DALLAS – Bexar County, Texas called on Frost Bank of San Antonio to underwrite $128 million of tax-exempt debt Monday in a deal designed to enhance the city’s convention and tourism venues while raising the hometown bank’s profile in the municipal bond industry.

With ratings of A1 from Moody’s Investors Service, A from Standard & Poor’s and A-plus from Fitch Ratings, Bexar County’s venue-tax revenue bonds maturing in 2049 with 5% coupons drew yields of 4.07% in Monday’s pricing. The bonds are subject to optional calls in 2022. On the short end, maturities of 2014 with 2% coupons drew a yield of 95 basis points.

Samco Capital Markets served as financial advisor.

Frost has sought to break into the underwriting business since 2005, but this marks the first year of major activity for the department. Frost, headquartered in San Antonio, is the largest bank exclusively chartered in Texas.

Frost Bank, a subsidiary of Cullen/Frost Bankers Inc., last served as book runner on an October issue of $550 million of venue tax bonds for the City of San Antonio.

In August, Frost worked with a co-manager and two lead investment banks and nine co-managers that would handle the bond sale for San Antonio’s convention center expansion.

The bank qualified for the city’s pool of underwriters in 2011. In May, Frost worked on a $96 million deal for San Antonio International Airport.

Frost was sidelined from an earlier San Antonio deal because of a $250 campaign contribution to Mayor Julian Castro from one of its investment bankers. The Municipal Securities Rulemaking Board forbids an investment banker who makes a campaign contribution to a city official from working on a bond issue for the municipality for two years.

Rogelio Rodriguez, a JPMorgan Chase investment banker hired in 2006 to beef up the Frost’s municipal bond work, left last year, according to the San Antonio Business Journal.

In preparing for Monday’s deal, Bexar County officials said they were looking to take advantage of low costs of borrowing resulting from historically low long-term interest rates currently available in the tax-exempt market.

Proceeds from this issue will refund short-term debt for projects backed by the county’s venue tax, including youth athletic facilities, river improvements, rodeo and arena enhancements, and a performing arts center.

County officials said they were looking to take advantage of low costs of borrowing resulting from historically low long-term interest rates currently available in the tax-exempt market.

The county will also use bond proceeds to fund a debt service reserve fund.

The bonds were issued in two tranches, including $101 million backed by the combined venue tax revenues, and $27 million backed by the rental-car taxes.

The combined venue tax refunding bonds are secured by a first lien on a 1.75% hotel occupancy tax and a junior lien on revenues generated by a 5% rental-car tax levied in the county.

Moody’s placed a negative outlook on the larger issue and a stable outlook on the smaller issue backed by the car rental taxes.

“The stable outlook on the [car rental tax] bonds reflects the favorable debt service coverage when including the new sale,” wrote Moody’s analyst Adebola Kushimo. “The negative outlook on the CVT bonds reflects narrow debt service coverage that is slightly above sum sufficient when given the effect of the current issue.”

S&P and Fitch assign stable outlooks on both tranches.

“The San Antonio tourism and convention market remains one of the most competitive in the nation,” according to Standard & Poor analyst Horacio Aldrete-Sanchez. “As such, growth over the most three recent years has boosted HOT revenues to an all-time high for the county, approximately $14.35 million for fiscal 2012.

The stable outlook reflects S&P’s anticipation that during the two-year outlook timeframe, regional convention and tourism activity will continue to provide an overall strong and growing pledged revenue base, despite recurring fluctuations due to changes in the economic cycle, he added.

Voters in the county approved the extension of the hotel occupancy rental car taxes in 2008.  The tax streams were originally approved in 1999 to finance construction of the AT&T Center as home court for the San Antonio Spurs of the National Basketball Association.

In extending the taxes, voters authorized $415 million in new tourism projects, including $125 million of San Antonio River projects, $80 million for amateur sports projects, $100 million for rodeo and arena enhancements, and $110 million for cultural arts projects.

Pledged revenues are supported by presence of five of the state’s top 10 tourist attractions, including the Alamo, the San Antonio River Walk, Sea World, Six Flags over Texas, and the San Antonio Zoo.

After strong growth through fiscal 2008, hotel and car-rental tax revenues declined by 15.5% and 6.4%, respectively in fiscal year 2009, according to Fitch Ratings analyst Jose Acosta.

The tax revenues rebounded by more than 5% in fiscal years 2010 and 2011.

For this year, hotel tax revenues are on track to grow by 7.2%, while car-rental tax revenues are increasing 6.6%, Acosta said, “although the county’s conservative forecast assumes flat pledged revenue growth which Fitch views favorably.”

Voters in San Antonio have remained supportive of bond issues, approving $596 million for a variety of projects in May. In improving the San Antonio River Walk downtown that anchors the city’s major tourist attractions, Bexar County is responsible primarily for flood control. San Antonio financed the expansion of the convention center at the site of the 1968 Hemisfair World’s Fair. 

The city’s $550 million issue in October provided lease revenue bonds to fund the convention center renovations and to refinance an existing $254 million hotel occupancy tax debt on previous expansions.

For the first time, the city applied incremental growth of the annual occupancy tax revenue for debt service.  The convention center expansion is expected to be completed in 2016.

Cullen/Frost, meanwhile, has continued to grow its business through 115 banks in Texas and $20.9 billion in assets.  The banking firm’s net income for the third quarter of 2012 was $58.7 million, or $0.95 per diluted common share, up 7.6% compared to third quarter 2011 earnings of $54.5 million, or $0.89 per diluted common share.

Some Frost executives have spoken out against the “too big to fail” concept of banking that has led to taxpayer bailouts of the banking giants after the 2008 financial collapse.  Frost was the first bank in the nation to turn down federal funding under the Troubled Asset Relief Program because the company didn’t need the money.  Frost executives said that taking TARP funds would have diluted shareholder value.

Frost exited the residential mortgage business in 2000 because the bank said the industry had moved away from the relationship model. Thus, Frost had no direct exposure during the mortgage crisis that began in 2007.

Chairman emeritus Tom Frost, 84, also told The Dallas Morning News that he supports legal separations of the investment banking and commercial banking sides of the business that existed under the Glass-Steagall Act of 1933. Frost said he supported the repeal of Glass-Steagall but has changed his mind.

“I thought we’d bring the banking culture to the transactional mindset of Wall Street,” Frost told the News. “What’s happened is the exact opposite.”

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