New York, April 18, 2017 -- Issue: Limited Tax Schoolhouse and Refunding Bonds, Series 2017; Rating: Aaa; Rating Type: Underlying LT; Sale Amount: $837,800,000; Expected Sale Date: 05/02/2017; Rating Description: General Obligation Limited Tax;
Issue: Limited Tax Schoolhouse and Refunding Bonds, Series 2017; Rating: Aaa; Rating Type: Enhanced LT; Sale Amount: $837,800,000; Expected Sale Date: 05/02/2017; Rating Description: General Obligation Limited Tax;
Issue: Lease Revenue Refunding Bonds, Series 2017; Rating: Aa1; Rating Type: Underlying LT; Sale Amount: $21,615,000; Expected Sale Date: 05/02/2017; Rating Description: Lease: Appropriation;
Summary Rating Rationale
Moody's Investors Service affirms Houston Independent School District's, TX Aaa and Aa1 on $2.8 billion general obligation limited tax (GOLT), and $170.2 million lease revenue bonds, respectively. Concurrently, Moody's assigns a Aaa underlying and Aaa enhanced rating to $837.8 million limited tax schoolhouse and refunding bonds Series 2017, and Aa1 to $21.6 million lease revenue refunding bonds Series 2017. The outlook is stable.
The Aaa rating is anchored by the district's continuous history of strong operating performance, and a large economy with solid assessed valuation growth despite weakness associated with the oil and gas industry. Additional considerations include a high debt profile, and low wealth indices. The Aa1 on the lease revenue bonds reflects the non-appropriation risk, and essential nature of the assets. The Aaa GOLT rating is the same as the Moody's internal assessment of the issuer's hypothetical unlimited tax debt, reflecting the available taxing headroom under the tax cap.
The Aaa enhanced rating is based on the rating of the Texas Permanent School Fund and the structure and legal protections of the transaction which provide for timely payment by the PSF if necessary. Moody's currently rates the Permanent School Fund Aaa. For additional information on the PSF program, please see Moody's Rating Update Report on the Texas Permanent School Fund dated January 27, 2017.
The stable outlook reflects a stable financial profile that should continue to benefit from sound fiscal practices and economic performance that will augment assessed valuation growth, subject to the state's funding formula. The outlook also considers the district's importance as an academic institution for kindergarten through 12th-grade education, drawing stable demand within its service area.
Factors that Could Lead to an Upgrade
Factors that Could Lead to a Downgrade
Additional leverage combined with narrowed revenue raising ability under the property tax cap
Significant narrowing of balance sheet
Structural imbalance that reduces reserves
Material economic deterioration
The general obligation limited tax bonds are secured by a direct and continuing annual ad valorem tax, levied on all taxable property within the limits prescribed by law.The lease revenue bonds are secured by lease rental payments made by the district, subject to annual appropriation, made from lawfully available revenues, which under current law is limited to Basic Allotment Tier 1 Funds, and any unintended surplus maintenance tax revenues.
Use of Proceeds
A portion ($540 million) of the limited tax bonds support district wide capital initiatives, while the remainder will refund certain maturities of the district's outstanding debt, for an expected net present value savings of 13%.Proceeds from the lease revenue bonds will be used to refund certain maturities of the outstanding lease revenue bonds, for an expected net present value savings of 8.7%.
Houston Independent School District serves approximately half of the City of Houston (Aa3 negative). Enrollment grew 0.2% in fiscal 2016 to reach 215,627 students, with estimates showing a modest increase in 2017 to 216,106 students.
The principal methodology used in this underlying rating was US Local Government General Obligation Debt published in December 2016. The principal methodology used in this enhanced rating was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in December 2015. The principal methodology used in the lease rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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