Houston Toll Debt Sells Amid Biggest Loss Since ’94: Muni Credit
Grand Parkway Transportation Corp., which is building part of a 184-mile toll road encircling Houston, is readying the $3.7 trillion municipal-bond market’s biggest borrowing in more than a year even as the yield penalty on some Texas highway bonds has risen 28 percent since January.
The state agency’s $2.86 billion sale next week, to pay for sections of an outer loop serving the fourth-most-populous U.S. city, may meet resistance from investors already suffering from a 3.5 percent decline for local securities in 2013, the most since 1994, according to Bank of America Merrill Lynch data.
Texas has pledged to support all but $200 million of the Grand Parkway deal if revenue is insufficient to repay the debt, according to sale documents. Standard & Poor’s rates the larger portion of the debt AA, third-highest, while grading the rest six steps lower. The yield penalty on state-supported AA bonds issued by the North Texas Tollway Authority to construct a toll road serving the Dallas-Fort Worth area rose to 2.3 percentage points on July 9, higher than the 1.8 percentage-point penalty at the start of the year, according to data compiled by Bloomberg.
Investors may also seek wider spreads on the Grand Parkway sale, said Peter Hayes, who manages $114 billion as head of munis at New York-based BlackRock Inc.
“If they try to get too aggressive and price it as a double-A type of credit, they might be disappointed in the demand,” he said in a telephone interview. “A deal this size, with the market tone having been somewhat shaky over the last couple of months, means it’s going to have to be priced to go.”
Interest rates spiked last month after the Federal Reserve said it plans to reduce bond purchases as the economy improves. Yields on benchmark 10-year munis jumped to 2.96 percent June 25, the highest since April 2011, data compiled by Bloomberg show. Investors pulled $4.5 billion from U.S. muni mutual funds in the week through June 26, the most since Lipper US Fund Flows began tracking the data in 1992.
The Grand Parkway deal is the largest municipal-bond offering since Michigan Finance Authority sold $2.9 billion of revenue debt in June 2012 to repay federal unemployment-benefit loans, Bloomberg data show. Transportation debt has lost about 3.6 percent this year and has trailed the muni market every year since 2009, the longest losing streak since at least 1989, when Bank of America Merrill Lynch data begins.
Grand Parkway’s sale includes several types of securities. Among them are taxable bonds, short-term debt and, possibly, capital-appreciation debt whose principal and interest aren’t paid until maturity, according to Greg Carey, chairman of New York-based Goldman Sachs (GS) Group Inc.’s public-sector and infrastructure group. The longest-maturity borrowing would be 2053, said Carey, whose firm is leading the sale.
In addition to insurance companies that normally buy munis, the wide menu of securities should help attract crossover buyers who typically purchase corporate or U.S. bonds, Carey said in a telephone interview.
“If we were able to bring this to market three months ago, we would have gotten a better price,” Carey said. “But the credit fundamentals are strong. This is a very sound, well put-together structured transaction that will be attractive to many pockets of the market.”
While this year’s issuance of long-term, fixed-rate munis totaled $168 billion through July 5, the least since 2011, states and localities plan to increase borrowing within the next month. Issuers from Washington to Maryland are set to borrow $15.4 billion of long-term, fixed-rate debt in the next 30 days, compared with the one-year average of $9.2 billion, Bloomberg data show.
At the same time, mutual funds and other institutions had $1.1 billion of local debt for sale July 9, almost double the one-year average of $577 million, Bloomberg data show.
The Grand Parkway sale includes $468 million of taxable debt and $947 million of debt subject to a mandatory tender on April 1 that the issuer will need to refinance to avoid paying a higher interest rate, according to bond documents and Carey.
Texas’s Department of Transportation anticipates repaying the tender bonds with a U.S. loan under the Transportation Infrastructure Finance and Innovation Act. Such federal credits have been used for North Texas Tollway projects. New York State is also seeking to borrow through the program to help build a new Tappan Zee Bridge across the Hudson River.
Proceeds of the Grand Parkway deal will finance construction on 55 miles (89 kilometers) of four-lane roadway in Harris and Montgomery counties in the northwestern Houston area. The first segment will open at year-end and begin charging tolls in February. The second stretch will open by January 2016, with charges to start the following month, according to bond documents.
The planned roadway is less than a mile south of a new Exxon Mobil Corp. (XOM) campus that’s set to open in Montgomery County in early 2014 with a capacity of 10,000 employees by 2015, Patrick McGinn, a spokesman, said by e-mail. Based in Irving, Texas, ExxonMobil is the world’s largest publicly traded oil and gas company.
The state will support the deal by providing an advance called a toll-equity loan to Grand Parkway of up to $9.6 billion over the life of the debt to repay the bonds if toll revenue falls short. The money will come from the State Highway Fund, which includes federal cash, state gasoline taxes and motor-vehicle fees, according to sale documents.
Yields on portions of the Grand Parkway debt will need to compensate investors because the roadways are still under construction and any revenue growth will be in the future, said John Flahive, who helps manage $22 billion of munis at BNY Mellon Wealth Management in Boston.
“Whenever there’s a ramp-up and when there’s construction risk, and especially a deal of this size, you would suspect that they’re going to have to price it accordingly,” Flahive said.
The Houston region’s population is expected to climb to 6.4 million by 2015 and 9.6 million by 2035, according to sale documents. Its total population has increased by an average annual rate of 2.5 percent from 1970 to 2010.
Total toll revenue from the 55-mile Grand Parkway stretch will be an estimated $7.3 million in the fiscal year ending Aug. 31, 2014. That’s projected to grow to $943 million by 2054, according to bond documents.
At 4.36 percent, yields on benchmark 30-year munis are the highest in two years, Bloomberg data show. That compares with 3.68 percent for similar-maturity Treasuries.
The ratio of the interest rates, which shows relative value, is about 118 percent, compared with a five-year average of about 112 percent, Bloomberg data show. The higher the figure, the cheaper tax-exempt debt is against federal securities.
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