Bexar County Hospital District
Limited Tax Refunding Bonds, Series 2016
The firm’s fourth transaction completed for the District and its third senior managed transaction
On August 9, 2016, Siebert Cisneros Shank (“SCS”) served as the book-running senior manager on the above entitled transaction for the Bexar County Hospital District (“District”). This transaction represented the firm’s fourth transaction completed for the District and its third senior managed transaction. With this experience and understanding of the District’s credit, the firm actively monitored the District’s refunding opportunity of the Series 2008 Bonds. After the fallout of the Brexit vote, interest rates plunged to all time historical lows, providing the District an opportune time to refund the Series 2008 Bonds. On top of that, August is historically a large month where municipal cash supply for reinvestment is at annual highs which further helped with investor demand. However, this transaction experienced a slight step backward due to a rating downgrade.
Unlike the previous bonds the District has issued, these Bonds were downgraded one notch by Fitch from ‘AAA’ to ‘AA+’. The Bonds were rated Aa1/AA+/AA+, and backed solely by a limited ad valorem tax pledge without any double barreled revenue pledge as well, which the previous bonds had. Fitch’s rating downgrade had nothing to do with the District’s finances nor the limited ad valorem tax pledge. The downgrade was reflective of Fitch now rating the District’s credit via a different methodology than before. Fitch did not rate this limited ad valorem tax back debt using its tax backed credit methodology, it instead used its healthcare methodology. Despite the downgrade, the District was still in the highest rated healthcare category for Fitch as they haven’t rated any healthcare issuer ‘AAA’. With the downgrade, SCS’ sales desk diligently took its time to educate potential investors on the rationale behind the Fitch downgrade and keep them focused on the strength of the limited ad valorem tax pledge.
With the market tone in the favor of the District, SCS recommended pre-marketing the transaction with aggressive pricing spreads relative to comparable transactions recently priced. Since this was a refunding transaction, SCS also thoroughly explored smaller coupon options to maximize refunding savings. After the pre-marketing period, the consensus offering included 3% and 4% coupon bonds on and after 2031, the final maturity was 2037. As the order period was started, there was ample demand up and down the maturity structure except for the 2019 and 2036 maturity. Aside from those two maturities, every maturity was approximately 1x to 3x oversubscribed on a priority basis. To fill in the unsold bonds in the 2036 maturity, its coupon was changed from 3% to 4% to bring in investors who weren’t allocated bonds in the earlier 4% coupon maturities.
To address the oversubscriptions in the other maturities, SCS lowered pricing spreads from 1 to 3 basis points. For the unsold 2019 balance, SCS stepped up to underwrite $4.86 million bonds for the benefit of the District. As a result of the lowered interest rates and underwriting of unsold bonds, the District was able to generate net present value savings of $37.18 million or 17.26% of the refunded par amount. On a total gross debt service savings basis, the refunding produced a total of $51.33 million in debt service savings.
For this refunding transaction, there were 40 different institutional investors that submitted bond orders as well as several retail accounts. SCS’ sales desk submitted $377 million total orders or 72.60% of the total orders submitted. Of those 40 different institutional investors, 9 of them previously supported the District’s bond transactions in 2009 and 2010. When compared to recent comparable transactions, the District’s transaction was priced 2 to 12 basis points lower than a Harris County Hospital District transaction priced the week before.