DALLAS - Two weeks after breaking ground on the $5 billion State Highway 121 turnpike, the North Texas Tollway Authority will confront a challenging credit market this week with a $2.3 billion revenue bond deal, the largest bond transaction in its history.
The offering constitutes the first long-term debt for the project, and the bonds will take out a portion of $3.5 billion of bond anticipation notes issued by the authority last year to purchase the right to develop the road and to jump-start the project.
While the issue represents a new way of doing business for the NTTA, its debt will triple to pay for the project. The deal also comes amid ambitious plans for a number of costly toll projects in the Dallas-Fort Worth area as traditional road financing gives way to concessions, such as the one created for SH 121.
The $2.3 billion of debt will be divided into five series with pricing scheduled for Thursday.
The NTTA will offer $1.4 billion of Series 2008A first-tier current interest bonds and $233.2 million of Series B first-tier current interest bonds. Series C will consist of $19.1 million of taxable first-tier current interest bonds. Series D is made up of $150 million of insured first-tier capital appreciation bonds, and Series E is $500 million of first-tier put bonds.
Bear, Stearns & Co., Citi, and Lehman Brothers are lead co-managers on the negotiated deal. They are joined by Estrada Hinojosa & Co., First Southwest Co., Morgan Keegan & Co., M.R. Beal & Co., Southwest Securities, and Wachovia Bank.
RBC Capital Markets serves as financial adviser. McCall, Parkhurst & Horton, and Simmons Mahomes serve as co-bond counsel.
The bulk of the new debt will cover the NTTA' $3.2 billion payment made last year to the Regional Transportation Council for the right to build the highway. While total financing for the project is expected to be about $4.9 billion, only $275 million of proceeds from this week's deal will be applied to the $640 million cost to build the 26-mile SH 121 roadway. Commercial paper will be used to pay for the remaining cost of the highway.
The NTTA's payment to the council supplanted an earlier commitment from the private development team Cintra-JPMorgan, which won the project a year ago. But the idea of a foreign company building the roadway didn't sit well with many lawmakers. At the urging of Texas Sen. John Carona, R-Dallas, the NTTA was allowed to submit a competing bid after the project had already been awarded.
The authority offered the RTC $2.5 billion up front and $833 million in future payments, but the council had the option to request the entire sum up-front and did.
The NTTA's bid exceeded the $2.1 billion up-front offer from Cintra-JPMorgan, but an independent study by PriceWaterhouseCoopers rated the Cintra offer as superior based on a number of factors.
The new process for bidding out toll projects was encoded in SB 792, which was steered through the Texas Legislature by Carona last year as the omnibus transportation bill. Under the measure, signed into law last June, regional authorities such as the NTTA have the right of first refusal on concessions to build toll roads. If the public toll operators decide not to participate, the project can be bid out to private developers. In the early stages of planning for SH 121, the NTTA had passed on the project but agreed to operate the toll road under Cintra's proposed 50-year operating agreement.
One major concern for the local governments that make up the RTC was whether such a large increase in the NTTA's debt limits its ability to take on other projects in the booming region. The authority has proclaimed its ability to serve as the toll road operator and builder for the region, despite the large debt load.
Nonetheless, the expected increase in debt has taken a toll on the agency's credit ratings. Standard & Poor's lowered its rating one notch to A-minus, while Moody's Investors Service maintained an A2 rating, supporting the NTTA's goal of staying within the A category.
"These ratings are consistent with our expectations and indicative of the NTTA system's financial strength and stability," board chairman Paul N. Wageman said earlier this month. "We have a sound financial plan to permanently finance SH 121, a truly superior project."
However, a dissenting opinion came from Fitch Ratings, which dropped the NTTA's rating on existing debt one notch to BBB-plus. Fitch - which was not asked to rate the upcoming deal - at the same time withdrew its rating at the request of the authority.
"The financing for SH 121 represented a significant departure from NTTA's approach to project financing and delivery," Fitch analysts noted. "It is expected that the NTTA's debt burden, which was estimated by Fitch to grow to about $2.5 billion in the near term, will triple with near certainty to about $7.5 billion in the next few years. With the assumption of other projects, the debt load will increase further."
Under its existing covenants, the NTTA pledges its system-wide revenues for all new debt. That could trigger system-wide toll increases if any particular project were to fall below projections. Proactively, the authority has scheduled toll increases to maintain adequate debt-service capability.
Fitch's analysis indicates that "on a stand-alone basis, the SH 121 project's financial profile (revenues, expenses, and debt) on a single lien would have non-investment-grade credit characteristics."
Moody's said its A2 rating "incorporates NTTA's substantial debt level associated with the SH 121 project agreement and the continued capital investment needed for an expanding tollway system; modest construction and ramp-up risk associated with the SH 121 roadway project; NTTA's willingness to raise tolls as evidenced by the adoption of a toll policy; and the improved rate covenants incorporated into the amended trust agreement."
The proceeds from Thursday's sale will also be used to refund the authority's 1997 bonds for an estimated net-present-value savings of about 6%,and several series insured by Financial Security Assurance for a net present-value loss of approximately 6.5%. The NTTA is refunding the FSA bonds because the insurer has not agreed to the amended trust agreement in the new issue.
On the new debt, only the $150 million of Series D capital appreciation bonds will be insured. The insurance will be provided by Assured Guaranty Corp, which remains triple-A rated by all three rating agencies.
The NTTA is not providing any credit or liquidity for the $500 million Series E put bonds but is expects to obtain the principal through remarketing of the bonds. A failed remarketing would not constitute a default, according to the official statement.
Depending on market conditions, the NTTA may attempt to sell an additional $500 million of unhedged variable-rate demand bonds. It is in discussions with Société Générale for a letter of credit.
"Because of the recent volatility in the bond markets, it is not clear whether the authority will be able to issue the additional refunding bonds in the manner contemplated," the official statement notes. "In such event, the authority has developed alternative financing plans utilizing primarily fixed-rate current interest bonds."
Market volatility will present a real challenge for any large issuer this week.
"New issuers don't want to sell into this kind of market, so a lot of deals are being shelved," said Chris Ihlefeld, co-portfolio manager at Thornburg Investment Management. "You still have a lot of latent volume out there in the market."
With the groundbreaking last month, the NTTA officially began a highway that will stretch from the far northeastern Dallas suburb of McKinney to the Tarrant County line near Dallas-Fort Worth International Airport to the southwest. The northern tier of suburbs in Denton, Dallas, and Tarrant counties will be served by the highway that will intersect with the authority's flagship Dallas North Tollway.
"The region, as well as the state, benefits from SH 121," Wageman said at the groundbreaking ceremony. "Money from NTTA's $3.2 billion upfront payment for SH 121 will be used by the Regional Transportation Council to finance other regional transportation projects for the region. It is not every day that we are given an opportunity to shape a new path in service to the public. For the NTTA, today is one of those days."