DALLAS – With time growing short in 2008, Texas issuers will defy the current credit-crunch environment with some sizable deals along with the usual ration of bank-qualified bonds.
“This will be the last week that things will get done in an efficient manner, in my opinion,” said Jeffrey Timlin, portfolio manager at Sage Advisory Services in Austin. “It’s going to be the last full week of cramming.”
The University of Texas System leads issuers with a $255 million pricing of system revenue bonds on Wednesday. The negotiated deal is led by Morgan Stanley, with Morgan Keegan & Co., Loop Capital Markets, Ramirez & Co. and Siebert Brandford Shank & Co. as co-managers.
The bonds, which will take out commercial paper used for a variety of projects, are rated triple-A across the board because of their backing by the Permanent University Fund. With investors rushing into safe havens, that gilt-edged credit is expected to attract a healthy market.
“For a natural triple-A, you still going to see demand for that,” Timlin said. “For the rest of the fixed-income market, it’s really pretty horrible. You have to ask if the market will be able to handle the new issuance that’s coming out, along with the pressure from the secondary market.”
Large institutional investors, especially insurance companies, will be selling bonds in the secondary market to improve their liquidity position, Timlin said. In addition, investors will also be unloading underperforming bonds to take a tax-deductible loss.
“I think a lot of investors have had enough dealings with this year,” he said. “They’re all pretty melancholy.”
Indeed, the PUF itself has seen its value fall 25% due to the collapsing financial markets. The fund, which backs bonds for the University of Texas and Texas A&M systems, is made up of royalties and other income from state lands invested in a variety of markets.
In October, UT System regents halted plans to sell production from oil and gas properties on the state lands after oil prices plummeted from the July high of $147 to less than a third of that. On Friday, oil futures closed below $42 per barrel.
Another question facing the system is whether a lawsuit filed last week might prevent issuance.
According to the lawsuit, the regents’ decision to lay off 3,800 employees of the UT Medical Branch in Galveston was illegal because it was done in a closed session. The regents said they could not afford to pay employees while the medical school was recovering from damage caused by Hurricane Ike this summer.
While the state’s Open Meetings Act allows governmental boards to consider individual job decision in private, decisions affecting large groups of employees must be done in public, according to the lawsuit.
Attorneys for UT’s bond counsel, McCall Parkhurst and Horton, could not be reached for comment.
Coming to market Tuesday is San Antonio’s CPS Energy with $218.6 million of electric and gas systems revenue refunding bonds to market in a negotiated sale. Retail pricing will be followed by institutional on Wednesday.
Morgan Stanley is the lead underwriter on the San Antonio issue. The underwriting team includes Merrill Lynch & Co., Banc of America Securities LLC, Depfa First Albany Securities LLC, First Southwest Co., Ramirez Co. and Siebert Brandford.
Co-bond counsel are Fulbright & Jaworski LLP and Escamilla & Poneck Inc. Co-financial advisers are Public Financial Management Inc. and Estrada Hinojosa & Co.
To the north of San Antonio, Austin is planning to issue $160 million of water and wastewater system refunding revenue bonds on the heels of an upgrade from Standard & Poor’s. Ratings analysts lifted the credit one notch to AA, citing the city’s “demonstrated willingness to adjust rates as necessary to maintain what we view as a strong overall financial position, including good debt service coverage of all liens.”
Standard & Poor’s rates the city’s general obligation debt AAA. The serial bonds with a final maturity in 2028 also carry ratings of AA from Fitch Ratings and Aa3 from Moody’s Investors Service.
Merrill Lynch serves as senior manager with a syndicate that includes eight other underwriters. The PFM Group is financial adviser, with bond counsel provided by Fulbright & Jaworski.