San Antonio District's $205 Million Build Americas Cut Borrowing Costs 23%

Bexar County Hospital District, which encompasses San Antonio, the seventh most-populous U.S. city, cut its borrowing costs 23 percent from 2009 as it sold $205 million in Build Americas amid plunging municipal issuance.

States and municipalities are set to sell about $1.9 billion next week, the lowest total for a full trading week since Dec. 19, 2008, according to data compiled by Bloomberg. About $7.1 billion in debt was issued this week, including $1.2 billion marketed only to investors in Puerto Rico.

Concern that the U.S. recovery is slowing has driven investors to Treasury and municipal debt, sending yields to historic lows. Average Build America yields touched a record-low of 5.54 percent Aug. 24, according to the Wells Fargo Build America Bond index, which began about a year ago.

“The market has been very strong even at these new levels,” said Regina Shafer, assistant vice president of fixed- income investments for USAA Investment Management Co. in San Antonio.

Investor demand combined with a shortage of supply further depressed yields, said Shafer, who manages $5.3 billion of tax- exempt municipal bonds.

The Bexar hospital district, which operates as the University Health System, sold bonds due in 2040 priced to yield 5.41 percent, or 185 basis points above 30-year U.S. Treasuries. The district also sold 30-year Build Americas last August, which were priced to yield 6.9 percent, or 240 basis points above the benchmark. A basis point is 0.01 percentage point.

Seeking a Haven

Investors seeking a haven amid speculation of a renewed U.S. recession were drawn to Bexar’s sale, according to Raul Villasenor, senior vice president of First Southwest Co. in San Antonio, the financial adviser on the deal.

“There’s no question this is a very strong underlying credit,” Villasenor said. “Otherwise we would have seen spreads a lot higher. We’re very pleased with that.”

Top-rated Austin, the capital of Texas, yesterday sold about $80 million in tax-exempt public improvement bonds, with 10-year securities priced to yield 2.37 percent, 21 basis points below an index of AAA debt, according to Concord, Massachusetts- based Municipal Market Advisors. The index, which began in January 2001, is at the lowest level ever.

“It’s still a time to be very careful, but investors are realizing municipal bonds aren’t that risky,” Shafer said.

Build Americas

Bexar’s sale comes with the future of the Build America Bonds still undetermined.

The program was created last year as part of President Barack Obama’s economic-stimulus package. Issuers, which are eligible for a 35 percent federal subsidy on interest costs, have sold about $130 billion of the taxable securities. A bill was introduced in the U.S. House of Representatives July 28 to extend the program by two years.

Bexar’s Build Americas include an “extraordinary redemption” of 100 basis points above Treasuries, according to a release from Siebert Brandford Shank & Co., which marketed the sale to investors. Such a redemption would protect the district from the elimination of federal subsidy payments.

Yesterday’s offering was the district’s final debt sale to fund a $899 million capital plan, according to an Aug. 16 report from Fitch Ratings, which ranked the bonds AAA. About $770 million for the plan is financed by tax-supported debt, with an additional $130 million coming from cash reserves, the report said.

Credit Rating

The hospital district’s issue received the second-highest ratings from Moody’s Investors Service and Standard & Poor’s, Aa1 and AA+, respectively. S&P assigned a stable outlook in an Aug. 13 report.

“Despite the magnitude of the capital program, we believe debt levels will remain low and the tax rate impact should be minimal,” S&P credit analyst James Breeding wrote in the report. “Demand for hospital services is expected to continue at similar, if not increasing, levels, and financial margins are expected to be in line with historical results.”

Following are descriptions of pending sales of municipal debt in the U.S.:

PENNSYLVANIA TURNPIKE COMMISSION, established in 1937 to help manage the state’s highways, plans to issue about $600 million in tax-exempt debt and taxable Build Americas as early as next week. The revenue bonds, rated fourth-highest by Moody’s at Aa3, will be used for capital-improvement projects. Bank of America Merrill Lynch will lead marketing of the obligations. (Updated Aug. 27)

STATE OF NEW YORK MORTGAGE AGENCY, which provides low- interest fixed-rate mortgages and financial assistance to help low- and moderate-income families become homeowners, plans to issue about $152.9 million in tax-exempts, according to bond offering documents, as soon as next week. The mortgage-revenue bonds, rated highest by Moody’s, at Aaa, will be marketed by a group led by Morgan Stanley. (Added Aug. 26)

To contact the reporter on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net

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