This transaction was SWS’ first senior managed mandate for the District, having served as a co-manager on three occasions and exhibited by strong sales performance in 2017 and 2019.
The Bonds are being issued to advance refund the Unlimited Tax Refunding Bonds Series 2011 and 2012 and the Unlimited Tax School Building Bonds Series 2014, each originally issued with a 10 year par call and an average coupon of 5%. The Series 2020 Bonds were backed by the Texas Permanent School Fund Guarantee Program and rated ‘Aaa’ and ‘AAA’ by Moody’s and Fitch, respectively. Citing a trend of operating deficits inconsistent with ‘Aa2’ peers, Moody’s Investors Service downgraded the District’s underlying long-term debt rating to ‘Aa3’ from ‘Aa2’ in the weeks leading up to pricing.
SWS worked very closely with the District and their Advisors to 1) Refund as many high coupon bonds as economically feasible, 2) Maintain an adequate total par amount (bond par amount less than or equal to the refunded par, and 3) Target savings efficiency (individual savings divided by the sum of negative arbitrage and individual savings) of at least 50%. The triad of objectives led to a taxable structure that included premium current interest bonds in 2020 – 22, Capital Appreciation Bonds in 2023 – 26, and par current interest bonds in 2027 – 40.
The weeks leading up to pricing were marked by interest rate strength and consecutive weeks of municipal fund inflows (57 consecutive weeks by the time of pricing). Coronavirus fears and the potential flu-like virus’ global economic impact easily outweighed a solid corporate earnings season and strong economic releases. Volatility in equity markets did not carry over to Treasuries as an ongoing flight to quality helped stem a $7.85 billion municipal weekly supply calendar nearly double the year-to-date average. The ability to market the taxable issuance allowed SWS to take advantage of synergies afforded by the November 2019 merger of Siebert Cisneros Shank & Co. and The Williams Capital Group, and this marked the first opportunity in 2020 for SWS to showcase the outsized reach of its taxable client base.
Early marketing efforts to this group would be pivotal in ensuring a successful pricing and the firm’s sales force would be met with positive feedback, especially in the early to middle part of the curve. An order period that was steady throughout set the tone for a deal that would ultimately be 2.3 times oversubscribed on a priority basis with 2021 – 2034 current interest bonds and capital appreciation bonds 1.7 – 7.1 times oversubscribed.
SWS’ sales desk led the syndicate with over $203 million in priority orders allowing the firm’s underwriter to recommend 2 – 7 basis point yield decreases 14 of the 21 maturities. With a True Interest Cost (TIC) of 2.59%, the refunding generated $19.7 million in gross savings for the District, equivalent to $14.4 million in Net Present Value savings or 15.15% of the refunded par.