DALLAS – Houston had a good day in the bond market after two downgrades from the ratings agencies, Controller Chris Brown said.
"This was a good day, especially in the light of Moody's and S&P's downgrades," Brown said after Tuesday's pricing of $557 million in general obligation bonds. "As evidenced by the market's favorable reaction to the bond sale, Houston continues to be a terrific investment."
Moody's Investors Service lowered the city's GO rating to Aa3 from Aa2 on March 16 and retained a negative outlook, citing declining sales tax revenue and high fixed costs that included rising pension obligations. Two days later, Standard & Poor's followed suit, downgrading the nation's fourth-most populous city to AA from AA-plus while also retaining a negative outlook.
Brown reckons the downgrades cost the city 127 basis points or about $5.9 million.
"A downgrade—even though our ratings remain enviable—is a psychological blow, and this refunding reaffirms the city's many positives: our population growth, home sales and increasingly diverse economy," Brown said.
The city said $506.7 million of the sale refunded outstanding bonds, with a goal of shaving $10 million off of debt service costs in the 2017 fiscal year. Brown reported $49.1 million present value savings.
"At this time of city budget challenges, it is very rewarding to realize this kind of savings, $10 million in our next fiscal year," Brown said. "The city's critical tasks now are to address our pension liability, the budget shortfall, and our mandated revenue cap."
Book runner Loop Capital Markets negotiated Houston's Series 2016A public improvement refunding bonds to yield from 1.14% with a 5% coupon in 2019 to 3.36% with a 4% coupon in 2036. A 2038 term bond was priced as 3.5 coupons to yield 3.55%.
Loop's managing director Curtis Flowers was lead banker for the syndicate.
Co-managers included Wells Fargo Securities, FTN Financial Capital Markets, Jefferies, RBC Capital Markets and Stifel, Nicolaus & Company, Inc.
First Southwest Co. and TKG & Associates are the city's financial advisors.
Bracewell LLP and Baker Williams Matthiesen LLP are co-bond counsel.
While the strong response from the bond market buoyed the city's financial planners, a continuing rally in oil prices also helped. West Texas Intermediate Crude futures have recently traded above $40 per barrel, a healthy increase from the 2015 lows of around $26 per barrel.
"There's no question that oil prices are impacting us," Brown said. "But we've been through recessionary periods before -- four significant ones in the past 30 years -- and Houston has always rebounded."
