Houston ISD (TX)
Limited Tax Schoolhouse Bonds Series 2018
June 7, 2018
SCS steps up to underwrite $14 million at the initial offering yields, allowing the District to receive the lowest possible borrowing cost
Siebert Cisneros Shank served as the book-running senior manager on the Houston Independent School District’s Series 2018 bonds on June 6, 2018. This transaction was SCS’ first senior-managed transaction for the District. The Series 2018 Bonds represent the District’s final $100 million installment of a $1.89 billion bond program passed in an election held on November 6, 2012. The Bonds were structured with a 25-year amortization, a 10-year call option, and level debt service. They were also guaranteed by the Texas PSF program and received an “Aaa” underlying rating from Moody’s (stable outlook) and a “AA+” underlying rating from S&P (stable outlook). The District also planned to sell $174 million of non-PSF Maintenance Tax Notes with the District’s underlying rating the following day.
In the week prior to pricing, the municipal market rallied along with Treasuries as credit concerns, mostly regarding Italy, sparked a flight to quality. Demand from asset managers continued to dominate the market, primarily in the 1 to 12-year range. The primary calendar was light in the holiday-shortened week, but picked up for the week of pricing to a hefty $10 billion primary calendar, including $7 billion in negotiated transactions. As the week of pricing began, demand for treasuries softened as equity markets reacted well to the previous Friday’s employment data, which exceeded the 188K consensus at 223K, and a decline in the unemployment rate to 3.8%, an 18-year low.
On the day before pricing, SCS requested price views from the syndicate managers for both 5% and 4% coupons. However, our underwriting desk understood that while the spreads for 4% coupons had been MMD plus 45 to 55 basis points in the past few months for Texas PSF-enhanced school district transactions, current spreads for 4% coupons had widened substantially due to reduced investor appetite. Therefore, SCS recommended a premarketing scale with all 5% coupons bonds.
Additionally, SCS ran an option adjusted yield (OAY) calculation comparing 4% and 5% coupons and the 5% coupon bonds produced a lower option adjusted yield. However, the District expressed a strong preference for some 4% coupons in order to lower its debt service cash flow. SCS’s nimble underwriting desk worked diligently with the District’s financial advisor to get feedback from some investors with 4% coupon interest, such as Merrill TOB and State Farm to help the District evaluate against the 5% coupons. SCS’s underwriting desk also received indications of interest for 4% coupons on the longer maturities, but at the much wider spreads than were prevailing in the secondary market.
On the day of pricing, SCS went out with an aggressive preliminary pricing scale tailored to the District’s preferences with 4% coupons in maturities 2034-2037 at MMD plus 52 to 55 basis points and 5% coupons with MMD plus 22 in maturities 2030-2033 and 2038-2040 and MMD plus 23 on the 2043 term bond. During the pricing, the tone of the treasury market continued to soften with treasury yields rising. At the end of the order period, all maturities were oversubscribed with the exception of the maturity in 2029 (5% coupon) and maturities 3034-3037 (4% coupons). The softening treasury market resulted in the small group of 4% coupon investors pulling back and deciding not to participate in the transaction.
At repricing, SCS recommended reducing yields by 3 bps in 2020, 5 bps in 2021, 3 bps in 2023, 2 bps in 2024, and 2 bps in 2025. Additionally, our underwriting desk recommended reverting maturities 2035-2037 back to 5% coupons at the previous premarketing yields. SCS rose to the occasion by utilizing its capital to underwrite the full $4.1 million 2035 maturity and $4.3 million of the $4.5 million 2037 maturity. Not only did SCS underwrite $14.62 million but SCS underwrote the bond at the initial offering yields, allowing the District to receive the lowest possible borrowing cost and positioning the District’s Maintenance Tax Notes, pricing the next day, in the best possible marketing position.
Despite the difficulty with 4% coupons, overall, the District’s bond sale was a great success. The 5% coupon bonds on this transaction (except for the 2-year maturity) were 2 to 6 basis points lower than the District’s Series 2017 transaction. Moreover, the 4% coupon bond in 2034 was also 9 basis points lower in spread. The District achieved an all-in-TIC of 3.63%.