Texas Highways Set to Cut Borrowing Cost on $1 Billion Issue

Texas, which may face a budget deficit of $21 billion a year from now, is set to cut its cost on a $1 billion highway-bond sale as investors receive about 17 percent less yield than in a previous issue.

The second most-populous U.S. state will have to pay about 1 percentage point above Treasuries in its 30-year taxable Build America Bond, compared with the 1.2 percentage point above the same-maturity benchmark when it sold the same type of bond last year, according to a source with knowledge of the deal. Texas is selling the general obligations to pay for road construction to alleviate traffic congestion.

Since the August 2009 sale, which comprised mainly Build Americas, legislative estimates of the state’s deficit for its next two-year budget cycle have doubled since January. The forecast cost for the issue declined as the overall market for Build Americas stayed at 1.8 percentage points over Treasuries.

“This will be priced at slightly lower yields than the previous sale,” said Paul Brennan, a senior vice president in Chicago for Nuveen Asset Management, which holds $73 billion of municipal securities. “Texas is a strong credit and investors are comfortable with that.”

Average Build America Bond yields fell to 5.71 percent yesterday, from about 6.02 percent at the time of the August 2009 sale, according to a Wells Fargo index. The Texas bonds from that sale traded at 4.8 percent on Sept. 21.

In the tax-exempt market, yields on top-rated 10-year debt fell by 1 basis point to 2.66 percent yesterday, according Municipal Market Advisors data. A basis point is 0.01 percentage point.

Build Americas

The Texas sale comes about three months before the Build America program, launched last year to stimulate the economy, is scheduled to expire. Build Americas, which come with a 35 percent interest-rate subsidy from the federal government, are the fastest-growing part of the $2.8 trillion municipal market.

Issuers have sold $135 billion of them since the program was launched in early 2009. Legislation introduced by Senate Finance Committee Chairman Max Baucus would extend the program for one year with the subsidy reduced to 32 percent.

Texas chose to issue the taxable debt rather than conventional tax-exempt securities because Build Americas offer the lowest borrowing cost, said James Bass, chief financial officer of the Texas Transportation Department, in an e-mail.

“We are not concerned with the bonds being considered in an orphaned program, even if Congress does not extend the program,” said Bass. “We expect considerable savings from the Build America Bond program.”

The bonds, which are being sold through the Texas Transportation Commission, have top ratings from Moody’s Investors Service and Fitch Ratings on the general obligation debt and AA+, one level lower, from Standard & Poor’s.

Cutting Expenses

State officials have already begun cutting expenses in anticipation of the deficit, which Texas lawmakers will have to address starting in January. Governor Rick Perry said in an interview with Bloomberg Television last week that the gap will be half as much as legislators predict, or about $10 billion to $11 billion.

Texas’s ability to respond more effectively than other states to its deficits instills investor confidence, according to Brennan. He contrasted the Lone Star state with California, whose budget is almost three months overdue.

“They have a lot more confidence in Texas’s credit,” he said. “They know budget gaps will be dealt with in a timely manner. That plays a lot with investor perception.”

Revenue Bonds

Texas benefited from its ratings when it sold $1.5 billion of Build America Bonds backed by transportation revenue on July 26. The issue, which was top-rated by Moody’s and S&P, included more than $1.2 billion in Build Americas due in 2030. The bonds were priced to yield 5.18 percent at sale, or 115 basis points above 30-year Treasuries. The same securities traded Sept. 16 at an average yield of 4.59 percent, or 66 basis points above the benchmark.

The extra yield investors demand for the federally subsidized debt, compared with benchmark Treasuries, fell 20 basis points in the same period, according to the Wells Fargo Build America Bond index. The so-called spread was 184 basis points on Sept. 16, down from 204 basis points on the sale date.

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

NEW MEXICO FINANCE AUTHORITY, created in 1992 to help state and local governments finance capital projects, plans to sell $428 million in tax-exempts today, to refinance existing debt. The bonds, backed by New Mexico Department of Transportation revenue, are rated Aa1 by Moody’s and AA+ by S&P, both second-highest. Underwriters led by Morgan Stanley will market the offering to investors. (Updated Sept. 22)

TENNESSEE STATE SCHOOL BOND AUTHORITY, which helps finance school construction and student loans, will issue $212 million in taxable Qualified School Construction Bonds tomorrow. The bonds are rated Aa2 by Moody’s and AA by Fitch, both third-highest. Underwriters led by Citigroup Inc. will market the issue to investors. (Added Sept. 22)

UTAH, the second-fastest growing state by population in the U.S., plans to sell $1 billion in tax-exempts and Build America Bonds tomorrow to fund the expansion and renovation of state highways. The securities, rated highest by Moody’s, Fitch and S&P, will be marketed by underwriters led by Goldman Sachs Group Inc. The borrowing will increase the state’s debt by 50 percent, to $3 billion. In 2009, Utah sold almost $1 billion of tax-exempt and Build America bonds for highway projects. Utah’s anticipated 2010 budget deficit is about 20 percent of its initial projections as revenue was boosted by tourism and companies such as Adobe Systems Inc. and Twitter Inc. (Updated Sept. 22)

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