DALLAS -Texas' largest school district will tap growing demand in the variable rate market and expand its own portfolio with $350 million of top-rated bonds to finance construction across much of Houston.
The deal, negotiated through book runner Morgan Stanley, is expected to price next week.
Kenneth Huewitt, chief financial officer for the Houston Independent School District, said no firm date had been set as of Friday.
"We're waiting for our Standard & Poor's rating before we put out our preliminary official statement," Huewitt said.
As a highly-rated, short-term investment, the HISD bonds will appeal to institutional investors who want to keep their options open in an uncertain rate environment, said Terrell Palmer, senior vice president at First Southwest Co. and financial advisor to the district.
"You don't have immediate liquidity, so it's not money-market," Palmer said. "But it does provide flexibility."
With uncertainty over the direction of interest rates following the Federal Reserve's meeting this month, some investors are looking to park their money in short-term debt until a clearer signal appears, experts have said. The Fed has kept its benchmark short-term interest rate near zero since late 2008. Recent Fed policy statements have said it expects to keep the so-called federal funds rate at rock bottom for a "considerable time" after it completely winds down a bond-buying stimulus program, expected in October.
The minutes said, however, that "some" participants were "increasingly uncomfortable with the committee's forward guidance. A later initial increase in the target federal funds rate as well as lower future levels of the funds rate could be in the offing. The minutes showed that "most" participants wanted to wait for further data on the economy, labor market and inflation, before issuing a change in their guidance for when investors might expect the first rate increase.
With an underlying rating of triple-A from Moody's Investors Service and a triple-A guarantee from the Texas Permanent School Fund on top of that, the bonds are expected to appeal to institutional investors who aren't chasing yield.
"We're expecting an interest rate of less 1% and a coupon of less than 2%," Huewitt said. Rates are expected to reset annually, he said.
Huewitt said the district typically maintains a variable-rate debt portfolio of 12% to 20%.
"It kind of helps us manage our debt a little bit," Huewitt said. "We can go as high as 25%. This issue will take us to 24%, but we will reduce that later."
Houston ISD now has about $2.4 billion of bonds outstanding, along with $99.7 million in lease revenue obligations, according to Moody's.
As a percentage of the tax base, Houston ISD's debt burden is 2.1% direct and 5.2% overall, which Moody's analyst Adebola Kushimo called "above average but manageable."
The district has $1.2 billion in authorized but unissued debt after voters approved a record $1.89 billion in November 2012.
The first issue of $451 million came in a two-part deal in January 2013.
Bonds from that issue maturing in 2038 with 4% coupons are yielding 3.44% versus the original yield of 3.02%. The spread against the Municipal Market Data index has risen 1 basis point to 38 basis points.
"When we initially did the bond referendum, we anticipated four tranches," Huewitt said. "We'll do another $435 million in 2015 and come back in the next year and do the last $415 million."
The district also plans a $350 million refunding issue in November, Huewitt said.
In addition to bond financing, HISD's capital improvement plan calls for transferring $15 million annually from the district's general fund for future capital needs.
"We expect the district to prudently manage future debt issuance in line with tax base expansion to maintain a manageable debt profile," Kushimo wrote in her Aug. 21 report.
The district serves about half of Houston and benefits from the city's role as the center of the energy sector. Analysts have said that Houston's increasingly diversified economy, particularly from medical services, research and transportation has eased concerns over the volatility of the energy industry.
After a 4.2% decrease in the tax base in fiscal year 2011, values have rebounded with growth of 1.4%, 5.4% and 12.6% in each year since then, equaling a total value of $125.7 billion, according to Kushimo.
"Although the five year average annual growth rate of 3.1% remains moderate, the July 2014 Moody's Economy.com reports that Houston's expansion will remain strong in 2014, with energy exploration, related manufacturing, nonresidential construction, professional and IT services, and local government leading the way," she wrote.
Houston ISD's enrollment levels have historically been flat with a five year annual average growth rate of 0.3%, while suburban districts have recorded explosive growth.
In fiscal year 2014, enrollment levels grew 4% to 210,716 students. That came after HISD annexed the troubled North Forest ISD. HISD has budgeted for flat growth in fiscal year 2015, but must update or replace aging buildings.
In recent years, the district opened several new schools funded by its 2007 bond authorization of $805 million. That program provided financing for 134 renovation projects and 25 new schools, with an emphasis on elementary schools.
Even while those projects were underway, voters approved $1.89 billion on Nov. 6 to upgrade 38 schools, including 20 new campuses for aging high schools. The bond proposal also called for three new elementary school campuses and $100 million in technical improvements across the district.
The HISD bond issue gained support from nearly 70% of the voters, even though it shared the ballot with more than $700 million of overlapping debt from the city of Houston and Houston Community College District.
"We were very pleased with that because we believed that was the community telling us that what we were doing academically was right," Huewitt said. "That high percentage of approval was an important affirmation for us."
As Houston ISD rebuilds or replaces aging campuses, neighboring districts are struggling to keep up with growth.
Voters in the Katy and Fort Bend ISDs west of Houston will consider more than $1 billion of bonds for new schools and facilities. That referendum comes six months after voters in the neighboring Cypress-Fairbanks ISD approved a record $1.2 billion of bonds.
Along with other districts in the state, Houston ISD is awaiting a verdict from Travis County State District Court Judge John Dietz on remedies for school financing that Dietz ruled unconstitutional in 2013.
The 2013 ruling came after the Legislature's $5.4 billion cut to public education in 2011. Dietz reopened the case after the 2013 legislative session restored $3.4 billion to the education budget, and allowed for new evidence.
Meanwhile, over the summer, HISD has been holding a series of community meetings to discuss the progress under the 2012 bond program, designed to renovate or rebuild 40 schools.
District officials said the goal is to present the work done so far in the design process and to share site plans, exterior drawings and, in the case of some schools, final blueprints and construction schedules.
"Our goal is to ensure all of these facilities meet the needs of each community so it's important we hear from people," said HISD chief operating officer Leo Bobadilla.
