DALLAS — School districts across Texas have had billions of dollars of bonds approved in the past few elections cycles, but now that the state has suspended its triple-A rated school bond guarantee program, districts need to acquire private insurance or rely on underlying bond ratings when bringing debt to market.
Earlier this month, Texas Education Commissioner Robert Scott suspended the Permanent School Fund backing until at least September, citing the declining value of the fund “to the point that outstanding guarantees exceed capacity under the federal regulations.”
Scott anticipates the “seasonal retirement of bonds in August” will add additional capacity to the program.
On Tuesday, the San Angelo Independent School District sold two tranches of bonds insured by Assured Guaranty Corp. after officials initially planned to wait until the PSF was restored.
The PSF credit enhancement enables schools to issue debt with the highest-possible ratings at a fraction of the cost of private bond insurance. The Texas Education Agency administers the program, which costs school districts just $2,300 per issuance.
Calls to the San Angelo ISD seeking information on the costs for the Assured Guaranty insurance weren’t immediately returned.
San Angelo ISD carries underlying ratings of AA from Standard & Poor’s and A1 from Moody’s Investors Service.
The central Texas district sold $117 million of school building bonds and about $4.2 million of refunding bonds. Yields on the Series 2009A new-money bonds ranged from 2.4% with a 3% coupon in 2013 to 5.38% with a 5.25% coupon in 2034. The bonds are callable at par in February 2019.
The refunding bonds, which aren’t callable, yielded 1.25% with a 2% coupon next year to 3.5% with a 3.5% coupon in 2017.
Southwest Securities Inc. was lead manager for the negotiated sale and First Southwest Co. is the financial adviser to the district.
Last week, the Manor Independent School District sold about $7.6 million of refunding bonds through a negotiated sale led by Morgan Keegan & Co. with Southwest Securities as co-manager. The bonds are insured by Financial Security Assurance.
Garry Kimball of Specialized Public Finance Inc., the district’s financial adviser, said the need to acquire private insurance cost about $20,000 a year over the life of the bonds.
“[The refunding] could’ve saved the district about $89,000 annually but that ended up being closer to $70,000,” he said. “But we were well into the money when we priced. We told the board it’d be advantageous to do the deal if the net present-value savings were above 3% and we were able to lock in the deal during a pretty good rally in the market last Thursday morning and ended up with 4.15% in net present-value savings.”
Yields on the bonds ranged from 1.25% with a 3% coupon this year to 2.7% with a 3% coupon in 2014. The bonds are not callable.
Earlier last week, the Denton Independent School District sold $31.9 million of refunding bonds through a negotiated sale led by Morgan Keegan. The debt wasn’t wrapped with any insurance.
The growing North Texas district carries underlying ratings of AA-minus from Fitch Ratings and AA from Standard & Poor’s. RBC Capital Markets and BOSC Inc. are the district’s co-financial advisers.
Yields on the Series 2009 bonds ranged from 3.61% with a 4.5% coupon in 2017 to 5.12% with a 5% coupon in 2028, and the bonds are callable at par in August 2019.
The Texas Legislature passed a bill to increase the bond guarantee capacity of the PSF to five times its market value and Gov. Rick Perry signed it.
But legislators, school officials, and the TEA continue to await a final decision from the U.S. Treasury Department on the tax implications of increasing the capacity. The delay may be due, in part, to the collapse of the auction-rate securities market that has sapped many federal resources from other projects.
In 1854, the Texas Legislature created the PSF, which includes stocks, bonds, and oil and gas royalties from state-owned land. The “sole purpose of the PSF is to assist in the funding of public education for present and future generations,” according to the TEA. Some estimates have the fund generating nearly $700 million a year in earnings.
The fund has been used to guarantee school district debt since 1985. Since then, nearly 2,600 bond sales worth about $80.2 billion have been issued with the PSF backing.
