Dallas transit system's refunding and new money deal enjoys good timing

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Amid record-low interest rates and a flight to safety in financial markets, Dallas Area Rapid Transit Authority is ready to refund $260 million of taxable and tax-exempt bonds.

“We’re expecting a robust appetite for both our taxable and tax-exempt bonds,” said DART treasurer Dwight Burns. “We did anticipate a few months ago that early spring would be an optimal time to execute this transaction but we did not anticipate the aggressive drop in interest rates that we’ve seen.”

DART's Green Line will intersect with the Silver Line under development from Plano to Dallas-Fort Worth International Airport.

Like other issuers, DART is issuing taxable refunding debt because Congress outlawed tax-exempt advance refundings in 2017. Now, rates are so low that issuers can still save money by issuing taxable bonds to refinance tax-exempts.

With last week’s selloff in the equities market, demand for the relative safety of municipal bonds has surged even higher amid fears that COVID-19 virus will inflict further economic damage. Federal Reserve chairman Jerome Powell has given indications that rates could be cut to compensate for lost economic activity.

DART’s pricing is scheduled for Thursday, with $145 million of tax-exempt bonds in two series through book-runner Ramirez & Co. and $113 million of taxable through JP Morgan Securities.

David Gordon, senior managing director for Estrada Hinojosa & Co., is co-financial advisor on the deal with Jill Jaworski, managing director for PFM Financial Advisors.

All three series carry ratings of Aa2 from Moody’s Investors Service, AA-plus from S&P Global Ratings and AAA from Kroll Bond Ratings Agency. Outlooks are stable.

“We do not expect to change the rating within the next two years,” S&P Global Ratings analysts Andy Hobbs and Joshua Travis said.

The Kroll rating represents an upgrade from AA-plus and “reflects a continued favorable pledged sales tax revenue trend, greater clarity regarding planned borrowing, and the underlying strength of the Dallas-Fort Worth Metroplex economy,” analyst Harvey Zachem wrote.

Series A bonds mature by 2040 with two term bonds maturing in 2045 and 2050. Series B bonds mature by 2023. Neither series is subject to the alternative minimum tax provisions of the Internal Revenue Service. The taxable Series C matures by 2034 with a term bond in 2042.

The bonds are backed by a senior-lien pledge of a 1-cent sales tax collected across the Dallas metropolitan statistical area and by pledged farebox revenues. Farebox recovery for the bus system hovers at about 10%, and light rail provides about 16%.

“Because DART relies on sales tax revenues to support operations, we believe it would be unlikely that farebox revenues would be available for debt service if sales tax collections declined below the level of required debt service payments and, therefore, we rate to the strength of the sales tax pledge,” Hobbs and Travis wrote in the S&P rating report.

In the decade after 2008 financial collapse, DART lost about a third of its bus ridership, leading to a current plan to redesign the bus network.

Proceeds from the senior-lien bonds will refund debt issued less than a decade ago for savings with no extension of maturities. The bonds will also finance system upgrades and line extensions, including the new Cotton Belt/Silver Line commuter rail across Dallas’ northern suburbs.

Created by voters in 1983, DART's 700-square-mile service area includes 13 municipalities and about 2.6 million people in Collin, Dallas, Denton, Ellis, Kaufman, and Rockwall counties. The authority operates one of the largest rail operations in the nation, along with bus, vanpool and para-transit service.

With this deal, DART will have $3.1 billion in senior lien sales tax debt outstanding. All of the debt is fixed rate, with an essentially flat debt service schedule through 2040 and final maturity in 2058. DART also has $70 million of commercial paper outstanding,

After a recent respite in debt issuance, DART is expected to seek financing for its $1.4 billion D2 downtown subway project still on the drawing boards and to cover costs for fleet replacement.

“Details and funding plans for the new subway line have yet to be finalized, but additional leverage that weighs down on coverage projections will remain a key credit consideration going forward,” Moody’s analysts Genevieve Nolan and Nicholas Samuels wrote.

Assuming $300 million in federal funding, along with conservative interest rate assumptions for fixed rate debt, DART is projecting 2040 maximum annual debt service to grow to $417 million, resulting in coverage of 1.5 times fiscal 2019 pledged revenues.

More immediately, DART is still working on details for its “Silver Line” that will follow the path of the former Cotton Belt freight track through Collin and northern Dallas counties, linking the city of Plano to Dallas-Fort Worth International Airport. Completion of the $1.25 billion project is expected in 2022.

DART last year approved a second Silver Line track for additional frequency at a cost of $100 million that will be coming from this week’s issue.

The transit authority won a $908 million federal loan in 2018 with additional financing from bonds.

The 26-mile Silver Line will cross seven cities and connect with three DART light rail lines, including the new Orange Line that connects DFW Airport with downtown Dallas. At DFW, the project would connect to the Fort Worth Transportation Authority’s TEXRail Regional Rail Line to Fort Worth and the DFW Airport Skylink People Mover.

DART’s gross sales tax revenues have risen at an annual rate of 5.8% since fiscal year 2010, which compares with a 1.8% annual increase in the consumer price index for the Dallas-Fort Worth metropolitan area, according to Kroll.

“Given population growth and development patterns, KBRA expects a favorable trend going forward,” Zachem wrote. “Except for a 9.25% decline in FY 2009 and a 0.6% decline in FY 2010 during the Great Recession, growth has been strong over the past 10 years.”

In 2019, sales tax collections totaled $613 million, up 3.3% from the previous year, providing maximum annual debt service coverage of 2.56x in 2040.

“We expect that coverage will remain very strong due to the recent growth in sales tax revenue collections, despite additional capital needs and debt plans,” Hobbs and Travis wrote. “Fiscal 2020 sales tax collections are trending positively, but DART officials indicate they have incorporated flat growth assumptions into the 2020 budget, which we view as prudent.”

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