Perry Appointees on Texas Transportation Commission have issued $5 billion of mobility fund bonds since 2001.
Taxables Headed For Highways
By Richard Williamson
The Bond Buyer
DALLAS - The Texas Transportation Commission will issue the state's largest tranche of Build America Bonds to date, with $1.1 billion of the taxable debt scheduled to price on Wednesday.
The deal comes in the wake of an upgrade from Standard & Poor's that lifted Texas' rating to AA-plus from AA. That put Standard & Poor's in line with Fitch Ratings' AA-plus and Moody's Investors Service's Aa1.
The state has already seen a benefit from the upgrade, with BABs from the Texas Public Finance Authority earning one of the lowest spreads against Treasuries - 160 basis points - in an issue this year. The TPFA's $180 million of BABs priced last week as part of a $450 million deal.
Jose Hernandez, managing director of debt for the Texas Department of Transportation, said the 30-year maturity for the general obligation bonds was a key factor in the decision to go all BABs on this issue.
"The muni yield curve looks very steep toward the long end, and Treasuries are fairly flat," he said. BABs, since being introduced earlier this year as part of the federal stimulus package, have come to market yielding up to 185 to 200 basis points above Treasuries, industry executives say.
Senior manager on the deal is Merrill Lynch & Co. with nine co-managers: Estrada Hinojosa & Co., JPMorgan, Piper Jaffray & Co., First Southwest Co., Loop Capital Markets, Southwest Securities, Jefferies & Co., Morgan Stanley, and Wachovia Bank NA.
RBC Capital Markets is financial adviser on the deal. McCall Parkhurst & Horton is bond counsel.
This deal will rank as the largest for a Texas issuer in a year where deals worth more than $1 billion have been scarce. In the first half of the year, Dallas Area Rapid Transit's $1 billion bond deal included more than $800 million of BABs.
The bonds will be issued under the name of the Texas Transportation Commission, which is the five-member board that supervises the Texas Department of Transportation.
The bonds are backed by the mobility fund derived from driver's license, vehicle inspection, and title fees among other sources that are expected to total $338 million for fiscal 2009 and $371 million by fiscal 2013.
The commission has issued $5 billion of mobility fund bonds since the Legislature created it in 2001. Voters approved the debt program later that year.
Mobility bonds have funded projects for the state's eight largest metropolitan areas. TxDOT will allocate bond proceeds for approved projects with two-thirds going to metropolitan areas and one-third going to small urban areas and statewide connectivity projects.
The commission projects pledged revenues to run no less than 1.1 times debt service each year. Up to $6.4 billion of additional bonds are permitted if debt-service coverage remains at that level or better as certified by the state comptroller.
While this issue takes the bond program close to its limit, the program can be expanded as debt is retired.
The commission also issues debt under the title of Proposition 14 and Proposition 12 for the ballot issues approved by voters.
In a special session this summer, the Legislature authorized the commission to issue $2 billion under the Proposition 12 fund. Up to $5 billion of Proposition 12 general obligation bonds were approved by voters in 2007 but needed legislative authority before they could be issued.
Lawmakers also extended a lifeline to TxDOT and the TTC. Both authorities would have gone out of business under the state's Sunset Law without reauthorization from the Legislature. When the regular session ended June 1, neither was authorized to continue operating after Sept. 1, 2010. But Gov. Rick Perry called the Legislature back into session to reauthorize TxDOT, the TTC, and three other state agencies scheduled to close under the Sunset Law.
Hernandez said this week's BAB issue will be the final one for the commission this year.
The BABs will be followed next week by $5.5 billion of tax and revenue anticipation notes that have earned top marks from the rating agencies.
The Trans are issued annually to smooth cash flows as the state begins its fiscal year Sept. 1. The borrowing represents only 7% of projected general revenues, a share slightly lower than in previous years.
Texas Comptroller Susan Combs took the strength of the credit rating as a sign of the state's economic strength.
"Certainly, our economy has slowed, but our housing market and business community are not as hard-hit as other states," Combs said. "And our state government continues its commitment to be fiscally responsible by spending taxpayer dollars wisely. This commitment is reflected in the bond rating firms' confidence that Texas Tran notes are a solid investment."
With no state income tax, the retail market for Texas debt is not as deep as it is in California or New York. While underwriters will seek retail orders, much of the Texas debt is expected to go to institutional investors, officials said.
The Standard & Poor's upgrade on Texas GO debt bucks a trend among the most populous states, with many struggling in a lingering recession.
Florida, the largest state to hold a AAA rating from Standard & Poor's, saw the outlook shift from stable to negative Jan. 14. California is rated A by Standard & Poor's with a negative outlook after a downgrade from A-plus on Feb. 2. New York's AA rating with stable outlook was affirmed March 2.
Texas, initially rated AAA by Standard & Poor's in 1961, has not carried a rating of AA-plus since 1987. It is the only state among the top five whose unemployment rate of 7.5% falls below the national average of 9.4%.
"We expect that the Texas economy will recover earlier and at a faster rate than most other states given its continued population growth and relatively low cost of doing business, which we expect will contribute to gradual employment gains in 2010, particularly in the health, education, and services sectors," said Standard & Poor's credit analyst Horacio Aldrete-Sanchez.
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