Bloomberg News

Texas Notes Poised to Beat California Sale: Muni Credit

August 20, 2012

Texas Governor Rick Perry

Texas Governor Rick Perry has asked state agencies to show how they could cut spending 10 percent in the next budget after signing a two-year spending plan last year that reduced school funding by $5 billion. Photographer: Scott Eells/Bloomberg

Texas Governor Rick Perry may chalk up another win over California when his state sells $9.8 billion of one-year notes tomorrow to help school districts pay bills ahead of revenue collections.

To beat the Golden State, Texas will have to come close to breaking its own record-low yield of 0.27 percent, obtained last year. California borrowed at 0.33 percent on May maturities and 0.43 percent on debt coming due in June when it sold $10 billion of revenue-anticipation notes last week.

The two issues have top short-term ratings from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Yet Texas, the second most-populous state behind California, has done more to reduce spending as its tax revenue has increased, said William Henderson, a managing director with BlackRock Inc. (BLK:US)

“They’ve taken a lot of steps to rein in costs,” said Henderson, who oversees $12 billion in Princeton, New Jersey. “They’ve been careful and methodical in improving their financial position.”

Perry, 62, a Republican who began a failed presidential campaign a year ago, has asked state agencies to show how they could cut spending 10 percent in the next budget after signing a two-year spending plan last year that reduced school funding by $5 billion. He also has opposed expanding the state’s Medicaid program to include more low-income residents.

Annual Sales

Texas has sold short-term notes annually since 1987 to deliver aid to school districts when its fiscal year begins Sept. 1. The state then sets aside tax revenue to repay the debt within 12 months. This year’s issue is scheduled to be repaid Aug. 30, 2013, according Comptroller Susan Combs.

“We expect to be well-received by the financial community with strong demand for our notes,” R.J. DeSilva, a Combs spokesman, said by e-mail. Combs expects the state to benefit from its strong financial performance, according to a statement.

Texas and California are benefiting from Federal Reserve Chairman Ben S. Bernanke’s plan to keep the central bank’s key lending rate near zero through at least 2014.

The Lone Star state borrowed at 8 basis points higher than AAA rated, one-year munis last year, according to data compiled by Bloomberg. California’s September note sale obtained yields about 19 basis points higher than comparable top-ranked debt. A basis point is 0.01 percentage point.

Widening Spread

In California’s Aug. 16 sale, its yields were 17 basis points to 27 basis points higher than the 0.16 percent on the AAA, one-year benchmark, according to data compiled by Bloomberg.

Sales-tax receipts rose 10 percent to $2.05 billion in July over the same month in 2011, Combs said Aug. 8. That revenue stream, which has increased for 28 consecutive months, provides about half of general-fund revenue. She attributed the gain to business spending in industries such as oil and gas.

Crude futures have averaged about $96 a barrel this year on the New York Mercantile Exchange. Texas, the biggest oil- producing state in the U.S., taxes extraction of the fuel.

“These ratings reflect confidence in our state and its economic growth,” Combs said Aug. 14. “People continue to view Texas as an attractive and desirable place to live and do business.”

California’s borrowing costs have declined as Governor Jerry Brown, a Democrat, has taken measures to curb borrowing and reduce the state’s reliance on fiscal steps such as internal loans and delaying payments owed to schools and local governments.

Tax Proposals

Voters in California, the most indebted U.S. state, will decide on two proposed tax increases in November to help Brown balance the budget. The state ended its fiscal year with a $9.6 billion deficit, which it covered with internal borrowing and accounting maneuvers.

Three California cities -- San Bernardino, Stockton and Mammoth Lakes -- have sought bankruptcy court protection this year amid rising pension liabilities and eroding property taxes.

Even though the Golden State got the highest ratings on its notes, its long-term debt carries some of the lowest grades, at A1, Moody’s fifth highest, and A-, S&P’s seventh best. Texas has Moody’s top score of Aaa and S&P’s second-highest, at AA+.

Texas will sell its securities through competitive bidding. Last year, JPMorgan Chase & Co. bought most of the notes, also in a competitive sale. For California, JPMorgan and Wells Fargo & Co. were joint senior managers and Los Angeles-based bond firm De La Rosa & Co. co-managed last week’s negotiated sale.

Lower Yield

California’s one-year notes traded at 0.43 percent Aug. 17, or 25 basis points over similar top-rated debt, while Texas’s had a yield of 0.29 percent, or 11 basis points higher. California’s spread was wider a year earlier, at 36 basis points more than the index, while Texas’s was 10 basis points higher.

“Texas has traded at lower yields than California the last several years and that should hold true this year as well,” said Henderson.

The Texas deal will give money markets a respite from debt backed by letters of credit, which let investors sell back bonds, which has been more difficult to hold because of rating cuts to the facilities, Henderson said.

Since a record year in 2008, issuance of variable-rate demand notes has declined to $14.2 billion last year from $120 billion, according to data compiled by the Municipal Securities Rulemaking Board. The market has shrunk because of low fixed rates and weaker bank credit, Moody’s said in an Aug. 16 report.

The number of states issuing short-term cash-flow notes is expected to decline in the next year as revenue improves, Moody’s said in a July 31 report. It said the amount raised is expected to increase, however, as California and Texas dominate issuance.

“Texas remains one of the best credits out there,” Henderson said. “It’s a bellwether indicator of where market levels are.”

Following are pending sales:

BAY AREA TOLL AUTHORITY in Oakland, California, is set to issue $150 million of revenue debt as soon as next week to refinance debt, data compiled by Bloomberg show. Moody’s rates the debt fourth-highest at Aa3. (Added Aug. 17)

HOUSTON, TEXAS, plans to sell $140 million of combined utility system revenue bonds as soon as next week, Bloomberg data show. Proceeds will help finance repairs and extensions as well as refund debt, according to bond documents. S&P rates the deal AA, its third-highest grade. (Added Aug. 17)

PIERCE COUNTY, WASHINGTON, is set to issue $183.4 million of sewer revenue bonds through competitive bid as soon as Aug. 22, Bloomberg data show. Proceeds will help finance capital projects, according to bond documents. S&P rates the bonds AA, and Moody’s grades it Aa3. (Added Aug. 17)

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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