Texas Sells Record $10 Billion Notes for Schools After Cuts: Muni Credit
Texas will issue $9.8 billion of tax-exempt general-obligation notes today, the state’s largest short-term debt offering, to fund public schools.
Texas increased its annual top-rated tax and revenue anticipation note sale from last year by $2 billion to cover payments to school districts until the bulk of tax revenue receipts next year. The additional borrowing will compensate for the end of federal stimulus funding and property-tax collections that are below what was budgeted, said R.J. DeSilva, a spokesman for Comptroller Susan Combs. The state will direct more money to districts where property-tax revenue has fallen short.
State officials set the deal’s coupon rate at 2.5 percent, according to data compiled by Bloomberg. The note may price at yields of 0.30-0.35 percentage point, depending on the market, and whether investors of taxable funds also buy, said William Henderson, who oversees $16 billion of short-term municipal assets at BlackRock Inc. in Princeton, New Jersey.
Texas’s note deal “is the standard, cleanest, best-trading name in the industry,” Henderson said.
Last year, the state priced $7.8 billion of tax-exempt notes on Aug. 24 with a 2 percent coupon yielding an average interest cost of 34 basis points, or 10 basis points above an index of top-rated, one-year debt. A basis point is 0.01 percentage point.
Yields on top-rated, one-year debt were at 17 basis points yesterday. Tax-exempt rates for short-term and long-term debt have fallen in August as investors look to Treasuries and municipal debt as an alternative to equities.
Highly Rated
The one-year notes offer buyers an easy-to-trade and highly rated investment, Henderson said. Any interest from taxpaying investors and separately managed accounts would help the $9.8 billion deal find sufficient buyers, he said.
“The deal is larger than last year’s at a time when money- market fund assets are significantly smaller than last year,” Henderson said. “So you will to need to bring in different buyers than just the money-market world.”
U.S. municipal-bond mutual funds last week experienced net withdrawals for the fourth consecutive week, according to Lipper US Fund Flows. Disposals totaled $323 million, down from $682 million of withdrawals the week before.
Potential crossover buyers from taxable funds, ineligible for tax exemptions on muni debt, may push up rates on the notes to as much as 40-41 basis points, Christopher Nicholl, a senior portfolio manager at Bank of New York Mellon who oversees $2 billion in short-term assets, said in a telephone interview from Boston.
‘Wild Card’
“The big wild card is more taxable funds have discovered the muni market over the last couple of years and have found that even if they don’t need the tax exemption, there is a certain amount of yield enhancement they can get through the municipal market,” Nicholl said.
“So the question will be where do some of those very large taxable funds start to have an interest and come into the deal in significant numbers?”
The sale follows legislative action to tackle a deficit by targeting education expenditure. With public schools projected to serve 80,000 more students this year than last and a tax system that wasn’t expected to support that demand, Governor Rick Perry cut $15 billion from spending and shortchanged them by about $4 billion from previously mandated levels rather than raise taxes.
Yields on Treasuries have fallen faster than those on comparable one-year tax-exempt bonds. Municipal-debt yields represented about 231 percent of Treasuries yesterday, compared with an average of 153 percent in 2011, Bloomberg data show. Municipals and Treasuries became more expensive as investors sold equities after Standard & Poor’s downgraded the U.S. to AA+ and reports of a slower economic recovery.
Following is a description of a pending sale of municipal debt:
SAN FRANCISCO AIRPORT COMMISSION, which issues debt for the San Francisco International Airport, is set to issue today $452 million of tax-exempt and taxable debt to refinance existing fixed-rate and variable-rate bonds. The securities are rated A1, Moody’s Investors Service’s fifth-highest grade. E.J. De La Rosa & Co. will lead a syndicate of banks on the transaction. (Updated Aug. 23)
To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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