DALLAS Houston will go to market next week with the second part of a massive $3.1 billion water and sewer debt restructuring deal that includes three book-running managers and incorporates taxable and tax-exempt debt, auction-rate and fixed-rate debt, and a competitive swap offering.
Scheduled to be priced on June 8 are the citys Series 2004B and the Series 2004C combined utility system revenue refunding bonds. Both series are auction-rate bonds and have reset dates ranging from seven to 35 days.
The Series 2004B tranche is composed of $652.6 million of tax-exempt auction-rate bonds with a final maturity of 2034. Mandatory redemptions of the debt, which will be insured by XL Capital Assurance, begin in 2028.
Slated for the same date are $743.25 million of taxable auction-rate Series 2004C bonds with a final maturity in 2034 and mandatory redemptions beginning in 2028. That tranche of debt will be insured by Ambac Assurance Corp.
The first portion of the deal, $1.7 billion of tax-exempt fixed rate debt, Series 2004Awas priced last month.
The overall transaction, once completed, will be the largest bond sale in Houstons history. The issue takes out most of the citys outstanding water and sewer bonds, allowing it to reissue the debt under the covenant of the Houston Combined Utility System, which was created by the City Council last year.
Deputy city controller Jim Moncur said that although the deal is expected to bring some interest-cost savings, it was not planned with the need to create savings.
This deal was designed to bring as much of this debt over to the new ordinance as possible, he said. Any savings will be welcome, but they werent the main priority.
City Controller Annise Parker said the transaction helps modernize bond covenants, leaving very little debt remaining under old water and sewer bond covenants.
This deal gives us the opportunity to kill a lot of birds with one stone, she said. We are able to reissue this debt without the restrictions of some old and outmoded bond covenants, and by doing it all at once we avoid the costs of difficulties of trying to restructure this debt in a piecemeal fashion.
In addition to water and sewer projects, the combined system will be able to issue debt to finance some drainage projects. Houston, which is plagued by flash floods, has not previously had a mechanism to issue debt for drainage projects.
Judy Gray Johnson, the citys director of finance and administration, said she wouldnt hazard a guess as to interest rates on the upcoming issues.In this market, I dont even predict interest rates a day or two out, she said. We have a week to go, so I couldnt begin to predict what rates will be when we price.
Bear, Stearns & Co., Goldman, Sachs & Co., and UBS Financial Services Inc. will underwrite equal shares of the Series 2004B bonds. In addition, the issue will be swapped to fixed rate to provide the city with a locked-in debt service payment. Pricing for the swap will take place on June 7.
We will be swapping the Series 2004B bonds in a transaction based on a percentage of the London Interbank Offered Rate, said Moncur. Swapping that debt will give the effect of a synthetic fixed rate.
Moncur said the swap would be conducted on a competitive basis. He added that the city has some leeway as to when the swap will take place, but he expects it to occur around the June 8 pricing date for the bonds.
We have six firms qualified to bid on the swap, Moncur said. The firm that gives us the lowest fixed rate will win the bid. However, the other firms will have the opportunity to match the bid and participate at a pre-specified level.
The pre-qualified participants in the swap bid are Goldman, UBS, Bear Stearns, Lehman Brothers, J.P. Morgan Inc., and Citigroup Global Markets Inc.
If all of the firms participate at the winning bid level, we could have six firms participating in the swap, Moncur said. If after the winning bid is established and one or more of the firms opt to withdraw from the swap, their allocation will be redistributed at the discretion of the city.
Swap Financial Group is the citys swap adviser.
Lehman Brothers and J.P. Morgan will underwrite equal shares of the Series 2004C taxable bonds.
The taxable bonds will be used to restructure debt that is not advance refundable.
We wanted to take this particular debt out and bring it under the umbrella of the new bond covenant, so we decided to go with a taxable series, Moncur said.
However, the bonds are convertible to tax-exempt starting in 2005, with other maturities becoming convertible in 2007 through 2012. Moncur said that by 2012, the city might only have about $50 million of taxable debt outstanding.
The Series 2004A issue was insured by MBIA Insurance Corp., Financial Security Assurance Inc., and Financial Guaranty Insurance Co.
Those bonds were priced to yield from 2.20% in 2006 to 5.25% in 2028.
At a repricing, yields were lowered by one basis point in 2025 and 2026, by four basis points in 2009, and by five basis points in 2010 through 2016. Yields were raised by one basis point in 2021, 2022, and 2024.
Most of the bonds were sold on a priority basis from the beginning, though some of it was sold for stock, said Johnson. We also had a very good retail order period in which we placed about $87 million of the bonds.
That tranche of debt was lead-managed by Bear Stearns, Goldman Sachs, and UBS. The three firms shared top billing as co-book-running managers.
Co-senior managers for the deal were Piper Jaffray & Co. and Siebert Brandford Shank & Co.
The underwriting syndicate was comprised of co-managers Banc of America Securities LLC, Banc One Capital Markets, Citigroup, Cabrera Capital Markets, Estrada Hinojosa & Co., First Albany Capital Inc., J.P. Morgan, Lehman Brothers, Loop Capital Markets, Malachi Group, Merrill Lynch & Co., Morgan Keegan & Co., Morgan Stanley, RBC Dain Rauscher Inc., and Samuel A. Ramirez & Co.
Coastal Securities and SBK-Brooks Investment Corp. are the citys co-financial advisers for the entire deal, and Fulbright & Jaworski and Burney & Foreman serve as its co-bond counsel. Andrews & Kurth and Bates & Coleman are the citys co-special disclosure counsel, and Winstead Sechrest & Minick and West & Gooden are the co-underwriters counsel for the deal.
The deal is rated A-plus by Standard & Poors, A by Fitch Ratings, and A2 by Moodys Investors Service.
While the overall transaction will restructure most of Houstons water and sewer debt, the city will still have about $1 billion of water and sewer debt governed by the previous lien outstanding after all the new bonds are sold. That debt carries a junior lien on the citys water and sewer revenues but will be senior to the new bonds. The previous-lien debt is rated A-plus by Standard & Poors, A-plus by Fitch, and A1 by Moodys.
Moncur said that transferring available water and sewer revenues to the combined utility system required the permission of the majority bondholder of the previous-lien debt, the Texas Water Development Board.
Weve been working on this deal for the better part of a year now, and weve gotten so close to bringing it to market, said Johnson. Its great news that the city of Houston is ready to price a deal that will set its water and sewer enterprise financing on a sound financial footing.
The restructuring sale was originally slated for last year, but a ruling from Texas Attorney General Greg Abbott squashed it. That ruling stated that a drainage fee that would have helped back the bonds of the combined utility system was subject to a referendum.
That fee would have been levied on a sliding scale and would have been lower for property owners whose land has a lot of grass or lime and higher for those whose property is mostly buildings and parking lots. The attorney general likened the fee to a property tax.
