Houston Combined Utility System
First Lien Revenue Refunding Bonds Series 2014C
Sophisticated optimization model maximizes refunding savings for Houston CUS
The City of Houston Combined Utility System Revenue Refunding Bonds priced in March 2014 during a week of supply that was estimated to be in excess of $11 billion—the first time in 2014 that supply surpassed $10 billion. The $692 million refunding transaction was sold as part of a highly creative plan of finance to avoid a large transferred proceeds penalty. Because the Series 2004A escrow investments are not scheduled to mature until after the Series 2004A Bonds are fully discharged, the City decided to obtain a private letter ruling from the IRS to allow a portion of the refunding to be issued with tax-exempt bonds without being subject to a transferred proceeds penalty. Siebert Brandford Shank worked with the Financial Advisors and Tax Counsel to create a “What’s Best” model that optimized both the placement of tax-exempt versus taxable bonds and compared the issuance of tax-exempt with a transferred proceeds penalty versus taxable bonds. Our recommended approach was utilized by the City in completing the 2014 refunding transaction which produced total refunding present value savings of $207 million (14.92%), including the taxable refunding series.
Our sales desk worked diligently for several weeks in pre-marketing activities, including identifying existing holders of Houston Combined Utility System Bonds and reaching out to potential new investors. After an hour and half order period. We were able to tighten yields by up to 7 basis points on the 2027 and 2028 maturities. In addition to strong demand from existing holders, the bonds attracted approximately 46 new investors which placed a total of $455 million of orders. The deal achieved tighter MMD spreads, by as much as 10 basis points, as compared to the tax-exempt 2013 Combined Utility System bond transaction, notwithstanding the much larger serial maturities in the 2014 transaction.