DALLAS - The Harris County, Tex., Metropolitan Transit Authority is coming to market tomorrow with $227.6 million in its first ever sales-tax bond sale, which may include some taxable Build America Bonds on the long end.
The Metro plans to offer $184.7 million of sales and use tax bonds and $42.9 million of sales and use tax contractual obligations.
Merrill Lynch & Co. and Goldman, Sachs & Co. are joint book-runners for both tranches. First Southwest Co. and Siebert Brandford Shank & Co. are co-financial advisers to the issuer and Andrews Kurth LLP and Bates & Coleman PC are co-bond counsel.
Drew Masterson, managing director at First Southwest, said the deal is structured to include BABs after the board explored an extensive risk analysis.
If Thursday's market can't accommodate the board's eventual savings threshold, the entire deal will be tax-exempt.
BABs, authorized in the federal stimulus law, allow issuers to sell taxable debt and either receive a federal subsidy or offer investors a federal tax credit. The subsidy or tax credit equals 35% of debt service.
Proceeds from the Metro bonds will fund the first phase of construction of three light-rail lines in Houston as well as the acquisition of rail cars. Both tranches are structured as serials with the sales and use tax bonds maturing in 2010 through 2038 and the obligations maturing in 2010 through 2033. The debt won't be insured.
"We feel that the market for Aa3/AA rated bonds is very strong and our team wants to get these bonds out there at favorable levels so we can start construction," said Louise Richman, chief financial officer of the Metro. "First Southwest presented a detailed risk/reward analysis to our board's finance committee and we collectively determined to utilize BABs on a maturity-by-maturity basis if they offer significant savings compared to tax-exempt bonds."
Standard & Poor's assigned a AA rating to the bonds and obligations, citing the authority's "ability to trim expenditures as needed and good liquidity with proactive financial management."
"The ratings reflect what we consider to be a very deep and diverse service-area economy in Harris County, and a stable and still-growing sales tax base," said Standard & Poor's analyst James Breeding.
Moody's Investors Service assigned its Aa3 rating to the issue. Credit strengths include the Metro's 1% sales and use tax that is "levied upon a sizeable, diverse, and highly rated economic base which, while weakened, has thus far outperformed the nation through the current recession." Moody's said. In addition, 75% of the sales tax, which was approved by voters in 1978, is available for debt service.
Harris County is the third most populous county in the country with more than four million residents, up 18% from 3.4 million in 2000.
Richman said the board considered varying risks associated with BABs.
"The risks include, among others, political risk that the 35% would be reduced by a future Congress, debt service coverage risk that rating agencies will consider BAB payments as a revenue instead of an offset against debt service, and risk that the federal government offsets BAB payments against some disputed claim on a grant or on rebate," she said.
Richman added that stimulus funds are also helping fund the light-rail projects.
The BABs will carry a 10-year call at par, "which we feel gives us the flexibility to capture future refinancing benefits and the ability to respond to underlying risks we perceived with the issuance of BABs," Richman said.