Early bond payment could cost bankers
While move might save state $80M, some would feel ‘betrayed’
State bankers on Monday urged the Texas Transportation Commission to rethink a plan to pay off a $300 million bond issued in late 2020, more than nine years ahead of schedule and at a time when that initial investment has some bond buyers losing money on the purchase.
If paid off early, potentially by the end of April, the move could lead the state to save about $80 million compared to letting the bond mature further. The banks who bought it, however, would be absorbing that loss.
That move would leave banks “feeling hoodwinked at best and betrayed by their state at worst,” said Christopher Williston, president of the Independent Bankers Association of Texas.
Williston and other banking industry officials urged the commission on Monday to not proceed. After the comments, transportation commissioners met for more than 21⁄2 hours in executive session, then adjourned without taking any action.
The commission’s next scheduled meetings are March 27-28, but any bond sale does not require commission approval, said Adam Hammons, spokesman for the Texas Department of Transportation.
Hammons said the agency “is in the process of refunding previously issued bonds to save money for the citizens of Texas through unusual market conditions” and “fully disclosed the ability to redeem the bonds at the time of initial sale.”
Bonds are a common tool used to fund most of Texas’ transportation needs, especially capital programs where funding from federal sources and statewide fuel taxes can be spread over
multiple years. As of the end of August, the state had 33 active transportation-related bonds, totaling more than $17 billion — not counting those related to specific toll projects such as the Grand Parkway.
In late 2020 and throughout 2021, the commission and state officials allowed a flurry of bond sales tied to uncertainty over the COVID-19 pandemic, upcoming major projects and the availability of very low interest rates.
That uncertainty over time turned into a windfall. With additional money from the federal infrastructure bill approved in 2021, increases in the state’s tax revenues for fuels and voter-approved money from the economic stabilization fund, TxDOT, governed by the transportation commission, is in a financial position to pay off some of that debt faster.
The 2020 bonds have a “make whole redemption,” in their terms, allowing TxDOT at any time to pay off the remaining debt. Flush with cash, highway officials are considering if that time is now.
State officials often refinance or retire some bonds early, but the elimination of such a new bond, some banking officials said, was unheard of.
“This provision has never been exercised in this way in any realm I am familiar with,” Williston said.
The savings from paying the bonds early comes at a cost for the banks that bought the bonds. Assured of their stability at the time — and given Texas’ long record of paying its debts — the banks grabbed the bonds thinking they would make a sound long-term investment.
Now, that situation has changed. As interest rates have risen sharply since 2020, inflation has meant money doesn’t go as far as it once did, and their longterm profit is eliminated by the state paying the principal sooner.
“Yes, the state is going to save a little money, but the bondholders are going to get hammered,” said Kelly Stretcher, president of First Liberty National Bank.
Williston said based on conversations with the banks who are members of his group, the bond itself is today worth about 20% less than what bankers paid because they are not capturing that future interest.
Stretcher, who leads the small bank in Liberty County northeast of Houston, said while his bank’s roughly $500,000 loss is minuscule compared to the state’s overall savings, it still has an economic effect on the state by costing local banks capital they would otherwise invest.
“That is going to prevent us from making home loans, business loans,” Stretcher told transportation commission members.
While banking officials said the early repayment is certainly allowed under the terms, they worry it will make buying into state projects less attractive for some investors in the future.
“You can do it,” Williston told transportation commissioners about the early repayment. “… I can assure you when it comes to community banks, you will only do it once.”