Unlimited Tax School Building and Refunding Bonds, Series 2016
Round Rock transaction saves taxpayers $5.82 million annually from 2018 through 2030
This October transaction for Round Rock Independent School District was SCS’ second senior-managed transaction for the District.
With interest rates near historical lows, the District also decided to issue the remaining authorized but unissued debt from its 2014 bond measure. In addition to the highest underlying ratings of Aaa/NR/AAA, the Bonds were also backed by the Permanent School Fund Guarantee.
As the week of pricing approached, market conditions were relatively stable, but the municipal bond market faced two potential obstacles. First, the primary market supply was $14 billion, one of the larger supply weeks in history. Secondly, the Federal Reserve’s Richmond President made comments stating that a higher Fed funds rate was appropriate triggering a sell-off in Treasuries and pressuring the municipal bond market. Compounding these two market impacting conditions, several investors who were interested in the District’s bonds, could not invest due to the defeasance language which includes the possible inclusion of Texas municipality bonds in refunding escrows. The Treasury bond sell off was further intensified following a report that the European Central Bank was contemplating tapering down its quantitative easing.
Even with the resulting volatility, SCS and its underwriting syndicate felt comfortable entering the market with aggressive pricing spreads. The deal incorporated bifurcated maturities from 2018 through 2023 and lower 3% and 4% coupon bonds on and after the 2030 maturity. The lower 3% and 4% coupons were utilized to help improve refunding savings. In the order period, the sell off in Treasury bonds adversely impacted the bond sale with only $51 million in priority orders, including $150,000 in retail orders. There were no orders in several maturities. Ultimately, the underwriting syndicate underwrote $34.5 million for the benefit of the District with SCS taking into inventory $23.97 million.
The pricing adjustments and underwriting helped the refunding component generate net present value savings of $8.13 million or 12.49% of the refunded par amount. On an annual debt service savings basis, the District will save its taxpayers $5.82 million annually from 2018 through 2030. When compared to other comparable transactions in the market, the District’s transaction priced better. The Texas Department of Transportation transaction, a natural triple-A rated credit, historically prices better than Texas Permanent School Fund Guarantee school district bonds. The District’s 5% coupons bonds priced at +22 bps versus +25 bps for the Texas Department of Transportation. In addition, despite not having the flexibility to remove the defeasance provision as the Tomball ISD transaction had, the District’s transaction priced 1 to 3 bps better in the 2022 to 2024 maturities.