TxDOT Has $2.6B of Bonds Coming Soon

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DALLAS - The Texas Transportation Commission plans to offer $2.6 billion of debt in the first quarter of 2014, beginning with a $1 billion deal this month.

In a muni market that has seen new issues fall sharply in 2014, the top-rated bonds from an established issuer should have no trouble finding buyers, investment experts said.

"Texas DOT will be well received in the market based on credit quality, depth of investors, and most likely relative value," said Douglas Fowler, vice president and portfolio manager at the firm Wasmer, Schroeder & Co. "Volume year-to-date has been spotty so there is a strong need for quality issuance with good deal size."

The $1 billion TTC tax-exempt issue expected to price via negotiation near the end of February could include variable-rate bonds and about $300 million of refunding bonds, according to Benjamin Asher, innovative financing and debt management officer at the Texas Department of Transportation.

The State Highway Fund new money amount is expected to be $700 million, somewhat smaller than past deals that ranged from $700 million to $1.5 billion, Asher said.

Typically, TTC debt finds strong demand from institutional investors looking for munis whose yield curve tracks Treasuries.

"I would expect that the issue will come at a good relative value given the lack of state tax and other high quality issuers within the state," Fowler said. "I think that AAA scale plus 12 to 20 basis points would be very attractive in today's market."

The joint senior managers on this month's deal will be Piper Jaffray & Co. as bookrunner and Citi.

Dale Lehman, managing director at Piper Jaffray, is lead banker with Ron Marino, managing director at Citi.

Paul Jack, managing director at Estrada Hinojosa & Co., is financial advisor. Andrews Kurth, represented by partner Jerry Kyle, is bond counsel.

In early March, the commission expects to price about $400 million of tax-exempt fixed-rate Mobility Fund refunding bonds through negotiation with Bank of America Merrill Lynch.

In late March, the commission intends to price about $1.2 billion of fixed-rate Highway Improvement general obligation bonds with JPMorgan as senior manager.

The deal is all new money and larger than the credit's previous two deals, which were about $900 million to $1 billion.

The upcoming issues are welcome news for a market that has seen a dropoff in supply at the beginning of the year.

"A lack of trading in the secondary as well as a dearth of new deals has slowed the momentum in the municipal market," analysts at the investment firm Wasmer, Schroeder & Co. noted. "This lack of supply coupled with mutual fund inflows may grind municipal ratios tighter and mitigate the potential for selling pressure from tax sales in March and April."

The Texas Transportation Commission, which acts as the governing board of the Texas Department of Transportation, is perennially one of the largest issuers of revenue and general obligation bonds in the Southwest.

Although the commission issued no debt in its own name in 2013, it provided TxDOT guarantees for $2.9 billion of bonds in the name of the Grand Parkway Transportation Corp.

The Grand Parkway corporation, which is building a 184-mile toll loop around the Houston metro area, is operated by TxDOT management, with TxDOT chief financial officer and interim executive director James Bass as its president.

The GPTC priced $733 million of bond anticipation notes Feb. 5 through a syndicate led by Goldman Sachs & Co.

In 2012, the TTC issued nearly $1 billion of general obligation bonds authorized under Proposition 12, a constitutional provision approved by voters in 2007. The voters approved a maximum of $5 billion under the program.

In 2010, the TTC issued nearly $2.5 billion of Build America Bonds, including the largest single issue of debt in the region with a $1.5 billion revenue bond deal.

After the 2012 issue, the TTC had about $14.3 billion of debt outstanding, according to Moody's Investors Service, which rates the commission's debt Aaa with a stable outlook.

Standard & Poor's raised its rating on the TTC debt to AAA from AA-plus on Oct. 1, 2013 following a similar upgrade on the state of Texas on Sept. 27. Fitch Ratings also rates the state and the TTC AAA.

"The long-term ratings reflect the strong fundamentals of the Texas economy and the expectation that it will continue to perform more strongly than the nation," Moody's analyst Nicholas Samuels said in his 2012 report.

Despite the votes of confidence from the ratings agencies and a strong market appetite for Texas debt, TxDOT faces daunting challenges in keeping up with population growth in the state amid limited funding.

Voters will be asked in November to allow state officials to divert $1.2 billion a year in oil and gas taxes paid by drilling companies from the rainy day fund and put it towards transportation funding for repairs and maintenance.

In December, the TTC awarded a $150 million contract to Austin-Angel, JV for road repairs related to the state's oil and gas boom. The funding was part of the $225 million provided by the Legislature through House Bill 1025 for energy sector road improvements.

The Barnett Shale play in North Texas and the Eagle Ford Shale in South Texas have seen particularly heavy traffic.

The state has identified more than $400 million in immediate roadway safety needs such as repairs to severe edge damage on narrow roadways, deep rutting and pavement damage caused by the increased traffic associated with these activities.

Estimates show an additional $1 billion per year is needed to restore roadways heavily impacted by energy development to "good" or "better" conditions, officials said.

Trucks delivering equipment and hauling oil and gas from drilling sites in west and south Texas are pulverizing the paved roads that often are too narrow for the large vehicles, TxDOT officials have said.

Hydraulically fracturing a single well in the Eagle Ford oil and gas area requires 1,300 trucks, TxDOT said, and hundreds of wells are drilled each year.

In the rapidly growing urban areas of Texas, funds are needed to expand highways and bridges, but revenue has failed to keep pace with demand.

Increasingly fuel efficient vehicles mean declining collections from state and federal fuel taxes, which are levied on a per-gallon basis.

Texas has not raised its fuel tax since 1991, and politicians have found themselves under attack from Tea Party activists for suggesting solutions to the funding problem.

In lieu of funding for public roads, TxDOT has turned increasingly to toll roads financed by European banks and operated by private companies.

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