AUGUST 23, 2011, 3:27 P.M. ET.

Texas Sells State Record $9.8 Billion in Short-Term Notes

By MICHAEL ANEIRO

The state of Texas sold $9.8 billion of tax-exempt general obligation tax and revenue anticipation notes on Tuesday, in the largest offering in the municipal market this week and the largest-ever short-term note offering by the Lone Star State.

Such notes typically mature within one year and are generally issued by states at the start of their fiscal years to raise cash ahead of incoming tax and revenue receivables for that year. The Texas comptroller's office said the notes mainly will be used to support payments to public schools at the beginning of the new school year, noting that the state front-loads payments to schools at the beginning of each school and fiscal year.

It was by far the largest offering in the municipal market this week. The deal was oversubscribed by 3.23 times, according to the comptroller's office.

"We expect demand for this issue to give direction to the short-term market for this week," wrote Tom Kozlik of Janney Montgomery Scott in a note on Tuesday.

The notes, which carry the highest possible short-term note ratings of SP-1+ by Standard & Poor's, MIG 1 by Moody's Investors Service and F1+ by Fitch, were sold through a competitive offering, in which investment banks bid on blocks of the bonds and then reoffer them to other investors.

The notes will mature Aug. 30, 2012, and were sold with a weighted average net interest cost of 0.273% with a 2.50% coupon, according to the state comptroller's office, which said the winning bids came from J.P. Morgan Chase & Co., FirstSouthwest, RBC Capital Markets, Citigroup Inc., Barclays Capital and Piper Jaffray Cos.

In addition to funding schools, the state said the notes are being issued to manage cash flow in its general revenue fund for fiscal year 2012, which begins Sept. 1, and to avoid a temporary cash shortfall in the unrestricted accounts in the state's general revenue fund.

In an offering document, the Texas comptroller projected a maximum temporary cash shortfall of $13.2 billion within fiscal year 2012 before the note proceeds and other available borrowing. The state said it expects to start fiscal year 2012 with a $1.8 billion negative cash balance in the general revenue fund's unrestricted accounts, and to end the 2012 fiscal year with a negative cash balance of $6.7 billion.

The $9.8 billion represented the largest amount sold since the state first began selling short-term notes in 1987, according to the comptroller's office.

Write to Michael Aneiro at michael.aneiro@dowjones.com

http://www.atf.gov/press/releases/2011/ ... cheme.html