DALLAS — Triple-A rated San Antonio will supply a lean market with $200 million of debt for a variety of projects, including protection of the aquifer that provides the drought-stricken city with water.
The negotiated deal, led by Piper Jaffray & Co. as book-runner, comes Tuesday, in a week where volume is expected to rise slightly to $5.62 billion, from $5.21 billion the previous week. The demand for muni debt remains so strong that any new issue is likely to be snapped up quickly, industry experts said.
The deal is expected to include about $172 million of general improvement bonds, $27.5 million of certificates of obligation, and $18 million of tax-supported notes.
With an estimated population of 1.4 million, San Antonio is the nation's seventh-most populous city. Though the military continues to be a major sector of the local economy, the expansion of the production capacity at a Toyota Corp. manufacturing plant, along with several facilities in the information technology and health care sectors, has diversified the city's economic base.
San Antonio's construction sector has benefited from several large projects, including the recent completion of the $3.2 billion San Antonio Military Medical Center that brought about 12,500 additional military personnel to the city.
As a home for major military installations such as Ft. Sam Houston, San Antonio enjoys a built-in economic stabilizer in the form of federal funding.
Recent expansion of drilling activity at the Eagle Ford Shale south of the city has created a boomtown atmosphere in the region, driving unemployment down to 6.2%, well below the national average and even lower than Texas' average.
So far, the boomtown atmosphere hasn't trickled down to the city's taxable assessed valuation.
After double-digit increases in fiscal 2007 through 2009 that increased values to $72.5 billion, ad valorem value increases stalled in fiscal 2010 and declined by a slight 1.5% in fiscal 2011 to a $71.6 billion. Single-family housing values declined slightly in fiscal 2010, but were offset by new growth, and values remained flat.
In fiscal 2011, housing values stabilized, but declines in commercial, industrial and business inventory could not offset new construction values of $1.2 billion. The full valuation in fiscal 2012 declined slightly by 0.5%, yielding a $71.2 billion tax base. New construction was not enough to offset declines in values on existing properties. Preliminary estimates for fiscal 2013 indicate the negative trend will reverse.
Though housing values have declined slightly and foreclosure activities have increased, median housing prices have remained relatively stable through the downturn. Officials are focused on revitalization efforts in the city's aging core, which is expected to stabilize and improve values.
This week's issue comes three months after San Antonio residents overwhelmingly approved all five propositions in a proposed $596 million bond program, representing what Mayor Julian Castro called a "very clear message" that voters have confidence in the city's future and the management of city hall.
The largest share of the bond package, known as Proposition 1, provides $337.44 million to improve streets, bridges and sidewalks, including the northern connectors of the Loop 1604-U.S. 281 interchange on the city's north side.
Proposition 2 provides $128.03 million for 17 drainage and flood-control projects.
The Build SA Now political action committee formed to support the bond proposal spent generously on campaign ads in favor of the program.
Though officials have said that there would be no tax increase to support the debt, opponents pointed to the city's general obligation tax pledge, which requires tax increases to support debt if revenues proved inadequate.
That same pledge should reassure bondholders. Former Mayor Lila Cockrell, who served as chair of the bond committee, pointed to the importance of the city's triple-A rating in winning passage of the bonds.
This week's issue includes the final $98.65 million remaining in authorization from a 2007 bond election and $72 million from the 2012 election. Certificates of obligation are issued annually for public safety improvements, streets, drainage, parks and other city improvements.
Only Moody's Investors Service has a negative outlook on San Antonio's triple-A rating. Analysts attribute the negative outlook to the city's dependence on the federal government and prospects for a potential downgrade of U.S. debt.
Moody's has had the United States on negative outlook since Aug. 2, 2011, but has not yet followed Standard & Poor's action to downgrade it from its formerly top rating.
"Moody's has determined that issuers with indirect linkages, such as San Antonio, have some combination of economies that are highly dependent on federal employment and spending, a significant health care presence in their economies, have direct health care operations, or high levels of short-term and puttable debt," wrote lead analyst Kristin Button.
Standard & Poor's and Fitch Ratings retain AAA ratings and stable outlooks for San Antonio, even though Standard & Poor's is the only agency that has downgraded the United States' debt to AA-plus.
"We do not expect to change the ratings in the next two years, given the continued diversification of the city's economic and employment base, coupled with management's strong financial management practices," wrote Standard & Poor's analyst Lauren Spalten.
San Antonio's direct debt burden is at a level that Moody's considers "high yet manageable" at 3%, while the overall debt burden is "high" at 10.1% due to the debt of 16 overlapping districts.
Much of the overlapping debt is from several school districts in the city that have issued large bond issues to keep up with student enrollment growth or aging facilities. Many of the school districts receive as much as 60% to 80% of funding from the state to pay for debt service.
"Therefore, the overall debt burden is somewhat inflated when taking this into consideration," Button wrote. "We note that the city's practice of scheduling debt to retire in 20 years is favorable and consistent with the Aaa rating. Ongoing conservative debt management should allow the city to layer in future debt without negatively impacting the direct debt burden."