DALLAS — Houston will take advantage of historically low interest rates with a $527 million deal divided between taxable and tax-exempt bonds that for the most part will refinance outstanding commercial paper.
The offering is one of several from major Texas issuers expected to hit the market this week and next.
Houston will issue $255 million of Series A tax-exempt bonds and $251 million of Series B Build America Bonds, said Houston treasury debt manager Shawnell Holman. The city will also issue $21 million of Series C taxable pension obligation refunding bonds.
The negotiated deal is scheduled to price Nov. 16, with Jefferies & Co. as book-runner. Barclays Capital and Siebert Brandford Shank & Co. are co-senior managers. Citi, Cabrera Capital Markets, and Hutchinson, Shockey, Erley & Co. are co-managers.
First Southwest Co. is financial adviser. TKG & Associates, Fulbright & Jaworski, and Cochran Baker Williams & Matthiesen are co-bond counsel.
The commercial paper that the long-term bonds are refunding went toward capital projects and equipment purchases, Holman said. A similarly sized package of bonds was issued in 2009.
The deal will include current and advance refunding, Holman said.
“Our savings target is usually 4%,” she said. “We believe this will be well in excess of 4%. We are expecting savings of $30 million.”
This is the city’s second issue of BABs after an inaugural $76 million deal last year. Holman said the city is comfortable with the federally subsidized debt, despite a round of Internal Revenue Service audits and the fact that some cities, such as Austin, have had subsidies withheld until disputes over issues such as payroll taxes were resolved.
“We’ve tried to take a proactive approach,” Holman said. “We’ve read the headlines about where they plan to audit. There was a concern about payments not being received. Fortunately, Houston hasn’t run into that.”
The bonds carry ratings of AA from Standard & Poor’s and Fitch Ratings. Moody’s Investors Service rates Houston’s general obligation credit Aa2. All carry stable outlooks.
“The ratings reflect our assessment of the city’s sizable, deep, and diverse economic base, which has shown resiliency, and reserves that remain at a strong level, despite ongoing financial challenges and revenue pressure,” said Standard & Poor’s credit analyst James Breeding. “Partially constraining the rating is our view of the self-imposed revenue-raising restrictions, coupled with a large capital program that will keep debt ratios at an elevated level.”
With this issue, Houston will have $4.6 billion of outstanding debt, including $2.3 billion of GOs and $608 million of pension obligations, according to Fitch.
“Fitch considers Houston’s direct debt levels affordable at roughly $1,600 per capita and 2% of TAV (taxable assessed value),” analyst Steve Murray wrote in the Fitch report. “Overall ratios, which include debt issued by area school districts and numerous special districts, are above average at nearly $4,200 per capita and 5% of TAV. The pace of retirement of tax-supported debt is about average, with slightly more than 50% retiring in 10 years.”
In Houston’s first BAB deal on Aug. 21, 2009, the bonds maturing in 2039 carried original yields of 6.238%, or 195 basis points above Treasuries. The yield versus the Municipal Market Data curve was 169.8 basis points. Since then, yields have fallen to 6.076%.
Tax-exempt bonds priced the same day and maturing in 2036 with 5% coupons originally yielded 5%, or 49 basis points over the MMD. Yields have since fallen to 4.39%.
Houston will compete for investors with two Texas rivals this week. Dallas will issue nearly $300 million of GOs in three series, including $77.7 million of BABs in a deal led by Loop Capital Markets.
First Southwest also is financial adviser on the Dallas deal and is working with San Antonio on a $110 million revenue-backed BAB issue for the San Antonio Water System.
The largest deal coming to market from Texas this week is the Dallas Independent School District’s $1 billion of GOs.
With overlapping debt of $5.8 billion from other governments, combined debt in Houston comes to $9.5 billion, including self-supporting revenue bonds from authorities such as the Harris County Toll Road Authority. Overall debt per capita is $4,214, or about 5% of market value, but Fitch considers Houston’s direct debt levels “affordable” at roughly $1,600 per capita and 2% of TAV.
Houston’s 2011-15 capital improvement plan includes upgrades to the combined utility system, the Houston airport system, and the convention and entertainment facilities financed primarily with their own revenues.
The city is also a partner with Harris County in operating and expanding the Harris County Metropolitan Transit Authority.
The recession has lowered the value of Houston’s tax base by about 5% in fiscal 2011, according to city officials.
“This decline in TAV and resulting drop in property tax revenues is expected to contribute to another decline in operating reserves,” Murray said. “According to city officials, reserve levels will remain at or above the city’s target level of 7.5% of expenditures. While the recent deterioration in reserves is a concern, Fitch believes the current and projected general fund balances are consistent with the rating category.”
Murray cautioned that further declines could result in a review or possible downgrade.
The impact of the national recession was slow to hit Houston, and the city never experienced much of a housing bubble. Housing starts are down two-thirds the past two years, but median home values are about the same as in 2006, at roughly $150,000.
“Not unlike other economic areas within the state, the impact should be comparatively less, in our expectation, than in other major economic centers across the nation, especially those on the East and West coasts,” Breeding said. “There is also the potential for the area to recover more quickly. Given the resiliency of the Houston economy, including relative home price and employment stability, we expect the economic downturn should have a minimal impact on management’s ability to maintain healthy financial reserves, while also maintaining current service levels.”