Dallas Transit Authority's Borrowing Cost May Fall Even After Rating Cut
Dallas Transit Authority’s Borrowing Cost May Fall
Matt Nager/Bloomberg
Construction continues on a new Dallas Area Rapid Transit (DART) light rail transit stop for the Green Line in Carrollton, Texas.
Construction continues on a new Dallas Area Rapid Transit (DART) light rail transit stop for the Green Line in Carrollton, Texas. Photographer: Matt Nager/Bloomberg
Dallas Area Rapid Transit, which hauls 220,000 passengers a day across 700 square miles, is selling $729 million of taxable Build America Bonds to expand its bus and rail system in the week’s largest municipal bond offering.
The transit authority, which added to its planned Build America sale by including debt originally scheduled to be sold in 2012, saw its rating cut one level to AA+ by Standard & Poor’s on Sept. 17 in part because of the additional burden. The agency also is selling $100 million of tax-exempt bonds to refinance existing debt at lower rates.
The agency doesn’t expect to pay more after the rating cut, said David Leininger, chief financial officer, in a phone interview. That’s because benchmark U.S. Treasury bond yields, which are a basis for pricing munis, have fallen and the agency’s Aa2 rating from Moody’s is higher than when it sold debt last year because Moody’s recalibrated all municipal ratings, he said.
“When you have a split rating, you usually price off the lower of the two,” said Leininger. “Our spread should be lower than it was two years ago.”
States and municipalities are poised to issue about $10 billion in debt this week, up from about $9.3 billion last week, according to data compiled by Bloomberg. In the tax-exempt market last week, yields fell 6 basis points to 2.61 percent on Sept. 24, 3 basis points above the all-time low set Aug. 25, according to Municipal Market Advisors data. A basis point is 0.01 percentage point.
‘Solid Fundamentally’
The difference in yield between 30-year Treasuries and Dallas Area Rapid Transit Build Americas sold in June 2009 has fallen to about 1.23 percentage points in secondary market trading from 1.5 percentage points when the bonds were issued. Average Build America yields are about half a percentage point lower than they were in August 2009, according to a Wells Fargo index.
“They did accelerate debt issuance a bit,” said Howard Cure, director of municipal research at Evercore Wealth Management in New York, who oversees about $2 billion. “Even with the downgrade it is still solid fundamentally.”
The system is supported by a one-cent sales tax in addition to fares, according to S&P’s report. The agency raised its price for a ride last year amid the worst recession since the 1930s and cut $6 billion from its capital plan, Leininger said. It added money from fares to pledged revenue on Sept. 14.
All, or Some, Aboard
Fewer people have ridden the light-rail system in the past three fiscal years, Moody’s said in its rating report. Ridership declined by 4 percent in 2007, 8.9 percent in 2008 and 3.8 percent in 2009, according to federal data the company cited. Moody’s said service to Dallas Love Field airport starting this year and Dallas/Fort Worth International Airport in 2013 would get more people on board.
The transit agency moved forward $365 million of bonds it planned to sell in 2012 to take advantage of interest rates that have been near historic lows, and to make sure it can tap Build America’s 35 percent interest subsidy, which is to expire at year’s end.
Build America Bonds are the fastest growing part of the U.S. municipal bond market, with $139 billion issued. Congress and President Barack Obama launched the Build America program in 2009 to stimulate the economy by providing a federal subsidy for interest on the debt. Legislation introduced by Senate Finance Committee Chairman Max Baucus would extend the program one year with the subsidy reduced to 32 percent.
Stretching Dollars
S&P said in its rating report that by issuing the additional debt, the Dallas agency would stretch the shrinking tax base and fare revenue available to repay it. Waiting until 2012, when the Build America program may not exist, the subsidy is reduced and overall interest rates are higher would be more expensive, Leininger said.
“We actually save a ton of money,” said Leininger. “I’d be challenged by my board if we were not trying to save the money we’re trying to save.”
Even after the rating cut, the agency, which serves 13 cities with 2.4 million people, is at S&P’s second-highest level and Moody’s third-highest.
“It looks like a good time for this deal,” said Anthony Greco, a trader at Boston-based Breckenridge Capital Advisors, which manages about $13.5 billion of municipal bonds and owns some of Dallas Area transit’s bonds. “Demand for BABs will continue through the end of the year because we’ll be going from a 35 percent subsidy to a 32 percent subsidy or nothing at all.”
To contact the reporters on this story: Darrell Preston in Dallas at dpreston@bloomberg.net; Ashley Lutz in New York at alutz8@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.
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