Small, Steady Texas MUDs Keep on Bonding

This is why Houston, Texas is stil HOT for commercial developement:

New housing starts are down and home foreclosures are up across the country, but some Texas communities continue to expand using relatively small bond issues sold by municipal utility districts to provide the infrastructure for new development.
Those associated with issuing MUD bonds say demand for the low-rated or even unrated debt remains strong despite the credit crunch. They say there are fewer bidders of late, but the bids received reflect steady interest from buyers looking for uncomplicated tax-exempt securities.
"From what I'm seeing, the market for water debt is just fine," said Cheryl Allen, senior vice president with Southwest Securities Inc. "We may be pricing slightly higher than other bonds, but typically rated utility bonds are pricing similar to the rest of the market."
Allen is the financial adviser for more than 70 utility districts across Texas.
The majority of debt sales by municipal utility districts are bank-qualified and this helps keep demand high, she said.
"Wall Street firms have pulled out of bank-qualified water debt of late ... they're in, they're out," Allen said. "We get a steady group of purchasers for water debt and we do rely upon them. But if we get four bids or six it doesn't really matter, although the more the merrier,"
There are 740 active MUDs in the Lone Star state and another 327 utility districts that are classified inactive by the Texas Commission on Environmental Quality. Inactive MUDs are either built out or have been approved and just haven't started construction yet.
Many of the utility districts in the state are near Houstonin Harris Countyand Fort Bend County, and are at least partially responsible for the rapid growth of the area. Houston's population of about 2.13 million is up more than 9% from the 2000 Census.
Harris County has added nearly half a million new residents since the start of the decade. Only Maricopa County, Ariz., which includes Phoenix, has experienced a larger gain, with almost 700,000 new residents. With 3.9 million, Harris County is more populous than 25 states and the third-largest county in the country.
The Addicks Utility District is offering $7.9 million of waterworks and sewer system unlimited-tax and revenue bonds in the competitive market today, and the district's financial adviser expects at least two or three bids for the debt.
"A few MUDs were in the market last week and priced very well, and we expect to see rates that are competitive with that," said Anthea Moran, vice president with First Southwest Co.
"What we're experiencing with MUDs right now is that we're probably not going to see as many bids as we might have six months ago, but we still expect at least two or three bids," she said. "The bonds being bank-qualified may also lead to more interest from investors given the current market conditions."
Schwartz, Page & HardingLLPis bond counsel to the westHarris County district.
Moran said the debt may be insured but officials had not "heard anything definitive back from the insurers yet."
The bonds come to market following an upgrade of the Addicks district's underlying credit by Standard & Poor's to BBB from BBB-minus due to the district's assessed-value growth and declining debt burden. The upgrade also applies to nearly $13 million of outstanding debt.
"The district is in very good financial shape right now with healthy debt ratios," Moran said. "It's a more mature utility district with costs much lower than that of a start-up MUD."
Development within the district began in 1977 and there are currently 1,266 residential lots in a handful of different subdivisions. The home values within the district range from $95,000 to $205,000, and as of Jan. 18, there are 1,151 homes completed, 42 under construction, and 73 developed lots available. The district also includes a recently completed, 312-unit apartment building that is about 50% occupied.
The current estimated taxable assessed value of the district of nearly $200 million is more than double four years ago.
"We believe Addicks Utility District officials will incrementally issue additional debt because the property tax base's continued development is capable of supporting it," said Standard & Poor's credit analyst Jennifer Garza. "We also believe management will sustain its adequate financial position with reasonable reserves while the property tax base continues to mature."
Most utility districts that are rated carry underlying ratings somewhere near the triple-B threshold.
"The small number of MUDs in our A category speaks to the inherent strength of the specific credit," said Dwight Burnssenior analyst with Moody's Investors Service.
He said Moody's currently rates 22 Texas MUDs at A3 or higher.
Two weeks ago, the Faulkey Gully Municipal Utility District, about 23 miles northwest of downtown Houston, competitively sold nearly $4 million of waterworks and sewer system combination unlimited-tax and revenue bonds won by Sterne Agee & LeachInc.
The sale provided the issuer with a net interest cost of 4.5394%, and the underwriter secured the triple-A wrap provided by Assured GuarantyCorp. for the debt. Yields ranged from 3.4% with a 5% coupon in 2013 to 4.125% with a 3.75% coupon in 2018. Six series of bonds maturing between 2021 and 2037 weren't reoffered.
The debt came to market on the heels of an upgrade to A3 from Baa1.
Jimmy Fellus, senior managing director at Sterne Agee, said the underlying rating has become a key component for these types of bonds. for more information see : www.houstonrealtyadvisors.net or www.houstonrealtyadvisors.com