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TxDOT Seeks VR Exit from $150M of Variable Rate Debt

DALLAS - With short-term interest rates in a volatile state, the Texas Department of Transportation is planning a current refunding of $150 million of variable-rate toll bonds, most of which are held by Germany's Depfa Bank.

Depfa acquired $133 million of the bonds through failed remarketing of the bonds under terms of its contract with TxDOT's supervisory board, the Texas Transportation Commission.

The 2002B bonds were issued by the Texas Turnpike Authority for the Central Texas Turnpike System that operates toll roads in the Austin area. Insured by Ambac Assurance Corp., the weekly rates on the $17 million of the bonds still circulating have risen with Ambac's falling credit rating and the volatility in the market.

The bonds held by Depfa are paying 3.25%, down from 3.75% after the Federal Reserve's rate cut last week. But earlier in the month, rates on the balance of the bonds reset at 9.75% and have risen to as high as 9.9%.

"We modeled the rates at 5.5%," said James Bass, chief financial officer for TxDOT. "The life-to-date average is 2.82%. The cost has still been way under the original projections. It has been a good deal overall."

Once triple-A rated Ambac is now rated AA by Standard & Poor's and Aa3 by Moody's Investors Service. Fitch Ratings has withdrawn its ratings on the insurer.

If the ratings on Ambac should fall below AA-minus from Standard & Poor's or Aa3 from Moody's, the TTA would be forced to repay the $133 million of bonds held by Depfa within 90 days.

Otherwise, if the bonds held by Depfa have not been refunded by Dec. 20, TTA must accelerate payments to retire the bonds by 2016

In addition to Ambac's problems, Standard & Poor's last week downgraded Depfa Bank's rating to BBB-plus from A and placed its short-term ratings on negative watch.

TxDOT is working on two options for refunding the bonds, either a letter of credit from a bank or a private placement, according to Bass. The private placement would be arranged by a bank that approached the department about lining up investors to take on the debt, he said. The bank has not been named because no deal has been agreed to yet.

"We will decide based on what we ultimately think is best for the turnpike system that is the lowest cost, but also the least amount of risk given the current conditions," Bass said. "If Ambac is downgraded further, we might be in a position where we have to sell them in 90 days."

Fitch placed the bonds on negative watch last week with an underlying rating of BBB-plus after revising its view of the tollway sector. The bonds are also rated BBB-plus by Standard & Poor's and Baa1 by Moody's.

"The negative rating outlook reflects the potential for traffic growth to be less than forecast and also the increased costs of debt given the TTA's need to either amortize the series 2002B bonds within 10 years or refinance them at a significantly higher cost of capital," Fitch analysts wrote.

The variable-rate bonds were issued along with $1.2 billion of fixed-rate bonds. Both series are first-tier debt backed by system revenues.

The Central Texas Turnpike System includes three tollways around Austin: State Highway 45 and Loop 1 in North Austin and SH 130 parallel to Interstate 35. Two more projects are on the boards, including one to be built through private developers.

The project opened early and under budget and, so far, has surpassed the 2002 revenue forecast by nearly 32% and the revised 2005 revenue forecast by more than 15%.

"However, it appears to have leveled off well below expectations," Fitch analysts noted. As a result, "lower than expected traffic and revenue growth, coupled with either a higher cost of capital or an accelerated amortization - and the potential for an insurer adverse change - could significantly lower debt service coverage on the bonds."

In August, Fitch changed its outlook on for airports and toll projects in general to negative, based in part on stubbornly high fuel prices and growing economic weakness.

Citing "continued weakness in enplanements and toll-paying traffic volumes that are being adversely affected by more than seven months of volatile fuel prices, economic weakness, and inflationary pressures," the agency suggested that the sectors may be undergoing permanent transformation.

Since then, market conditions have worsened as stocks suffered an unprecedented decline in the past two weeks amid a stubbornly frozen credit environment.

Toll-paying traffic has fallen as much as 16%, according to the August report.

Fitch analyst Mike McDermott said that the changing travel patterns on toll roads could have a longer-term effect than on the airport sector. Commuters may actually change where they live or work because of the high cost of commuting, or start using public transit more than cars, he said.

For TxDOT, the toll bonds are just one piece of an extremely complex financial puzzle that includes declining fuel consumption that reduces state and federal gasoline tax revenues, turmoil in the federal budget as the bailouts of the banking system unroll, growing demand for infrastructure and repairs in Texas, and the need to issue debt to finance projects that have already been approved.

Amid all that, the department is in a "sunset review" in which its very existence is under challenge as the Texas Legislature prepares for its biennial session in January.

But Bass said TxDOT is not under pressure to issue any other debt before the end of the year. If the market recovers by January, the agency could issue up to $1.5 billion of bonds after the first of the year. But the amount could vary depending on market conditions, he said.

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