Leander bond rating goes from ‘near junk status’ to high rating
Leander bond rating goes from ‘near junk status’ to high rating
Written by Kara Vaught Monday, 07 January 2008
When Garry Kimball, senior vice president for First Southwest Company, began working on the City of Leander’s financial account, its bond rating was what mayor John Cowman called “near junk bond status.”
At its lowest, Kimball recalls the rating was BBB, one step above a non-investment grade rating, according to Standard & Poor’s, one of the three major ratings companies.
“Fortunately, we are now upgraded into the single A category, and we are well into investment grade sections of both Standard & Poor’s and Moody’s rating classifications,” Kimball said. “We’re real pleased with where we’ve ended up.”
Higher ratings mean access to lower interest rates and more buyers, which saves city taxpayers money.
How bonds work
Bonds are the mechanism cities and governments often use to borrow money. Banks, private investors and various other entities buy municipal and government bonds because they are considered safe investments: default is fairly rare.
Each time bonds are offered for sale to the public, the issuing entity requests a new bond rating review — which is more comprehensive than an annual review — by one or more credit rating agencies. A city could try to issue a bond without paying for a ratings review, but it would not have access to the best interest rates or buyer base, Kimball said.
Leander and Cedar Park use only Moody’s and Standard & Poor’s ratings agencies. The third ratings company, Fitch, is the newest, and cities do not typically request ratings from all three unless the amount borrowed exceeds $100 million in a single bond, Kimball said.
With municipal bonds, rating agency officials will examine aspects and policies of the city to determine what grade to assign.
Bond ratings companies do both a qualitative and quantitative analysis, Kimball said. The quantitative side is the ability to repay bonds, including tax collection percentages, property tax base, growth rates and general fund balance as a percentage of the total budget.
“They want to see how strong your reserves are and how your actual financial performance over the last three or four years stacks up with your budgeted performance,” Kimball said. “Those are quantitative measures that you can track and compare yourself to other entities fairly easily.”
Qualitative measures involve the willingness to pay, which is determined through more subjective observations, including turnover in key staff positions, turnover on the city council, stability on the council and whether or not officials have the political will to impose the financial discipline to not raid the city’s reserves, Kimball said.
loadposition bigisland}Another important component — especially in dry climates — is whether officials have made the appropriate financial decisions to ensure an adequate supply of water.
Then
In the mid-’90s, Leander was unable to qualify for bond insurance, Kimball said, which is a minimum necessity to sell investment-grade bonds.
“I got brought in at kind of the low point financially,” he said. “So that was obviously not something that could be sustained.”
The low rating was caused by a combination of factors, including a statewide real estate crisis and general financial instability of the late ’80s and early ’90s, Kimball said.
Leander officials spent down the city’s reserves, and the city council implemented a development moratorium in 1995.
“The moratorium said that you couldn’t expand your tax base, so that was a really bad sign to Wall Street about future growth,” Kimball said.
Another factor was the interruptions in water service the city experienced.
“At that time, the city was under the Chisholm Trail [Special Utility District],” Kimball said. “I’m not pointing the finger, but the reliability of the infrastructure that served Leander was real unstable, leading to times when you had to boil water. Those things combined with council instability together put the city in a bad light financially.”
Now
In the last four years, Leander has adopted and fostered a strong reserves policy that has gone a long way toward making Wall Street comfortable that the city would not again raid its savings, Kimball said.
Turnover has slowed significantly, Cowman said, and the city council is strong.
“I’ve got former mayor pro tems, a council elderman in John Perez, a brand new city council member in Chris Fielder for fresh ideas and a very stable political base,” he said. “We made all these right moves: stable management, stable politics, and Wall Street notices that H-E-B is here, Lowe’s is coming, the toll road is here and the city is in a credible situation for growth, stability, the works.”
Natural economic factors have also contributed to ratings increases, Kimball said.
“You’ve got a tax base now that is over a billion dollars and growing,” he said. “You are in the central growth corridor for the greater Austin area as it relates to having a brand new toll road that literally lets people off at the doorstep to the city, and it experienced three times the traffic that was expected when the deal was conceived.”
Leander’s partnership with Round Rock and Cedar Park in the Brushy Creek Regional Utility Authority stabilizes the water supply, Cowman said, another positive sign to the ratings agencies.
Raising a bond rating as quickly as Leander has is not unprecedented, Kimball said, but few of his clients can say they have been upgraded twice within five years.
“It’s not something the ratings agencies do annually, even though they review annually,” he said. “Especially to go from a triple B category into a single A category is a major step on their part — they don’t take it lightly.”
Savings
In 2007, Leander saved approximately $350,000 on $9.2 million in debt by receiving a ratings increase and thereby a lower interest rate. Also last year, $21.2 million was financed at 4.36 percent, saving more than $800,000 on a 20-year financing.
“By taking the steps to improve its credit, the city directly impacts its tax rate for the better in significant ways because those borrowing cost improvements represent real money,” Kimball said. “I can’t emphasize just how much it means to have stable and experienced management in place and a stable council in place that recognizes what its obligations are. We fortunately benefit from that when we take them to the market now.”
| Bond ratings by agency | ||
| Credit Risk | Moody’s Investor services* | Standard & Poor’s** |
| Investment grade | ||
| Highest quality | Aaa | AAA |
| High quality (very strong) | Aa | AA |
| Upper medium grade (strong) | A | A |
Medium grade | Baa | BBB |
| Not investment grade | ||
| Ba, B, Caa,Ca, C | BB, B, CCC, CCC, CC, D | |
*The ratings from Aa to Ca by Moody’s may be modified by the addition of a 1, 2, 3 to show relative standing within the category, 1 being highest in the category. **The ratings from AA to CC by Standard & Poor’s may be modified by the addition of a plus or minus sign to show relative standing within the category. | ||
| Most recent ratings | |
Leander | A3 6-15-07 |
| Cedar Park (stable at A1 or A2 since 1998) | A1 |
| Round Rock (steadily increasing since 1997) | Aa2 |
| Georgetown (AAA since 1998) | AAA 12-19-07 |
| Pflugerville (steadily increasing from A3 since 2001) | A1 11-12-07 |
| Austin (fluctuates within high quality ratings) | Aa3 11-30-07 |
| Sources: www.standardandpoors.com, www.moodys.com, fitchratings.com | |
Ratings reasoning
Moody’s Investors Services, one of the three ratings agencies, provides narratives about particular ratings assignments on www.moodys.com.
Aug. 1, 2005 — A Baa1 rating is assigned to the City of Leander’s $4.29 million general obligation refunding bonds, series 2005.
“The Baa1 rating is indicative of the city’s robust tax base expansion, narrow financial reserves and elevated debt position. Elevated debt position expected to remain high given population growth.”
June 15, 2007 — Moody’s assigns A3 rating to the City of Leander’s $9 million certificates of obligation, series 2007.
“Concurrently, Moody’s affirms the A3 rating on the City’s $74 million in outstanding parity debt. The rating assignment reflects the city’s trend of consistent and considerable tax base growth, improving socioeconomic profile and improving reserve levels, amid above-average debt burdens driven by rapid growth. Over the last three years, the city has seen increased revenues associated with the economically volatile sales tax revenues.”
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