Dallas, Fort Worth and Houston hit the market with $1.5 billion of bonds

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Lured by rates near record lows, three of Texas’ largest cities are pitching water and sewer bonds on the same week as they struggle to balance budgets during the worst economic crisis in a generation.

Combined, the cities will provide nearly $1.5 billion of bonds to a municipal market ready to absorb just about anything the issuers deliver.

Dallas is pricing $296.9 million of tax-exempt and $364.2 million of taxable waterworks and sewer system refunding bonds through book runner JPMorgan with Hilltop Securities and Estrada Hinojosa & Co. as financial advisors. The bonds are rated AAA by S&P Global Ratings and AA-plus by Fitch Ratings.

Houston is offering $415 million of tax-exempt and $41 million of taxable combined utility system revenue and refunding bonds with Wells Fargo as senior manager. Masterson Advisors and TKG and Associates are co-financial advisors.

The Houston bonds are rated Aa2 by Moody’s Investors Service and AA by Fitch with stable outlooks.

Also sharing the market is Fort Worth, with $152.5 million of general obligation bonds on Tuesday and $169 million of water and sewer revenue refunding bonds on Wednesday in competitive sales. The GO bonds are rated Aa3 by Moody’s Investors Service and AA by S&P and Fitch.

Moody’s rates Fort Worth’s water and sewer bonds Aa1, two notches above the GO debt.

“The higher revenue bond rating reflects the strong credit profile of the system, a strict separation of accounts and assets and an absence of rating triggers tied to the general obligation credit quality in utility financings while considering the fundamental linkage of the city's general credit and the utility system, including shared governance and an open loop of pledged funds per the bond ordinance,” Moody’s analyst Denise Rappmund wrote.

The cities are part of an expected $9 billion of deals for the week.

“This time of year we always have a rush of seasonal borrowings,” according to John Hallacy, president of John Hallacy Consulting LLC. “What is different this year is that the greatest projected monthly cash flow deficit is probably greater and that permits more borrowing under the guidelines. Low rates provide another positive.”

Last week, the weekly average yield to maturity of the Bond Buyer Municipal Bond Index, based on 40 long-term bond prices, fell three basis points to 3.71% from 3.74% the week before.

“The recent outbreak of coronavirus and related government containment measures worldwide create an uncertain global environment for the water and sewer sector,” Fitch analyst Gabriela Payne wrote about the Houston utility's AA rating. “While the utility's performance data, through most recently available data, has not indicated impairment, material changes in revenue and cost profile are occurring across the sector and likely to worsen in the coming weeks and months as economic activity suffers and government restrictions are maintained or expanded.”

Moody’s, in a commentary released Thursday, wrote that widespread protests over the deaths of black citizens in police custody, coming on top of the pandemic’s economic shutdown, adds a risk factor for major cities.

“Anger about police brutality and institutional racism has led to protests, in some cases accompanied by looting, in as many as 140 cities,” analysts said. “With governments facing weak overall economic conditions and austere budget realities for at least the next two years because of the negative effects of coronavirus, underlying inequality and other social weaknesses represent an additional source of credit risk. Left unaddressed without proactive governance, these weaknesses will hamper economic growth, especially in urban areas and further strain budgets with considerable resources already devoted to public healthcare, housing assistance and other social services.”

At an emergency eight-hour Dallas City Council meeting Friday after 674 people were arrested in a demonstration on the Margaret Hunt Hill Bridge, tempers became heated. Three council members brought up the idea of defunding the police department in a year when Dallas is facing severe difficulty in recruiting new officers while trying to keep the city’s Police and Fire Pension solvent.

In nearby Fort Worth, police took a non-confrontational approach to protesters, and Fort Worth Police Chief Ed Kraus joined nearly 50 other police chiefs across the country in signing a letter that called the death George Floyd at the hands of Minneapolis police as “unnecessary, avoidable and criminal.”

In Houston, 150 people were arrested during protests of the death of Houston native Floyd, which was recorded by bystanders. The city council also faced calls for reduced funding for police.

"Unfortunately, the increasing levels of social unrest across the country reallocated efforts and scarce resources away from the former focus of getting state, regional, and local economies back to some semblance of normalcy," noted Hilltop Securities municipal analyst Tom Kozlik.

All three cities are facing fiscal uncertainty as they work toward balancing their budgets.

Houston Controller Chris Brown’s annual trends report on May 20 indicated that Houston’s savings could dip to a historic low of 2.1% of maintenance and operating expenses by the end of Fiscal Year 2020-21, falling well below the 7.5% threshold required by city financial policies. The balance can dip below 7.5% only in the event of economic instability beyond the city’s control, the policies state.

Brown’s projection of the city’s $45 million ending fund balance is $108 million lower than the projection used by the city's finance department to form the proposed FY 2020-21 budget. That spending plan already calls for 3,000 layoffs along with other cost-saving measures.

“I don't like having this talk about disastrous financial consequences for the city,” Brown said. “But I feel like if we don't have it now, in 12 or 18 months, we're going to be having the same meeting and you all are going to say, ‘Why didn't you tell us that it could be this bad?’”

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