DALLAS - With $5.4 billion of toll-road related projects on the drawing board, Harris County, Tex., today plans to issue $350 million of senior-lien toll road revenue bonds with maturities stretching to 40 years.
The negotiated deal led by Goldman, Sachs & Co. comes on the heels of a credit boost to Aa3 from A1 by Moody's Investors Service and to AA-minus from A-plus by Fitch Ratings. Along with a AA-minus from Standard & Poor's, the ratings negate the need for credit enhancement on the bonds, according to Edwin Harrison, the county's director of financial services.
"We're an excellent credit," he said. "There's no need for insurance, which investors don't want anymore. This kind of debt will sell like hotcakes."
As an indicator of potential demand, Harrison points to last month's $236 million issue of Harris County bonds for the Port Authority of Houston that were oversubscribed four times.
The underwriting team consists of co-managers JPMorgan, Citi, Estrada Hinojosa & Co., Lehman Brothers, Loop Capital Markets LLC, and Siebert Brandford Shank & Co.
Harrison said the same team carried out a market valuation of the toll road system for the Harris County Toll Road Authority.
"They've done a lot of work for us," he said.
First Southwest Co. works as financial adviser for the county. Andrews Kurth LLP is bond counsel on today's deal. Greenberg Traurig LLP serves as disclosure counsel, with Bates & Coleman PC as underwriters' counsel.
The deal will primarily refund commercial paper used to maintain the existing system and bolster the debt-service reserve fund, as HCTRA prepares to develop a series of projects that will require about $5.4 billion of new debt.
The long 40-year maturities of the revenue bonds pricing today are possible because of a relatively flat, long-term yield curve, Harrison said.
The 40-year debt and the system's use of electronic toll tags are examples of how the county is trying to adopt some of the tools used by private developers that are now allowed to compete for some toll projects, according to Harrison.
He said private developers are able to use greater leverage on their debt, whereas public entities such as HCTRA are required to work within stricter limits.
Jose Lopez, U.S. director of Cintra Concessiones Infraestructures de Transporte, a Spanish toll road developer operating in Texas, compares the two financing models to a football game.
"We can play on a muddy field," Lopez said. "They have to play on good grass or artificial turf."
Although HCTRA has not had to face competition from private developers the way the North Texas Tollway Authority has, the county toll operator must assume a competitive posture, Harrison said.
"This toll road system is a business," he said. "It is an enterprise fund, and we believe the people of Harris County can derive the best benefits if it is run like a business."
In upgrading the credit, Moody's analyst Thomas Paolicelli noted the county's history of strong debt service coverage and ample cash balances supported by steady traffic and revenue growth.
Despite a national economic downturn, HCTRA saw its first-quarter toll revenues increase by better than 16%, according to Harrison. While Houston has not been totally immune to high gas prices, Moody's observed "a relatively high inelasticity of demand and acceptance of tolls by Houston-area commuters."
Challenges facing HCTRA include the prospect of rapidly growing debt for the new projects and the risk of a local or regional economic downturn, Moody's analysts wrote in the rating report. However, Harris County has committed to funding only projects that are self-supporting and won't dilute the toll authority's credit profile.
HCTRA is a partner in a multi-county project known as the Grand Parkway, a loop around the outer Houston metro area. While much of the loop will run through undeveloped land, HCTRA's portion of the project traverses populated areas that would make the section self-supporting, Harrison said.
Analysts at Moody's and Standard & Poor's consider HCTRA's willingness to raise tolls to hit revenue targets a positive factor, but note that tolls are higher than the industry average. The authority's Hardy Toll Road charges 14 to 18 cents per mile, and the Sam Houston Tollway rate is 15 cents per mile.
"The tolled facilities face competition from free alternatives that surround them," noted Standard & Poor's analyst Laura A. Macdonald.
Houston's notorious traffic congestion led to creation of HCTRA in a 1983 election that authorized $900 million of tax-backed debt to get the system started.
The Hardy Toll Road and the Sam Houston Tollway-West, the first two components of the toll system, were completed in 1987 and 1990, respectively. In May 1994, the county bought the Jesse H. Jones Memorial Bridge toll facility from the Texas Turnpike Authority and renamed it the Sam Houston Ship Channel Bridge.
HCTRA took center stage in acrimonious debates over Texas's overall transportation plan in the 2007 Legislature. Under SB 792, which redefined how toll projects would be awarded, HCTRA landed six projects in Harris County and was exempted from paying the Texas Department of Transportation for rights-of-way.
The projects were Beltway 8 Tollway East, the Hardy Downtown Connector, U.S. 290 toll lanes, State Highway 288, Fairmont Parkway East, and the South Post Oak Road Extension.
Because HCTRA lies entirely within Harris County, it lacks the jurisdictional politics of the North Texas Tollway Authority, which covers several counties and cities in the Dallas-Fort Worth area. However, HCTRA works with toll authorities in surrounding counties on connecting projects.
Unlike the Harris County agency, the NTTA was required to bid for toll projects, conduct market evaluations, and pay up-front concession payments to the area's Regional Transportation Council. To build State Highway 121 north of Dallas, the NTTA had to pay the council and TxDOT $5 billion for the rights to the project.
"At the North Texas Tollway Authority, you have a confederation of five or six counties," Harrison said. "It's just a different dynamic or different paradigm."