Missouri DOT Plans $150M Garvee Sale in Fall; $700M Deal Put on Hold

CHICAGO - The Missouri Department of Transportation is advancing plans for its first Garvee deal by selecting a team for the fall sale while a $700 million private-activity financing remains in neutral, with current market conditions blamed for complicating negotiations with the contractor selected to repair and maintain 800 bridges.

MDOT recently selected Citi to serve as the book-running senior manager on the Missouri Highways and Transportation Commission's first grant anticipation revenue vehicle bond issue for $150 million.

Banc of America Securities LLC and Merrill Lynch & Co. are co-senior managers, said the department's chief financial officer Roberta Broeker. Public Financial Management Inc. is the financial adviser and Gilmore & Bell PC is bond counsel.

MODOT is aiming for an October sale of the federal grant-backed bonds with the proceeds providing funding for the reconstruction of Interstate 64 in St. Louis.

"This was a high priority project picked by the region to receive federal funding," Broeker said. The $536 million project relies on a mix of federal and state funding and is expected to be completed next year.

Broeker said she expects the final maturity to be limited to 10 years. No decision has been made yet on whether the bonds will be backed only by Title 23 Federal Aid Highway Program grants administered by the Federal Highway Administration or will carry a secondary pledge.

Strong coverage ratios and a relatively short, 10-year maturity schedule are viewed favorably as issuers go for ratings on such debt because those factors decrease the risk of delays or shortfalls as Congress reauthorizes its funding package in six-year cycles. The most recent reauthorization was delayed after running out in September 2003, though payments to states continued under 12 short-term extensions. The state's goal is to capture ratings in the double-A category.

The commission last summer sold $550 million of new-money of state highway revenue bonds and plans another issue of $350 million in 2010 to wrap up a $2 billion borrowing program. Senior manager Merrill Lynch's offer - which was accepted - to purchase the bonds last August as an alternative to an institutional pricing as yields were widening in the market was one of the first more glaring examples of the growing credit crunch and liquidity squeeze in the muni market.

State officials say it is current market conditions - specifically the municipal yield curve - that is now to blame for complicating negotiations on a final contract with the selected team chosen to repair and maintain bridges.

The commission late last year named the Missouri Bridge Partners as the best value contractor. The bonds would be issued under a federal pilot program established in 2005 that allows private companies to benefit from the issuance of up to $15 billion of tax-exempt, private-activity debt to finance the construction of transportation projects and rail-to-truck freight facilities. The bonds are not subject to state PAB volume caps.

The program calls for 802 bridges to be replaced or repaired within the next five years. The company would then maintain the bridges for a 25-year period. The Missouri Development Finance Board would issue the bonds and those funds along with a roughly 10% equity contribution from the contractor would finance the repairs and reconstruction.

The bonds would be repaid with so-called availability payments the state would make to the company over the life of the contract. Those availability payments would be pledged to bond repayment.

The funds would come from the state's share of federal bridge funds. The plan's affordability was based in part on the ability to capture sufficient earnings on the investment of the proceeds not immediately used.

With the credit crunch only worsening, the short end of the market remains relatively stable while rates on the long end have risen. In effect, the state would be earning the same or less than originally expected on unused bond proceeds while paying a higher long-term rate than originally believed.

"What's happened with the market has made borrowing more difficult. It's now prohibitively more expensive," said Ken Warbritton, project director on the bridge program. The state still is aiming to take advantage of the federal pilot program and Warbrittton said various alternatives are being considered.

 

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