Muni primary will get a $1.3 billion infusion from Houston

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Houston heads to a hungry municipal bond market this week with nearly $1.3 billion of highly rated debt.

By all accounts, demand could not be higher for a large refunding deal, given falling yields and a flight to safety amid a turbulent equities market.


“Given the extreme yield rally, there is no shortage of interest down the credit curve,” Kimberly Olsan, senior vice president at FTN Financial, wrote in a market commentary Monday.

“We feel like this is a very favorable time to be in the market selling municipal bonds and expect the deals to be well received,” said Trey Cash, managing director for Houston's financial advisor, Masterson Advisors.

The bonds are coming in two deals.

On Tuesday, the city prices about $785 million of combined utility revenue refunding bonds through book runner Citi. That deal comes in three tranches with a taxable Series C of $540 million.

On Thursday the city offers about $484 million of public improvement refunding bonds through senior manager Ramirez & Co.

Houston expects to see savings of about $100 million on the Tuesday deal and about $30 million on Thursday, Cash said.

Moody’s rates the utility bonds Aa2, while S&P Global ratings confers its AA rating. Both have stable outlooks.

Moody’s analyst Adebola Kushimo said the rating “reflects the city's large and robust economy with regional and global outreach, and a stable financial profile marked by satisfactory reserve levels.

“These factors have remained despite somewhat recent challenges from a major weather event and steady but low oil prices,” she added. “The rating also incorporates the city's manageable debt and moderated pension profile that continues to benefit from the 2017 reform.”

The bonds come to market as Houston prepares for a new tax cap under legislation passed in the 2019 session. The property tax reform requires that local governments obtain voter approval to keep tax revenues in excess of a 3.5% growth rate.

While the city has continued to see growth in sales tax revenue, the future could darken after a number of oil and gas bankruptcies were filed and workers laid off. The trucking industry, which is also heavily involved in the Port of Houston, is also seeing layoffs.

The Houston City Council, which already operates on a tax cap imposed by city voters in 2004, approved a $2.5 billion general fund budget for the fiscal year that began July 1.

“This is a forward-looking budget that upholds the people’s priorities — public safety, financial integrity, commitment to street repairs and drainage and enhancing our quality of life,” Mayor Sylvester Turner said. “Simply put, it sets the foundation to meet the essential needs of a thriving city without excess or waste.”

To balance the budget and comply with the property tax revenue cap voters approved in 2004, Turner cut another $11.1 million in city department spending — the fourth consecutive year in which he trimmed municipal government costs.

Pension reform that was brokered by the mayor and approved by voters is saving the city billions of dollars and avoided an even larger annual budget gap.

The fiscal year 2020 budget does not rely on selling city land or deferring any payments, which were balancing techniques used in the past.

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Primary bond market Refunding bonds State and local finance City of Houston, TX Texas
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