DALLAS -- With Texas already having its second best year for bond issuance, dealers predict volume could reach $16 billion by yearend if interest rates keep falling.
"I think that's achievable," said Tom Masterson, chairman of Masterson, Moreland, Sauer, Whisman Inc. in Houston.
He and others have reason to be optimistic. In the first nine months of the year, Texas bond volume totaled $13.228 billion, 15% ahead of all of last year and $1 billion ahead of 1986, which had been the state's second best year ever.
In August Texas bond volume, third in the nation behind California and second-place New York, surpassed the $11.488 billion sold in all of 1991. But volume is still far off the 1985 record of $21.5 billion.
Bond dealers surveyed believe that local governments in the state are poised to restart debt sales over the next two years at levels not seen since before the mid-1980s economic bust.
"This state hasn't quit growing," said Masterson, a financial adviser. "We still have major growth ahead of us, just not the runaway growth we once enjoyed."
Many believe the expansion in Texas may finally prompt local governments, and cities in particular, to revive capital programs delayed after tax bases collapsed.
Jerry Pierce, managing director and manager of public finance in the Dallas office of Smith Barney, Harris Upham & Co., said, "You can only postpone infrastructure so long before you have to sell bonds."
Before looking to next year, Wall Street and regional firms say they still have a busy three months ahead. Just how busy will depend largely on what happens with interest rates.
"With continued lower rates you are going to find a tremendous pressure to refund a lot of the marginal deals that aren't being done now," said Vince Matrone, senior vice president and manager of public finance in Dallas for Rauscher Pierce Refsnes Inc., the largest underwriter among Texas-based firms. "There are a couple of billion that are marginal."
Other bond dealers agreed, saying that many large deals are waiting for the market's negative arbitrage situation "to straighten out," as one underwriter put it.
In this market scenario, the yield on securities that issuers escrow to defease their refunded bonds is below the yield on the refunding bonds, which evaporates potential savings. As a result, many are waiting for short-term Treasury yields to climb before selling deals.
Even if those deals do not get done, underwriters are preparing for a near $1 billion block of state-issued bonds that have already been approved for advance refundings by yearend. Other major deals are also in the works.
For instance, the proposal to sell the financially troubled Houston Ship Channel Bridge could result in a $320 million deal by December. Houston officials have also discussed a refunding of up to $500 million of revenue debt. Other authorities in the state are monitoring market conditions.
With Texas firms typically concentrating on the financial advisory business, Wall Street firms again dominated underwriting in the state this year. Goldman, Sachs & Co. was the lead senior manager, with $1.86 billion in issuance, while the leading Texas-based underwriter was Rauscher Pierce of Dallas, which handled $882 million in deals.
The state's leading financial adviser so far this year has been First Southwest Co., which began underwriting more bonds after being sold to a local investor group a year ago.
The firm held 28% of the market with 171 deals totaling $3.7 billion. That was more than the combined totals of Rauscher Pierce and Masterson Moreland, which came in second and third, respectively.
Among bond counsel, Houston-based Fulbright & Jaworski was number one with $4.9 billion of Texas bonds. Second-ranked McCall, Parkhurst & Horton of Dallas reported $3.99 billion of Texas bonds, claiming the most deals with 166 issues completed.
This bumper year is in sharp contrast to the often lean years that followed the 1986 economic crash in Texas.
In 1990, total volume was $6.62 billion, barely half the current level for just nine months. Buoyed by two consecutive strong years, bond dealers are predicting a rebound of new-money issuance in 1993 that some say could cause total volume to reach $10 billion.
"There's a lot of pent-up demand that could conceivably come do market in a year or two," said Don Karlberg, a Houston-based senior analyst for Kemper Securities Inc. "So much will depend on whether the Texas economic growth continues."
Over the last two years, local school financing has been a major factor in the Texas bond market, accounting for nearly $2 billion annually of issuance. While many say those districts have exhausted authorizations, they note that many cities still have debt capacity that was approved before the 1986 economic crash.
But many cities are still dealing with declining tax bases that have prompted officials to curb issuance in recent years to avoid property tax increases.
Fort Worth Councilman Morris Matson, first vice president for AMBAC Indemnity Corp., said that next spring his city may seek a $60 million general obligation bond deal for street projects, but will likely use it slowly.
"We don't see the growth in the tax base occurring, so we are going to be very careful," Mr. Matson said yesterday. "It's not that we don't have needs."
How a Texas-Sized Pie Is Divided
With tax-exempt volume over $13.2 billion in the first three quarters, the state's bond industry is already having its second best year ever and some predict volume could reach $16 billion by yearend. Here is how underwriters, financial advisers, and bond counsel rank through Sept. 30. Firms listed in bold are Texas-based operations ranked in the top 25 through the third quarter. [TABULAR DATA OMITTED]
