CHICAGO - The Missouri Highways and Transportation Commission and its finance team are watching the market closely to decide whether or not to proceed as soon as next week with Missouri's long-planned, first-time issuance of Garvee bonds in a $150 million sale.
The grant anticipation revenue vehicle deal was originally slated for last week, but officials held back as interest rates climbed and buyers shunned the market. Officials said they were more hopeful late last week as institutional and retail interest improved, but no decisions had been made by Monday as they waited to talk to members of the finance team to discuss the deal's timing, said commission chief financial officer Robert Broeker.
"Rates are coming down so all the signs are pointing in a good direction," said Ben Reeser, finance manager for the Missouri Department of Transportation. The state does not face an urgent need for the bond proceeds, so officials can wait until rates fall to levels more in line with those seen as the deal's structure was planned early this year.
Citi is the senior manager and Banc of America Securities LLC and Merrill Lynch & Co. are co-senior managers. Public Financial Management Inc. is financial adviser and Gilmore and Bell PC is bond counsel. Proceeds from the sale will help finance the $536 million rebuilding of Interstate 64 through the St. Louis area.
It is the first in a series of three major projects or initiatives for which Missouri plans to issue $935 million of Garvee bonds in the coming years. The second, which could sell in 2010, would finance the state's share of $85 million in construction costs for a new interchange being built as part of a new Mississippi River span. The third initiative calls for about $700 million to be issued to finance the reconstruction of 800 Missouri bridges under the "Safe and Sound" bridge program.
The rating agencies weighed in last week on Missouri's plans. Fitch Ratings assigned a AA-minus, Standard & Poor's rated the bonds AA, while Moody's Investors Service assigned a Aa2. The federal reimbursement state road bonds are first secured by the state's federal highway aid grants, but also carry a subordinate backup pledge of other highway-related state funds.
That backup pledge is subordinate to debt service on the state's traditional road bonds, of which $2.3 billion are outstanding, but it helps "mitigate bondholders' risk should the flow of federal funds be disrupted," Moody's wrote. The bonds mature in 2025. The credit's strengths also include a strong debt service coverage level of 9.4 times once all of the planned Garvees are issued and an additional bonds test requiring five times debt service coverage levels.
Credit challenges include the reauthorization risk of the federal program along with the overall uncertainty of federal highway trust fund funding stemming from concerns over the shortfall that developed earlier this fall as a result of falling gasoline tax collections. Congress was forced last month to approve a transfer of $8 billion from the federal general fund to the highway trust fund.
Missouri also faces greater reauthorization risk because in its future issues, it plans to use a 24-year maturity which will span four federal reauthorization periods. A bond term of that length would "pose significantly greater reauthorization risk relative to similarly rated bonds in other states, and could result in a downgrade of the current issue," Moody's warned.
"With the primary payment source of debt intended to be federal highway funds, the 24-year maturities planned for bonds issued under this program are a meaningful weakness at this rating level, but are offset by the pledge of state-controlled gas tax funds," Fitch warned
At the state level, challenges include a slowing of state transportation, motor fuel, and vehicle sales taxes. Motor-fuel tax collections are expected to fall by 2.6% in fiscal 2009 while gross motor vehicle sales taxes decreased by 13.6% in fiscal 2008 and are estimated to decline by 6.1% in fiscal 2009.
After subtracting the amounts needed to cover debt service on its traditional road bonds, the tax revenues still are expected to provide about 7.9 times coverage of debt service on all planned state Garvee bonds.
The second initiative to be paid for with a future issue of Garvees is the new $640 million bridge across the Mississippi River. Under the plan, Missouri is contributing $88 million and Illinois is contributing $313 million. Federal funding of $239 million would cover the remaining cost.
Garvees will also finance the state's bridge program. The commission last month dropped its first-of-a-kind plan to use $700 million of private-activity bonds under a federal pilot program to repair 802 bridges.
The worsening credit crunch sapped any potential financial benefits of the program, as the costs rose for the contractor to raise the required private equity contribution, which in turn would drive up the state's payments.
