Bond Buyer 6/16/14 2:14pm ET By Richard Williamson

DALLAS — Texas is preparing to pour $1.85 billion of top-rated debt into the bond market this month with issues from three state agencies.
The largest of the three is a $900 million refunding from the Texas Transportation Commission expected to price this week through negotiation with senior manager Bank of America Merrill Lynch.
The serial bonds, maturing from 2016 to 2034, are expected to generate present value savings of about $100 million, said James Bass, chief financial officer for the Texas Department of Transportation.
“The bonds are rated triple-A and carry a strong double-barreled pledge of not only dedicated revenues to the Texas Mobility Fund but a backstop of the full-faith and credit of the state of Texas,” Bass said in an investor presentation on June 9.
With $327 million in the Mobility Fund backing the bonds and pledged revenues running more than 1.1 times higher than debt service coverage, the chance that Texas lawmakers would need to provide additional coverage is unlikely, officials said.
“These bonds are expected to be self-supporting, so that the general obligation pledge is not expected to impact the state’s GO debt limit,” said Rebecca Bronson, associate general counsel for TxDOT.
Leading the deal for Bank of America Merrill Lynch are managing director Mitchell Gold and director Bradley Gewehr.
Financial advisor Paul Jack, managing director at Estrada Hinojosa & Co., worked with TxDOT on two previous deals this year worth $1.8 billion.
With this issue, the Texas Transportation Commission will secure its place as the largest issuer in the Southwest region for the first half of 2014 with $2.35 billion of bonds. The city of Houston, with nearly $2 billion, will be runner-up.
The TTC issues have supplied a lean market whose volume appears to be growing at the end of the second quarter.
“The supply of paper has just been anemic relative to what we’ve seen in prior years,” said Douglas Benton, senior municipal credit manager for the investment management firm of Cavanal Hill. “The state will probably get a really low interest rate on these bonds. They appeal to the individual investor in terms of security. So, we’ll have to look at them and see if they fit with our portfolios.”
At the beginning of the year, TxDOT had planned to issue about $1.2 billion of general obligation Highway Improvement Fund bonds by March 31. Those bonds have been delayed, however.
“After reviewing the cash balances across our various programs we adjusted our issuance schedule and now plan to issue HIGO late this summer,” Bass said via email on June 13.
In addition to that deal, the agency plans another Mobility Fund bond sale in the next 12 months.
“Timing will be dictated on the cash flow demands of Texas Mobility Fund-funded projects and we would anticipate issuing a minimum of $750 million (preliminary and subject to change) within the next 12 months,” Bass said.
Another Texas issuer will add $500 million to the volume with general obligation bonds scheduled to price June 24 and 25.
The Texas Public Finance Authority, second-largest issuer of general obligation bond debt for the state, will price those bonds in two equal tranches through senior manager JP Morgan, led by executive director Tim Peterson.
John Hernandez, interim executive director of TPFA, said that he expects the market to still have an appetite for Texas debt after the TxDOT deal.
“We have communicated with TxDOT regarding the timing of the other Texas paper, and our financial advisor believes there should be enough demand,” Hernandez said.
“From what we hear from our underwriters, our bonds should be well received,” he said.
“About half of this issue is taxable, so I don’t think it’s going to have any impact from the TxDOT deal,” said financial advisor Jorge Rodriguez, managing director of Coastal Securities. “It seems that volume is picking up a little bit, but it’s got a long way to go before it gets back to where it was.”
The first $250 million from TPFA will be tax-exempt, while the second issue will be taxable, Hernandez said via telephone June 10.
The taxable bonds will take out commercial paper issued for the Cancer Prevention Research Institute of Texas, which is authorized by voters for up to $3 billion of bonds.
TPFA has previously issued $343 million for CPRIT and has about $1.7 billion in total outstanding debt, according to Standard & Poor’s.
Part of the TPFA proceeds will also fund projects to improve roads in the colonias on the border with Mexico, Hernandez said.
Authorized in 2001 under Senate Bill 1296, Border Colonia Access Program provides $175 million in bond revenues to provide financial assistance to counties for roadway projects serving border colonias.
The colonias in Texas are communities built in unincorporated areas, often in flood plains. Residents live in houses that they or family members built from scratch without conforming to building codes and usually with no title to the property. Often the neighborhoods lack proper sanitation or water services.
The Texas Veterans Land Board is bringing approximately $452 million of taxable variable-rate refunding bonds to market, the proceeds of which will be used to redeem all of the board’s existing taxable variable-rate debt.
About $339 million of bonds are expected to price June 18 with an interest rate equal to one-month LIBOR plus a spread to be determined. Later this month, the board will issue $113.9 million through a private placement, said Rusty Martin, chief investment officer for the Texas Veterans Land Board.
The new bonds will require neither liquidity nor remarketing and will replace existing seven-day floaters that are remarketed weekly and require liquidity facility extensions or substitutions every three years, Martin said.
“There’s a group of investors interested in in a high credit-quality, floating-rate product that resets monthly at a fixed spread over LIBOR,” Martin said. “They will hold these bonds to maturity. From our point of view, it’s an extremely attractive deal.”
Martin estimates the board is paying about 57 basis points for liquidity and remarketing on its current bonds. The refunding should reduce that by at least 10 basis points, he said.
The Texas Veterans Land Board was created in 1946 to make land available to returning World War II veterans. VLB also owns and manages four Texas State Veterans Cemeteries and the Texas State Veterans Home Program that provides long-term care to veterans and their spouses in eight veterans’ homes across the state. In the 1980s, the VLB was authorized to provide home loans to veterans, along with loans to buy land.
The veterans’ home loan program has tracked the deep slump that hit the housing market generally in the Great Recession, Martin said.
“Our demand was down about 40% at one point,” he said. “But the program is strong and healthy, and veterans are generally very responsible when it comes to paying their bills. As a result, we’re back to about 90% of where we were before the bust.”
About $2.4 billion, or 17%, of Texas’ outstanding tax-supported debt is variable rate, which Moody’s Investors Service analyst Nick Samuels considers high relative to most states.
Through agreements with the state comptroller, $759 million of outstanding variable rate debt is supported by the state’s own liquidity as of February 2014, Samuels noted in a June 11 report.
Additionally, the state has an outstanding notional amount of interest rate swaps of slightly more than $2 billion.
“Based on stress scenarios that reflect basis, swap termination, collateral posting and liquidity facility term-out risks, our analysis shows that Texas’ available liquid resources are sufficient to mitigate unforeseen circumstances related to its variable rate and swaps portfolio,” Samuels wrote.
With $16 billion of debt outstanding, Texas is seen as a conservative fiscal manager by ratings analysts.
“We view the state’s debt and contingent liability as low, with total tax-supported debt at $594 per capita, 1.4% of personal income, and 1.13% of the gross state product,” S&P analyst Kate Choban wrote in a June 9 report. “Debt service carrying charge costs are also low, in our opinion, at 1.4% of governmental expenditures in fiscal 2013.”

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