DALLAS — The Houston-area Royal Independent School District sold nearly $20 million of school building bonds yesterday following an upgrade of its underlying credit to A-plus from A-minus by Standard & Poor’s.

Only a handful of Texas school districts have sold bonds the past few weeks as many issuers remain on the sidelines due to volatile markets. That has been the case even though the credit enhancement of the state’s triple-A rated Permanent School Fund on school debt has become “the gold standard for muni bonds right now,” according to one trader in Texas.

Southwest Securities Inc. was lead manager for the Royal ISD sale, and RBC Capital Markets, Piper Jaffray & Co., and First Public LLC were co-managers.

Yields on nearly $19.2 million of capital improvements bonds ranged from 5% with a 5% coupon in 2022 to 5.625% with a 5.5% coupon in 2039. About $803,000 of the bonds yielded between 4.29% in 2014 and 5.42% in 2020. All the debt is wrapped by the PSF and the bonds are callable in 2017.

Coastal Securities Inc. is the financial adviser to the district, which is about 40 miles west of downtown Houston, and serves roughly 1,900 students in four schools. Vinson & Elkins LLP is bond counsel.

Enrollment is up nearly 29% since 2002 and officials recently lowered growth projections to 3% annually from a previous estimate of 10%, as the housing market cools, according to analysts.

Royal ISD business manager Gladys Hein said this is the third and final tranche from a $62 million authorization passed in November 2006 for a new high school, a new early-childhood center, and renovations across all facilities. Voters rejected a $31 million bond referendum a year earlier, and Hein attributed the 2006 approval to increased information from the district regarding the needs for new facilities, as schools reached capacity.

“We’re at or near capacity at all our schools and have to use portables to keep pace with growth, so we just let them know that the longer you wait the more portables we’ll need to use and costs will continue to go up,” Hein said.

Standard & Poor’s analysts said the higher rating reflects the district’s “very strong financial performance and position with growing fund balances.”

“While it’s hard to quantify exactly what the upgrade meant for the sale, it’s certainly nice and shows the school’s ability to manage its operations, debt, and growth issues,” said Lewis Wilks, managing director at Coastal Securities. “The underlying rating means more now than it did a year ago, but the PSF is the big thing investors are looking at right now, especially after all the monoline insurers’ problems of the past year.”

Analysts said other credit strengths for the district include its participation in the Houston metropolitan economy and labor market, an expanding property-tax base, and adequate income levels.

Royal ISD’s fiscal 2009 tax base rose 5.5% to $678.5 million, despite some moderation in growth due to the current market conditions, according to analysts.

“We believe that despite the constraints imposed by the current school funding system and growth pressures associated with increased enrollment, district officials will continue to maintain high reserves,” Standard & Poor’s credit analyst Jim Tchou said. “We also think district officials will prudently manage the high debt levels while implementing the capital plan.”

The upgrade applies to about $14 million of debt outstanding, and analysts said the outlook is stable.



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