(Bloomberg) – Bexar County Hospital District, which encompasses San Antonio, the seventh most-populous U.S. city, cut its borrowing costs 23 percent from 2009 as it sold $205 million in Build Americas amid plunging municipal issuance.

States and municipalities are set to sell about $1.9 billion next week, the lowest total for a full trading week since Dec. 19, 2008, according to data compiled by Bloomberg. About $7.1 billion in debt was issued this week, including $1.2 billion marketed only to investors in Puerto Rico.

Concern that the U.S. recovery is slowing has driven investors to Treasury and municipal debt, sending yields to historic lows. Average Build America yields touched a record-low of 5.54 percent Aug. 24, according to the Wells Fargo Build America Bond index, which began about a year ago.

“The market has been very strong even at these new levels,” said Regina Shafer, assistant vice president of fixed- income investments for USAA Investment Management Co. in San Antonio.

Investor demand combined with a shortage of supply further depressed yields, said Shafer, who manages $5.3 billion of tax- exempt municipal bonds.

The Bexar hospital district, which operates as the University Health System, sold bonds due in 2040 priced to yield 5.41 percent, or 185 basis points above 30-year U.S. Treasuries. The district also sold 30-year Build Americas last August, which were priced to yield 6.9 percent, or 240 basis points above the benchmark. A basis point is 0.01 percentage point.

Seeking a Haven

Investors seeking a haven amid speculation of a renewed U.S. recession were drawn to Bexar’s sale, according to Raul Villasenor, senior vice president of First Southwest Co. in San Antonio, the financial adviser on the deal.

“There’s no question this is a very strong underlying credit,” Villasenor said. “Otherwise we would have seen spreads a lot higher. We’re very pleased with that.”

Top-rated Austin, the capital of Texas, yesterday sold about $80 million in tax-exempt public improvement bonds, with 10-year securities priced to yield 2.37 percent, 21 basis points below an index of AAA debt, according to Concord, Massachusetts- based Municipal Market Advisors. The index, which began in January 2001, is at the lowest level ever.

“It’s still a time to be very careful, but investors are realizing municipal bonds aren’t that risky,” Shafer said.

Build Americas

Bexar’s sale comes with the future of the Build America Bonds still undetermined.

The program was created last year as part of President Barack Obama’s economic-stimulus package. Issuers, which are eligible for a 35 percent federal subsidy on interest costs, have sold about $130 billion of the taxable securities. A bill was introduced in the U.S. House of Representatives July 28 to extend the program by two years.

Bexar’s Build Americas include an “extraordinary redemption” of 100 basis points above Treasuries, according to a release from Siebert Brandford Shank & Co., which marketed the sale to investors. Such a redemption would protect the district from the elimination of federal subsidy payments.

Yesterday’s offering was the district’s final debt sale to fund a $899 million capital plan, according to an Aug. 16 report from Fitch Ratings, which ranked the bonds AAA. About $770 million for the plan is financed by tax-supported debt, with an additional $130 million coming from cash reserves, the report said.

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(Bloomberg) – Texas issuers led by San Antonio’s Bexar County and Austin, the state capital, are set to borrow $990 million this week, almost three times more than last week, as taxable and tax-exempt yields plunge to record levels.

The risk of a renewed U.S. recession led investors to the perceived safety of Treasuries, pushing 10-year benchmark yields to a 19-month low this week. Top-rated tax-exempt municipal yields due in 10 years fell 2 basis points yesterday to 2.58 percent, the lowest ever, according to data from Concord, Massachusetts-based Municipal Market Advisors dating to January 2001. Bond prices move inversely to yields.

“Munis are shining right now, even at the lower rates,” to David Jaderlund, who works in fixed-income trading and sales for Hampstead Group in Dallas, an investment adviser who buys debt only from Texas issuers.

The state doesn’t charge income tax, so resident investors don’t benefit from the usual double-tax exemption on muni debt.

Yields on top-rated 10-year debt haven’t risen since June 15, according to MMA. With an increase in 10-year Treasury yields yesterday, the top-rated, 10-year municipal bonds yield ratio fell to 97 percent, the smallest in three weeks, according to data compiled by Bloomberg.

“It appears the market is telling you we’re entering into a disinflationary world at best, if not a deflationary world,” said R.J. Gallo, portfolio manager at Pittsburgh-based Federated Investors, which has $33 billion in municipal holdings.

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(Bloomberg) – Texas, the second most-populous U.S. state, is set to benefit from its top ratings when it borrows $1.5 billion for roads tomorrow, the week’s largest municipal bond deal and the biggest Build America issue in a month.

The state, through the Texas Transportation Commission, is selling $1.38 billion as taxable Build America Bonds, debt that comes with a 35 percent interest-rate subsidy from the federal government, and $115.6 million of tax-exempt securities for bridge and highway projects.

Investors have been distinguishing between different quality Build Americas in recent months, said Chris Mier, municipal strategist and managing director with Loop Capital Markets LLC in Chicago. Spreads above Treasuries for top-rated municipal issuers have been narrowing compared with borrowers with lower credit scores.

“There’s been a little bit of a break for top-rated issuers,” Mier said. “For those without the well-known name, it will be a wider spread than it was two or three months ago.”

Top-rated University of Virginia sold $190 million of 30- year Build America Bonds July 21 priced to yield 4.9 percent, the lowest on record for that maturity, or a premium of 95 basis points to longest-dated Treasuries. A basis point is 0.01 percentage point.

The same day, the Sacramento, California, Municipal Utility District, with the fifth-highest investment grades from Standard & Poor’s and Moody’s Investors Service, sold $250 million 26- year bonds at a spread of 225 basis points above the benchmark. The spread on a previous sale by the agency, in May 2009, has widened 100 basis points in trading since April to 222 basis points by July 21, according data compiled by Bloomberg.

Average Yield

The average Build America Bond yielded 6.05 percent on July 23, according to a Wells Fargo & Co. index that began last August. Build Americas’ yield spread above 30-year U.S. Treasuries reached a record high of about 207 basis points this month, up from 142 basis points in early May, Bloomberg data show. The spread increased in part as Treasury rates fell amid signs the economy is slowing.

“The BABs market has become a little more discerning on credit quality,” said Tom Boylen, managing director at BMO Capital Markets in Chicago. “Everyone is more cognizant of credit.”

Issuers have sold about $122 billion of Build Americas since they were created as part of last year’s $862 billion economic-stimulus package. The program expires at year-end.

International Buyers

The taxable municipal bonds have offered international buyers higher yields than some corporate bonds, coupled with lower default risk. Investors in the U.S. and from other countries “are more comfortable with things they’ve heard of,” Mier said.

“You’ve got a lot of domestic issuers and international investors with no prior experience in munis,” he said.

Yields on top-rated, tax-exempt general obligations that mature in 10 years averaged 2.86 percent on July 23 for a third consecutive day, the lowest in at least nine-and-a-half years, according to Municipal Market Advisors data since January 2001. The securities have not had an increase in yields since June 15, data from Concord, Massachusetts-based MMA show.

This week’s total scheduled municipal issuance of $7.9 billion includes about $2.3 billion in Build America debt. Both figures are the highest since late June, when the Bay Area Toll Authority sold $1.5 billion in Build Americas, the last sale comparable to the Texas deal.

The city of Columbus, Ohio, has the third-largest scheduled sale of the week, a $430 million issue that includes the second- largest Build Americas issue, totaling about $280 million.

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(The Bond Buyer) – The Texas Transportation Commission is preparing a record $1.5 billion bond issue under the voter-approved program known as Proposition 14 that dedicates fuel taxes and vehicle fees toward highway construction.

The deal will include taxable Build America Bonds and tax-exempt revenue bonds in a combination to be determined before pricing the week of July 26.

Financial adviser RBC Capital Markets is working with the TTC and lead manager Goldman, Sachs & Co.

Co-managers on the negotiated deal include Citi, Bank of America Merrill Lynch, Morgan Keegan & Co., Piper Jaffray & Co., Southwest Securities, Estrada Hinojosa & Co., and M.R. Beal & Co. Andrews Kurth is bond counsel.

Ratings have not been reported, but under the recalibrated scales of Moody’s Investors Service and Standard & Poor’s, the previous issue in 2008 is rated triple-A.

The $150 million in 2008 was the smallest annual issuance of Prop. 14 bonds since the program was authorized in 2003.

The 2007 issue of $1.3 billion was the largest single deal, but the $1.55 billion in three series in 2006 was the largest combined issuance in any calendar year.

Under the original Prop. 14, Texas was allotted $3 billion of bonds with a minimum of $600 million to be spent on safety ­projects.

The 80th state Legislature ­increased the capacity of the highway program to $6 billion, with a maximum annual issuance of $1.5 billion, and $1.2 billion ­dedicated to safety projects.

State motor fuel taxes, vehicle registration fees, reimbursements from federal funds, and other miscellaneous revenue sources are combined in the highway fund to secure the bonds.

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(Dallas Morning News) – Senate Majority Leader Harry Reid will make a visit to North Texas today.

Irving Mayor Herbert Gears said the Nevada Democrat will be at a private event at his home about lunchtime.

“It’s just him coming to my house to learn about Irving,” Gears said.

The senator, whom Republicans hope to oust in November, was scheduled to appear at a January fundraising event in Las Colinas hosted by Gears. Reid canceled the day before the event because of negotiations on health care legislation, his aides said at the time.

Gears said today’s event is not a fundraiser for the senator.

Gears has gotten to know Reid while lobbying federal lawmakers for changes to the Build America Bonds program.

The city wants to use the bonds to build a $255 million entertainment center in Las Colinas.

That is currently prohibited because $50 million of the costs are being covered by a private development company.

Gears said the project will create thousands of jobs. He said that if the bonds program allowed private-public partnerships, the city could save $100 million in financing costs.

Gears said he didn’t know what prompted Reid’s trip to North Texas or what other events he may be attending.

“Harry Reid is a friend of mine, and I want him to know what we’re doing here in Irving,” Gears said.

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(The Bond Buyer) – The Internal Revenue Service is withholding up to $1.2 million of direct-payment subsidies for Build America Bonds issued by Austin last year, said Treasurer Art Alfaro.

The federal offset was imposed in a dispute over payroll taxes, and the city is challenging the IRS letter. In the meantime, the city comptroller’s office has shifted funds to the debt-service sinking fund, avoiding any impact on investors, Alfaro said.

In the letter, the IRS says it is withholding $617,284 in interest subsidies due last month, he said. But based on the amount that appears to be in dispute, Alfaro expects the agency to also withhold $673,401 due in September.

“The amount in dispute was in that range,” he said.

Because the 2009 deal was Austin’s first BAB issue, Alfaro said he did not include the federal subsidy in his budget for the debt service. Even without the subsidy, the yields on the 2009 bonds came in well below his target net interest cost of about 5.2%, Alfaro said.

“I figure we saved about $7 million in net interest cost,” he said.

However, he has warned Austin Energy about the offset as the city-owned utility prepares to issue $100 million of BABs to take out commercial paper next month.

“If the offset is citywide, they’re going to withhold your payment,” Alfaro said he told them.
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The Central Texas Regional Mobility Authority has issued $140 million in bonds to fund a five-mile 183A Toll Road extension.

The financing was broken into two funding designs. About $45 million was issued in subordinated taxable Build America Bonds that were placed by J.P. Morgan and purchased by CityView/AE Capital Advisors. Officials likened the bonds to taking a second mortgage that is subordinate to other debt.

Another $98 million in traditional tax exempt toll revenue bonds will cover the rest of the extension from New Hope Road in Cedar Park to just north of RM 2243 in Leander.

The bond package has an average 7.2 percent interest rate and will be repaid in various increments over 30 years.

“This is an innovative yet conservative bond package,” Mobility Authority Executive Director Mike Heiligenstein said.

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