Texas' $1.1B Transportation Bonds Coming to Market After 6-Month Delay

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DALLAS — After a six-month postponement, the Texas Transportation Commission expects to price $1.1 billion of general obligation bonds in October in a deal that will likely cement the agency's rank as largest issuer of the year in the Southwest.

TxDOT announced the deal in January as one of three planned for the first quarter of the year, but never issued the bonds or explained why the sale was withheld.

Now, officials say the bonds were withheld because the contract letting process for highway projects was going slower than expected and the money wasn't yet required.

The delay should prove fortuitous, because rates are actually lower than they were last spring.

The bonds are tentatively scheduled for pricing Oct. 2.

JPMorgan remains senior manager and bookrunner on the deal, with executive director Jaimie Scranton and managing director Marshall Crawford as lead bankers.  Crawford has handled more than $27 billion of transportation financings in his 25-year career.

Paul Jack, managing director at Estrada Hinojosa & Co., is financial advisor on the issue. Jack, whose 17-year career included stints at JP Morgan, Public Financial Management and Citi, has been involved in more than $12 billion of financings for issuers in Texas and the U.S.

The bonds are Highway Improvement General Obligation bonds, known familiarly as HIGOs or Proposition 12 bonds.

Texas voters approved the Proposition 12 constitutional provision on Nov. 6, 2007, authorizing the Texas Transportation Commission to issue the bonds in an aggregate amount not to exceed $5 billion to fund transportation improvement projects.

The Texas Bond Review Board has approved issuance up to $2.5 billion of HIGO bonds.

After this deal, the TTC plans to issue about $900 million more of GO bonds in a deal that could include refunding, according to an announcement Sept. 22. The senior managers on that deal will be Bank of America Merrill Lynch and Wells Fargo Securities.

TTC led all issuers in the Southwest in the first half of the year with $2.43 billion issued through June 30. That volume helped push Texas into the lead among the 50 states in total bond issuance from all issuers during the first half.

The TTC, which supervises the Texas Department of Transportation, has about $17 billion of debt outstanding, but ratings analysts see the load as sustainable. Texas carries triple-A ratings on all of its general obligation bonds.

"As a percentage of personal income, the state's net tax-supported debt is 1.5%, compared to the 50-state median of 2.6%, ranking Texas 40th," Moody's analyst Nicholas Samuels noted in his Sept. 16 report. "The state's debt burden is low compared to others, but it has risen in recent years, pushed upwards in particular by both general obligation and revenue-backed issues for highways."

Texas' net tax-supported debt per capita is $614 and ranks 38th in the US, compared to the national median of $1,054.

About $2.4 billion, or 17%, of the state's outstanding net tax-supported debt is variable rate, which Moody's considers high relative to most states.

"The state's liquidity overall is strong, with a total treasury cash balance of $31.5 billion at the end of February 2014," Samuels said.

At TxDOT, officials are coping with rapid growth in suburban areas and growing stress on roads in the oil and gas producing regions, particularly in the Eagle Ford Shale play in South Texas and the Barnett Shale of North Texas, including the booming Dallas-Fort Worth area.

A proposed constitutional amendment on the Nov. 4 ballot could add $1.7 billion a year to highway spending, according to TxDOT officials.

Proposition 1 would transfer a portion of the revenues from oil and gas production taxes to the State Highway Fund. Those moneys now flow into the state's rainy day fund.

The rainy day fund, officially known as the Economic Stabilization Fund, is expected to total $8 billion when lawmakers return to Austin in January for their biannual 150-day session.

The rainy day fund now receives 75% of the annual energy production tax revenues over and above the collections posted in fiscal 1987, when it was created.

Passage of Proposition 1 would shift that ratio to 50% for the rainy day fund and the other half for the highway fund.

State Comptroller Susan Combs estimated in August 2013 that the amendment would shift $1.2 billion a year into the highway fund in fiscal 2015. However, the latest estimates raise that to $1.7 billion in the first year that the amendment is in effect.

The $1.7 billion in 2015 would provide $1 billion to relieve congestion on urban roads and improve connectivity of the rural road system, $340 million for highway maintenance, and $340 million to repair and upgrade roads in south and west Texas damaged by heavy trucks used in oil and gas drilling.

While that new money will help, TXDOT says it needs another $5 billion to keep up with demand for new roads and upkeep on the existing system.

At a hearing earlier this month, Rep. Joe Pickett, D-El Paso, chairman of the House Select Committee on Transportation Funding, Expenditures, and Finance, suggested that the Texas Transportation Committee stop issuing bonds supported by the Texas Mobility Fund.

Revenue from driver's license fees and other transportation-related charges go into the debt-service fund, which was created in 2001 to allow the state to issue highway bonds backed by future revenues. The fund had a balance of $1.1 billion at the end of fiscal 2013.

Texas is currently spending twice as much on annual road debt service as it does for new highway construction projects, Pickett said.

TxDOT's chief financial officer James Bass said that the mobility fund would contain an extra $90 million at the end of fiscal 2015 if no new bonds are issued. The annual surplus would go to $122 million in fiscal 2016 and to $125 million by 2018.

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