DALLAS -- After a half-decade of tough times, Texas municipal utility districts are returning to the bond market with a vengeance.

Thanks to a recovering economy and a new rule liberalizing refundings, Texas MUDs, as they are known, are on track for their second-best year ever, with year-to-date issuance of $272.8 million already 104% ahead of the same period last year.

While cautiously optimistic, many observers say stronger housing demand in the Houston area may prompt a long-term growth in new-money issues in the next few years.

Not everyone is sanguine about the current boom in issuance. "I think this [current issuance] is a pig in a boa constrictor," said Joe Allen, a partner at Vinson & Elkins in Houston, a leading bond counsel for municipality utility districts. "This is the big volume now, and my guess is that by November you will see a big drop-off."

While others agree, they say total volume could top $400 million by yearend, not far from the record $510 million issued in 1985. That was the year issuance peaked before the Texas economy collapsed in an energy and real estate recession that stopped growth and MUD issuance.

And because the heavily regulated utility districts are considered good barometers of the economy, investment bankers say the move back to the credit markets is an encouraging sign for all segments of the Texas municipal bond industry.

"The level of issuance, generally, continues to increase as a consequence of an improved economy," said Craig Rathmann, senior vice president at Rauscher Pierce Refsnes Inc. in Houston.

That is especially true in the Houston area, where many of the state's 1,400 development-style special districts are located. After bottoming out, bankers say housing demand and property values are again improving.

But most attribute the high volume to advance refundings made possible by a new Houston ordinance adopted in February. In fact, nearly 82.1% of all bonds sold this year have been refunding issues, compared with 37% last year.

Mr. Allen said Houston-area MUDs had no authorization to do refunding until 1986, when the Houston City Council adopted rules allowing for refundings if there was a 3% net present value savings to be had.

Even if a district could do that, its authority for restructuring was restricted. That changed in February after the council adopted new rules designed to help distressed districts, but only if they met certain financial standards.

For instance, a district now must lower its tax rate at least 10% and may restructure its debt out five years above the original maturity.

Tom Cassell, vice president at Juran & Moody Inc. in Houston, said the ability to restructure the debt without requiring a 3% net present value savings has meant new opportunity for his clients.

Beyond any interest rate savings, he said districts are able to lower their annual debt service costs, and tax levy, up to 25% a year by extending the life of the bonds.

"If interest rates stay down, I think we're going to see this sustained," Mr. Cassell said.

So far, however, there has been no strong trend of increased new-money issues, though some see an improving South Texas economy as the first sign issuance is rebounding.

One explanation may be tougher requirements a district must meet before the Texas Water Commission, which oversees the districts, will approve new-money bonds. "Because of the new feasibility rules, it will take longer for a new district to come to us with new issues," said Carol Limaye, an official at the commission.

Already, the creation of new districts has slowed to just three this year. That is half the number of new districts created in 1990 and down sharply from the 43 new districts in 1989. Of those, only one-third are active.

No one is complaining about the tighter regulatory process. Instead, investment bankers credit it with preventing the kind of uncontrolled district issuance that has caused problems in other states, most notably in Colorado, where more than $300 million of special district bonds have defaulted.

By contrast, only three special districts -- two of them MUDs -- have defaulted in Texas during the last decade when $2.37 billion of bonds were sold. The regulation and track record of the districts has attracted investors of all kinds.

"The knowledge of the credit is better today than it was," Mr. Cassell said.

Marvin Moreland, president of Masterson Moreland Sauer Whisman Inc. in Houston, agreed. He said investor demand, which shifted from institutions to individuals over the last two decades, is now a mix of the two.

"It's been primarily an individual market," he said. "But we are seeing some institutions who are interested now."

Investors are not the only ones interested.

After years of focusing mostly on workouts for troubled districts, many brokerages are cashing in on the new, record-pace volume. That is especially true for Masterson Moreland in Houston.

Earlier this year, the firm purchased the public finance Neuhaus & Webb Inc., the now-closed Houston branch of Kemper Securities Group -- the top underwriter of MUD bonds in 1990.

At the time, company chairman Tom Masterson said the expectations that MUD issuance was about to surge were a factor in his negotiations to purchase the contracts. Six months later, he has not been disappointed.

"It doesn't surprise me one bit," Mr. Masterson said. The business has really picked up because they are building houses again."

Masterson Moreland ranks second so far this year in overall volume of issues, but with 13 deals sold has handled more than any other underwriter. The firm also is ranked third as financial adviser to MUDs.

In the meantime, even newly formed firms are part of the push to market, including upstart Coastal Securities in Houston, which has completed transactions totaling $1 .3 million.

"We've gone through four to five years of turmoil," said Carlin Short, a principal at Coastal. "I suspect that this year there are going to be some frowns turned into smiles."

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