DALLAS - As other large states struggle to maintain their credit ratings, Texas has earned an upgrade from Standard & Poor's, climbing one notch to AA-plus from AA.
The new rating came as the state was pricing $450 million of general obligation bonds through the Texas Public Finance Authority yesterday. The Texas Transportation Commission is also preparing to issue $1.1 billion of general obligation bonds next week.
"It helped," said Noe Hinojosa, president and chief executive of Estrada Hinojosa & Co., a co-manager on the TPFA deal.
On the $180 million Build America Bonds portion of yesterday's TPFA deal, spreads came in at about 160 basis points over Treasuries, he said. That compares to 135 basis points in a triple-A Chicago bond deal that Hinojosa believes is the lowest. Spreads have been typically 185 to 200 basis points he said.
"That's one of the lowest spreads we've seen in a BAB deal, and the AA-plus had a good impact," he said. "For the Southwest, this has been one of the lowest, if not the lowest."
The upgrade puts Texas within one notch of triple-A Florida, which carries a negative outlook from Standard & Poor's. Florida's outlook shifted to negative from stable Jan. 14.
Financially troubled California is rated A by Standard & Poor's with a negative outlook after a downgrade from A-plus on Feb. 2. New York's double-A rating with stable outlook was affirmed March 2.
Texas, initially rated AAA by Standard & Poor's in 1961, has been downgraded but never upgraded by the agency. It has not carried a rating of AA-plus since 1987.
Analysts also raised the rating on Texas' appropriation debt, primarily issued by the Texas Public Finance Authority, to AA from AA-minus. The outlook on all ratings remains stable.
"The ratings continue to reflect our opinion of the state's large and steadily diversifying economy, which despite the recession continues to perform better than the nation in terms of both economic activity and employment," said Standard & Poor's credit analyst Horacio Aldrete-Sanchez. "Furthermore, we expect that the Texas economy will recover earlier and at a faster rate than most other states given its continued population growth and relatively low cost of doing business, which we expect will contribute to gradual employment gains in 2010, particularly in the health, education, and services sectors."
Fitch Ratings had already placed Texas at AA-plus, with Moody's Investors Service providing an equivalent Aa1.
Gov. Rick Perry, who is running for re-election next year against U.S. Sen. Kay Bailey Hutchison, has made the Texas business climate the cornerstone of his campaign.
Citing reports that 70% of all new U.S. jobs in 2008 were created in Texas and that the state is home to more Fortune 500 companies than any other, Perry attributed the relatively healthy economy to "holding the line on taxes, having a reasonable regulatory structure and offering economic development incentives such as the Texas Enterprise Fund and Texas Emerging Technology Fund."
Standard & Poor's applauded the state's low tax-supported debt burden.
The state's biennial budget maintains a rainy-day fund of $6.7 billion representing about 9% of fiscal 2009 expenditures. The reserve gives the state flexibility to deal with liquidity pressures involving school funding and other issues, analysts noted.
Potential downsides include the state's reliance on the energy sector, analysts observed.
"Despite the continued diversification of Texas' economy, the energy sector remains one of the state's main economic drivers, which in our opinion increases the potential for revenue and employment volatility in the medium term," the report noted.
