus. That would translate to interest rates higher than 7%, Mayor Herbert Gears estimates, and insurance simply isn't available. So far this year, investors have shown the most appetite for bonds with ratings in the double-A category and higher.

Rich Saskal and Jason Philyaw contributed to this story.

SEE MORE IN

RELATED TAGS

Texas ,

Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.