DALLAS — Texas school districts continue to reap the benefits of the gilt-edged backing for their bonds provided by the state’s Permanent School Fund.
Demand for bonds backed by the PSF remains high as several of the major monoline bond insurers remain mired in the ongoing credit crisis.
“PSF-backed debt has become the gold standard here in Texas,” said Steve Young, managing director at SAMCO Capital Markets. “The guarantee creates an opportunity for folks to continue to purchase triple-A debt.”
The fund has a $35 billion corpus of state lands and investments and backs school district bond sales for a standard flat fee of $2,300, which provides districts with the high credit quality of insured paper at a low rate.
“That’s a micro-fraction of what a district would have to pay with a private bond insurer … maybe even 10 times to 100 times less,” Young said.
Investors are flocking to the triple-A PSF bonds, some because it as an alternative to bonds insured by the monolines.
Last week, Fitch Ratings downgraded its rating on XL Capital Assurance Inc. to A from AAA after the insurer’s parent company disclosed it would not raise new capital. Standard & Poor’s continues to rate XL Capital at AAA although it has the credit on review for possible downgrade, and Moody’s Investors Service rates XL at Aaa with a negative outlook.
Fitch recently affirmed its AAA rating for Financial Security Assurance Inc., one of the few monolines not seriously threatened by exposure to the subprime mortgage mess. Earlier this month, Fitch lowered its rating on Ambac Assurance Corp. to AA from AAA due to its exposure.
In addition to the cost savings provided by the PSF, many Lone Star State school districts are also profiting from the current favorable rate environment.
Last Thursday, Young helped price $7.7 million of PSF-backed school building and refunding bonds for the Burton Independent School District and said the bonds were met with “very good demand nationally, as well as locally.”Yields ranged from 2.5% with a 3.5% coupon in 2009 to 4.2% with a 4.125% coupon in 2034. The debt is callable at par in 2018.
“The pricing went very well and the PSF saved the district a lot of very meaningful dollars,” said Dusty Traylor, associate vice president at RBC Capital Markets, the financial adviser to the small district midway between Austin and Houston.
A few dozen Texas school districts have brought bonds to market backed by the PSF in January, and much of the debt is yielding rates nearing historical lows, which could boost volume, especially in refunding issues.
And voters across Texas approved billions of school-district bond packages in November. So there’s a large supply waiting to get to market.
Last year, Texas Gov. Rick Perry signed into law a bill to increase the bond guarantee capacity of the PSF to five times its market value or its cost value from two and a half times.
The bill remains contingent upon the increased capacity not hurting the fund’s triple-A rating and approval from the Internal Revenue Service. The federal agency had designated the item for consideration in calendar year 2007, but has not yet rendered its decision.
Last week, the Teague Independent School District sold $38.4 million of unlimited-tax school building bonds wrapped by the PSF.
Matt Boles, managing director with RBC, the financial adviser to the district, said the bonds were met with solid demand and sold well.
“We’re very happy with the transaction,” Boles said. “First Southwest [& Co.] was our lead underwriter and we were able to get it done in the morning while we had a little rally in the market. The 15-year structure with good block size sold real well and the interest rate came in much lower than the ISD had budgeted.”
Yields ranged from 2.58% with a 3.5% coupon in 2010 to 4.15% at par in 2023. The debt is callable at par in 2018.
Boles said the “exceedingly volatile market” necessitates that issuers pick their spots when bringing PSF-backed debt.
By comparison, the Klein Independent School District competitively sold $32 million of unlimited-tax bonds backed by the PSF in December with yields ranging from 3% with a 4% coupon this year to 4.58% with a 4.5% coupon in 2033.
But not all Texas school systems qualify for the program, leading to increased costs of issuance.
Next month, the Crandall Independent School District is bringing about $20 million of unlimitedtax bonds to market in a deal that won’t be backed by the PSF.
Chief financial officer John Chase said the district doesn’t qualify for the program because its annual debt service per student is higher than the $1,250 limit. It also fails to qualify for an exception to that rule, which allows districts that have experienced enrollment growth of 25% or more over the past five years to be exempt from the requirement.
Chase said enrollment within the south Dallas district is up about 21% from five years ago to about 2,450. He added that continued growth is expected with the student population estimated at 6,000 by 2015
“We’re growing but not enough to get that exemption and qualify for the PSF. So we’ll probably going to have to go out and get private bond insurance,” Chase said. “It’s not something we particularly want to do, but it looks like we have to … and I saw one figure at about $60,000. So it’s obviously a lot more expensive than if we had the PSF guarantee.”
Leon Johnson of Southwest Securities Inc., financial adviser to the Crandall ISD, said the decision to purchase private bond insurance for the deal won’t be made until right before the pricing, which is expected the week of Feb. 11.
“We got caught in a numbers crunch here at Crandall, as someone down in Austin came to understand what finite means … and this deal won’t be eligible for the PSF,” Johnson said. “But if it doesn’t make economic sense for us to buy insurance, if it’s going to result in a significant upcharge, then we’re not going to get it. What I’d like to see is a revert back to what it was like in the olden days, where everyone looks at the credit on its own regardless of whatever type of insurance would be there.”
Fitch assigned an A-minus underlying rating to next month’s sale, and revised its outlook to stable from positive. Analysts said the rating reflects the district’s “consistently solid financial performance” and the large-scale expansion of its tax base and enrollment.
The outlook revision reflects the impact of a large, voter-approved capital plan that included $50 million of bonds. Next month’s sale represents a 75% increase in the district’s overall debt level, according to Fitch.
Johnson said depending upon the size of the issue, private bond insurance for a Texas school district could costs anywhere from $30,000 to $300,000. He said Southwest Securities handled the first PSF-backed issue and it was initially tough getting underwriters and purchasers to understand the program.
“But once they got it, they got it. And the triple-A has become the baseline for Texas school paper,” Johnson said. “Still, the PSF truly has been the greatest thing ever for us as taxpayers because it’s literally saved billions of dollars.”
Last April, Standard & Poor’s affirmed its AAA rating on the PSF, citing the fund’s strength and liquidity
“The fund’s long-term rating stability will depend on the level of future bond guarantees, the participating school districts’ underlying creditworthiness, and the liquidity of investments,” Standard & Poor’s credit analyst James Breeding.
The PSF endowment was established by the state in 1854, but by 1861 the fund was depleted by loan defaults by railroads, the collapse of the Confederate monetary system, and loans to fund the Civil War effort. The Texas Constitution of 1876 stipulated that certain land and proceeds from the sale of state-owned land be used to fund the PSF, according to the Texas Education Agency.
In 1983, Texas voters approved a constitutional amendment to allow the PSF to back school bonds. Since then, the TEA says the fund has backed nearly 3,350 school district bond issues totaling $76.39 billion in principal amount.
