DALLAS — Finance officials in Houston continue to adeptly navigate the bond market and the city’s credit ratings are receiving upgrades as a result.
Last week, the city converted about $653 million in several series of auction-rate bonds sold in 2004 to weekly interest rate mode, which prompted upgrades of the debt.
Moody’s Investors Service raised its long-term rating on the multiple series of combined utility system first-lien revenue refunding bonds to Aaa from A2 due to the letters of credit provided to back the bonds. Moody’s also assigned a VMIG 1 short-term rating to the refunding bonds that refinance debt sold in 2004.
The bonds are backed by several, but not joint, irrevocable direct pay letters of credit from Bank of America NA, State Street Bank and Trust Co., Bank of New York, and Dexia Credit Local.
Susan Bandy, deputy director for resource management in the city’s department of public works and engineering, said each of the four tranches of debt were “eight times oversubscribed” last week.
She said the utility system already had strong ratings, but the upgrades “were certainly very helpful as it makes the the debt appear even better.”
Upgrades indicate the overall strength of a credit is improving and often lead to lower costs of borrowing,
Bandy also said officials had the ability to convert the debt out of auction rate because it was included in the master-bond ordinance when the debt was sold. Overall the system had $1.4 billion tied up in auction-rate debt with plans to convert another roughly $249 million in early May.
Two weeks ago, Fitch Ratings upgraded its underlying rating on the system’s first-lien bonds to A-plus from A, while Standard & Poor’s raised its rating on both first-lien debt and junior-lien bonds to AA from A-plus on continued strength of all debt service and high liquidity levels.
Fitch, which rates the junior-lien bonds at AA-minus, said the utility system’s coverage levels improved to 1.7 times in fiscal 2006 from 1.3 times in 2004. Analysts also noted marked increases in liquidity with improved cash-on-hand and working capital ratios.
The combined utility system’s lien on net revenues derived from the operation of the water and sewer system is subordinate to the lien securing the water and sewer system junior lien bonds.
Mayor Bill White said in a statement earlier this month that the upgrades save residents money and reflect the “financial strength and good management” of the nation’s fourth-largest city.
“At a time when the financial markets are in some turmoil, we look on this as a very positive sign about Houston,” White said. “Our financial discipline and the plan we’ve put in place over the last four years to improve our water and drainage systems are paying off in lower financing costs. This reflects sound, fiscally responsible business practices.”
Houston has about $4.4 billion of utility-system debt outstanding.
The combined utility system includes groundwater and surface-water resources, treatment and distribution facilities, and wastewater collection. Fitch said $1.32 billion of the city’s capital improvement plan for 2009 through 2013 will fund improvements to the utility system.
Moody’s analysts said “upon the conversion of the sub-series, the rating will reflect Moody’s approach to rating jointly-supported transactions and is based upon the several but not joint letter of credit provided by the banks, the combined utility system first lien rating of [the city], the structure of the transaction, which ensures that timely debt service and purchase price payments are made to investors, and Moody’s evaluation of the creditworthiness of the institutions issuing the letter of credit.”
In December, Standard & Poor’s raised its rating on Houston’s general obligation debt to AA from AA-minus, citing continued economic growth and strong financial management. Analysts said then that officials have “effectively administered the city’s financial operations and essentially dealt with some significant long-term liabilities.”
Houston’s tax base rose 11.7% for fiscal 2008 to $122.8 billion, and the tax base has averaged about 6.1% annual growth the past five years. Since 2000, the city’s population has risen more than 9% to 2.14 million.
Morgan Keegan & Co., Coastal Securities Inc, and SBK-Brooks Investment Corp. are the financial advisers to the city. Fulbright & Jaworski LLP is bond counsel.
