WASHINGTON - The North Carolina Turnpike Authority expects to issue $616 million of bonds next week for the Triangle Expressway System - a project designed to relieve traffic in one of the nation's fastest-growing regions but delayed for months by the credit crisis.
The deal, the largest in North Carolina since September 2007, will include the state's first Build America Bonds and a large helping of insured toll-revenue bonds.
A retail pricing period is scheduled for Monday and the NCTA with its underwriters is holding an information session this afternoon for prospective investors.
North Carolina has not built a toll road in more than 100 years. Meanwhile, the state's population has soared, particularly in the Raleigh-Triangle Research area where the new expressway will be built. The Raleigh-Durham-Cary region, which includes three research universities and the state capital, was the fastest-growing metropolitan area in the U.S. from 1985 to 2005, according to Moody's Investors Service.
The traffic congestion led the state to establish the NCTA in 2002 as an agency of the state's Department of Transportation. The 18.8 mile Triangle Expressway is the first of five projects the authority has planned, and the bonds issued for its construction will be the NCTA's first sale.
Construction on the first section of the expressway is expected to be completed by the end of 2011, with the entire project finished a year later.
NCTA executive director David Joyner orchestrated the financing package, which includes more than $1 billion of total borrowing against a backdrop of a persistent credit crisis and economic recession. The bonds were tentatively scheduled to sell last September - just as the credit markets froze.
"What happened last fall threw everything into a tailspin," Joyner said in an interview. Now he has tapped multiple funding sources to initiate construction.
The three-pronged deal includes $342 million of state appropriation-backed revenue bonds, Series 2009A and B, $274 million of toll revenue bonds, Series 2009A and B, and a $390 million loan from the federal government via the Transportation Infrastructure Finance and Innovation Act.
North Carolina appropriation bonds are rated AA by Standard & Poor's and Aa2 by Moody's. The state has appropriated $25 million annually to the NCTA for debt service, and the bonds have the senior lien for the state appropriation.
Additional funds will come from the state's highway trust fund. Revenue backing this portion of the debt does not include toll revenue.
Joyner and his financial team started looking at the state-supported option over the winter.
"When we looked at the value we could create from issuing the appropriation bonds separately, it looked like the best possible deal for investors," he said.
The revenue flowing into the highway trust fund is provided by fuel taxes, title taxes on vehicles purchased in North Carolina, vehicle registration taxes, and road use taxes. The two largest tax revenue streams for the trust fund rely on car sales and fuel purchases, both of which are subject to economic volatility, rating analysts said.
Standard & Poor's said revenue projections for the highway trust fund in 2009 are down nearly 18% and could continue to decline until 2011.
More than 91% of the state-supported bonds will be issued as BABs, the new financing option in the issuer's toolbox that Joyner did not have in September. The NCTA's actual savings from the BABs won't be known until the bonds have priced, he said.
The $342 million of appropriation revenue bonds will be sold as $29.5 million of Series A, maturing between 2017 and 2012, and $312.5 million of Series B BABs expected to be offered as term bonds, with $112.3 million due in 2029 and $200.2 million due in 2039, though the maturity schedule could change at pricing.
The toll revenue bonds have an underlying rating of BBB-minus by Standard & Poor's and Fitch Ratings and Baa3 by Moody's - the lowest investment-grade ratings. Receipts from toll revenues will go to pay debt service on the bonds and then to a senior-lien reserve fund that supports the debt.
State appropriation funds may be available to support the bonds if funds remain after the senior-lien covenant is satisfied.
The $274 million of toll revenue bonds are expected to be sold as $191.5 million of Series A term and series bonds maturing between 2019 and 2039, and $82.3 million of Series B capital appreciation bonds.
Since the NCTA is a new issuer without any toll revenue history, and given the low ratings, Joyner sought and obtained insurance from Assured Guaranty Ltd. for the toll revenue bonds.
"The bonds may have been able to stand on their own" without insurance, Joyner said. But at interest rates in the triple-B range, "there's not much moving," Joyner said.
The 10-year tax-exempt interest rate for triple-B revenue bonds in North Carolina is 6.06%, or 285 basis points higher than a comparable triple-A bond, according to Municipal Markets Data. Joyner said the NCTA expects to save about $60 million with the insurance.
Assured Guaranty, which is rated AAA by Standard & Poor's, Aa2 by Moody's, and AA by Fitch, was essentially the only insurer to show interest in the turnpike. Joyner and officials from Assured took a helicopter ride over the turnpike's proposed corridor. Assured has been an active member of the NCTA financing team to seal the deal, according to Joyner.
Before providing the insurance, Assured requested a change in North Carolina law. The NCTA worked with state legislators this spring to change a law that affects bond refundings. The new law, which was signed by Gov. Beverly Perdue last month as part of the state-appropriated funds, effectively extends the maturity for any refunding bonds the NCTA may issue. The legislation would allow a refunding deal to extend beyond the maturity date of the original bonds.
The TIFIA loan makes up the third portion of the financing and is rated BBB-minus by Fitch. It is subordinate to the state-appropriation and toll revenue bonds. The loan is limited to one-third of the project cost and includes some provisions to defer payments.
The rating agencies and some construction opponents in North Carolina have concerns that the toll revenue estimates are optimistic. The NCTA relied on estimates from Wilbur Smith Associates for its revenue projections.
Moody's analysts said they are "concerned that the traffic capture rate and growth rate will be significantly lower than expected," according to the agency's rating report. Commuters driving the length of the new turnpike can expect to reduce their drive time by 11 to 13 minutes during rush hours, Moody's said, and as a short cut, it may not draw as many drivers as the NCTA hopes.
"Moody's believes the project will provide some congestion relief, particularly as the region continues its growth; however, we are skeptical of the expected capture rate of 28-30% of the traffic in the corridor given the limited time savings," the agency said.
The expressway will be one of the first in the country built completely for automated toll collection. Each toll will be collected electronically from drivers who have signed up with the state DOT. For those who haven't, Department of Homeland Security cameras that read license plates will enable tolls to be collected by mail.
"Probably initially you will have some wrinkles," said Laura McDonald, Standard & Poor's lead analyst on the toll revenue bonds. But in the long-term view, the automatic toll collection "shouldn't have an impact" on the NCTA's ratings, she said.
Environmental groups have also raised concerns about revenue estimates. Joyner has shrugged off the criticisms as their attempt to prevent construction.
The financing team includes 10 underwriters led by Merrill Lynch & Co. and Banc of America Securities LLC. The other underwriters are Citi, RBC Capital Markets, BB&T Capital Markets, Loop Capital Markets LLC, Wachovia Securities, JPMorgan, Siebert Brandford Shank LLC, and Southwest Securities Inc.
Womble Carlyle Sandridge & Rice will be bond counsel. The underwriters' counsel will be Bode, Call & Stroupe LLP and Rand & Gregory PA.
David Miller, managing director at Public Financial Management Inc. and head of its national transportation practice, is the NCTA's financial adviser.