DALLAS – Investors can board the Metropolitan Transit Authority of Harris County Wednesday as Houston’s mass transit provider goes to market with $136 million of double-A-rated refunding debt.
The rail and bus operator known locally as Houston Metro is an infrequent visitor to the bond market but a popular one, based on past responses. Previous issues since 2008 have been oversubscribed two to three times and one was oversubscribed seven times, officials said.
“Our dedicated sales tax guarantees our bonds and underpins Metro’s long-term credit ratings, which have just been reaffirmed by both Moody’s and S&P with stable outlooks,” said Debbie Sechler, chief financial officer for the authority. “Given this and the successful issuances in the past, I anticipate a strong and favorable market response to our upcoming refunding.”
Sechler was scheduled to give investors an in-depth look at the MTA’s finances at the fourth annual Houston Investor Conference on Monday.
MTA’s largest issue of about $510 million of sales tax bonds came in 2011 as part of $640 million approved by voters in 2003. Those bonds helped finance two new corridors for the light-rail system that began with a single, 7.5-mile segment in 2004.
This week’s deal is expected to bring net present value savings of between $9 million and $11 million, according to Philip Brenner, director of the office of management and budget for the authority.
Key players on this deal include Brian King, managing director of book-runner Cabrera Capital and Martin Cabrera Jr., the underwriter’s founder and chief executive. Co-managers are Citi and Crews & Associates.
Bruce Rideaux, senior managing consultant for Public Financial Management, is financial advisor for the MTA.
The upcoming issue consists of two series. Series A is about $92.3 million of refunding bonds maturing from 2020 through 2029. Series B is $32.4 million of contractual obligations maturing from 2020 through 2033.
With ratings of Aa2 from Moody’s Investors Service and AA-plus from Standard & Poor’s, the bonds are notable for their stable outlooks in an uncertain economy. The city of Houston took two downgrades ahead of a $600 million issue last month, falling one notch to Aa3 on the Moody’s scale and to AA on S&P’s. The S&P outlook for the city remained negative after the downgrade.
As a separate credit, Metro is spared many of the factors that led to the city’s downgrades.
“I think the key for us was that we don’t have some of the financial issues that city of Houston does,” Brenner said. “We don’t have the pension issues. As the sales tax has been declining, both of the ratings agencies have seen that as more manageable for the Metro.”
Moody’s analysts Genevieve Nolan and Nicholas Samuels noted that weakness in the energy sector has cut into pledged revenues, which are down 5.3% through the first four months of fiscal 2016.
“However, we note Metro's low leverage and lack of expansion plans will allow it to withstand a period of moderate revenue weakness while maintaining credit quality,” they wrote.
If the decline were to continue for a year or more or a severe economic decline ensued, the ratings would be pressured, they added.
S&P analyst Omar Tabani highlighted the fact that fiscal year 2015 pledged sales tax revenue covered maximum annual debt service more than five times.
The stable outlook “reflects our expectation that despite additional capital needs and bonding plans, the authority will likely maintain what we consider its strong debt-service coverage on senior-lien obligations.”
Metro's sales tax experienced some volatility during the recession years but quickly recovered, according to Moody’s. Texas felt the recession’s impact mostly during fiscal year 2010 when Metro's sales tax fell 4%.
In the 2008 recession, Houston was a late arrival and early to emerge as the rebounding oil and gas market rebounded with the growth of exploration in the state’s shale plays. Like the rest of Texas, Houston suffered only slightly in the housing market collapse because there was no real price bubble in the region’s real estate.
Metro’s compound annual growth rate of the sales tax between fiscal 2009 and fiscal 2014 was 5.8%. Even in fiscal year 2015 when oil prices were plummeting, sales tax collections grew by 4.4% from the year before.
Sales tax supporting Metro is collected in an area with a population of 3.6 million where it provides standard bus service, bus rapid transit, and light rail, along with ancillary services for the disabled and elderly. Houston’s metropolitan area has a population of 6.7 million.
Based on most recent data, population growth estimates in the metropolitan area are well above the national average, according to Moody’s, with a 2.5% increase in 2015 compared to U.S. growth of 0.8%.
“Houston's diverse employment base with skilled workers continues to bolster area wealth, with per capita personal income remaining well above average in 2015 at $54,946, compared to $47,669 nationally,” analysts said.
While Metro has barely dented Greater Houston’s car culture, the light rail line has provided a redevelopment boost to the inner city neighborhoods and made important connections between important destinations such as the vast Texas Medical Center south of downtown.
One section of the city that has seen a renaissance built around the light rail is Midtown, a once neglected neighborhood that has become a thriving mix of residential, office, education and entertainment venues.
The original Red Line also carries passengers to the zoo and the museum district and provides connections to two additional lines downtown.
For sports fans, the Metro connects to NRG Park where the Houston Texans of the National Football League play, as well as Major League Baseball’s Houston Astros Minute Maid Park and the National Basketball Association Houston Rockets’ Toyota Arena.
During college basketball’s Final Four championship tournament April 2-4 at NRG Park, Metro reported more than 250,000 boardings, an increase of 100,000 over the previous Final Four in Houston in 2011.
“In 2011 we had a seven-and-a-half mile system,” said Metro chief executive Tom Lambert. “Now we’ve got almost a 23-mile system. We also back in 2011 had only about 18 or 19 rail cars. Now we’ve got 74 rail cars that we had in service.”
To accommodate the extra passengers, “we were running trains, not only six minute headways but as we started getting really, really crush loads, you were seeing some trains come in every three minutes,” Lambert said.
Sporting events appear to be a key incentive for light-rail development. Houston’s Red Line began service shortly before the city hosted the 2004 Super Bowl. With Houston again hosting the NFL championship in 2017, Metro is playing an even larger role in getting people to the game on time.
One of the biggest questions for Metro is the degree to which the authority can get Houstonians to park their cars and take light rail or bus.
“Although ridership has started to increase after several years of decline, demand for public transportation in the car-dependent Houston metropolitan area is uncertain,” Moody’s said.
With pump prices below $2 per gallon, Metro faces an even stiffer challenge in luring drivers from their cars.
In an appearance before the Texas Transportation Commission in January, Houston’s newly inaugurated Mayor Sylvester Turner urged commissioners to look beyond expansion of highways in the state’s largest city.
Just seven years after the Interstate 10 Katy Freeway was expanded to 26 lanes, the widest highway in the world, congestion returned, Turner said. Instead of continuing to accommodate the 97% of commuters who choose to drive solo on the highway, efforts at the state level should encourage more ride sharing, he said.
“We need greater focus on inner-city rail, regional rail, high-occupancy vehicle facilities, park and rides, transit centers, and even programs, coordinated plans, to remove stalled vehicles on our interstates and roads,” the former state legislator told the commissioners. “As we grow and densify, these modes are the future foundation of a successful urban mobility system.”
