DALLAS – Boosted by its second upgrade within a year, Texas’ Cypress-Fairbanks Independent School District expects strong investor interest in $375 million of general obligation bonds coming in two series.
“The folks that buy our bonds are generally institutions,” said Stuart Snow, associate superintendent for business and financial services for the Houston suburban district. “We’re going to have a large contingent of buyers.”
Pricing on $225 million of Series A fixed-rate, tax-exempt bonds will come Tuesday through negotiation with book runner RBC Capital Markets and six co-managers. Gene Shepherd, managing director at RBC, is lead banker on the deal, with Terrell Palmer, senior vice president at First Southwest Co., as financial advisor.
The Series A bonds will include $160 million of new money for district schools with the rest refunding a 2006 issue that reaches final maturity in 2030, Snow said. With backing from the Texas Permanent School Fund, the bonds carry triple-A ratings.
In early November, Cy-Fair plans to issue another $150 million of Series B general obligation bonds as variable-rate soft puts. The district plans to issue the variable rate bonds in three tranches, all maturing in 2040.
Even though interest rates are at historic lows, the district decided to issue variable rate debt for flexibility and diversity in its portfolio, Snow said.
“We have about 11% of our debt in variable-rate mode,” he said.
The Series A bonds come to market during a week that is expected to offer nearly $8 billion of volume. That compares with $4.6 billion that came to market in the previous holiday shortened week, according to Thomson Reuters.
“If you look at what’s on the calendar, it’s all very skewed to higher quality paper, unlike last week,” said Brian Dixon, portfolio manager at Wasmer, Schroeder & Co.
With so many Texas districts issuing bonds this year, investors have not lacked for PSF-wrapped bonds, Dixon said.
“It seems like every week, we have something similar in size to Cypress-Fairbanks coming to market,” Dixon said. That should translate to spreads against the Municipal Market Data benchmark of about 17-20 basis points, he said.
While public schools in Texas have struggled with reduced state funding since the 2008 recession, falling interest rates have proven beneficial for fast-growing districts like Cypress-Fairbanks, which includes a section of Houston and its northwestern suburbs.
To guarantee the best rates available, the Texas Permanent School Fund provides triple-A enhanced ratings for most school bond issues. As of Aug. 31, the PSF had a book value of $29.1 billion and a market value of $37.3 billion. Through fiscal year 2015, the PSF guarantee applied to about $58.4 billion of school bonds.
With recent upgrades, Cypress-Fairbanks is nearing the triple-A rating on its own merits.
Standard & Poor’s lifted its rating one notch to AA from AA-minus on Oct. 14, citing the district’s “consistent financial performance and demonstrated ability to maintain very strong reserves despite growth-driven pressures."
The S&P upgrade came a year after Moody’s Investors Service raised its underlying rating to Aa1 from Aa2. Both agencies have stable outlooks on the ratings.
“The stable outlook reflects our expectation that we will not change the rating over the two-year outlook horizon,” S&P analyst Ann Richardson said. “We expect continued growth in the tax base should provide management with significant flexibility to implement its bond program without material changes to the district's debt ratios and reserve levels.”
Covering about 10% of Harris County, Cy-Fair is the state's third largest school district in terms of enrollment. With major thoroughfares, including the new Grand Parkway loop around the county, bearing traffic to the Houston area, the district has seen major tax base expansion in recent years.
The district’s taxable values declined in fiscal 2011 by 3.6% and by 0.9% the following year but quickly rebounded with double digit percentage growth from fiscal 2014 to fiscal 2016 to reach $44.9 billion full valuation, according to Moody’s.
“In the five year period through fiscal 2016 annual growth in assessed value averaged a solid 7.6%,” Moody’s analyst John Nichols wrote. “The substantial growth in recent years has stemmed from ongoing residential and commercial developments.”
Although falling oil prices has begun to affect the economy of the greater Houston area, economists have seen Cy-Fair as relatively well insulated by economic diversity and continued growth, Snow said.
“Only four of the top 10 taxpayers in the district are oilfield related,” he said. However, the top taxpayer, National Oil Well Inc., accounted for $490 million of taxable assessed value in 2015.
When the current school year started, Cy-Fair had had 87 general-purpose campuses, including 54 elementary schools, 18 middle schools, 11 high schools and four special program facilities. The 12th high school is in the planning stage.
Since the 1998 school year, Cy-Fair’s enrollment has more than doubled to 118,264, according to the preliminary official statement.
After the upcoming issuance, the district still has $816.3 million of total authorized but unissued general obligation debt that was approved in two different elections. Voters approved $807 million in November 2007 and $1.2 billion in May 2014.
The district plans to issue about $250 million of this authorization annually over the next four years to continue to build new schools and upgrade existing facilities, Snow said.
All of the new schools will be built in the west and southwest portions of the district, which is experiencing the most rapid growth, Snow said.
The district has about $2.4 billion in total outstanding general obligation parity debt, according to Moody’s. The overlapping debt includes bonds issued by 89 municipal utility districts, according to the POS.
“Although the debt burden is high, we note that it has been managed and maintained at a fairly consistent level over the last decade,” Nichols said. “Moody's expects the district's debt burdens will remain high over the medium term due to future debt issuances coupled slow principal amortization, but believes it will remain manageable given recent and projected assessed value growth trends.”
