CHICAGO — The Missouri Highways and Transportation Commission is gearing up to enter the market in mid-September with a $600 million Garvee sale to fund projects under the state’s Safe and Sound Bridge program that includes the upgrading or reconstruction of 802 bridges statewide.
The grant anticipation revenue vehicle bonds, which securitize future federal transportation grants the state will receive, will have final maturities out to 24 years, covering four cycles of federal multi-year transportation spending reauthorization. The current law expires at the end of September.
The Missouri commission’s chief financial officer, Roberta Broeker, said she is hoping for the same low double-A to mid-double A ratings on the September sale as were assigned to the agency’s first Garvee sale last fall as analysts incorporated the issuer’s intention to go out 24 years in their original review. “We will talk to the rating agencies next month,” Broeker said.
Banc of America Securities LLC/Merrill Lynch & Co. is running the books. Morgan Stanley and Stifel Nicolaus & Co. are serving as co-senior managers. Public Financial Management Inc. is financial adviser, Gilmore and Bell PC is bond counsel and Bryan Cave LLP is underwriters’ counsel.
The commission tentatively expects to hold a retail order period on Sept. 15 with the institutional pricing on Sept. 16. The agency has not yet decided whether to utilize the federal government’s taxable Build America Bonds program.
The commission had originally intended to fund the bridge program with a first-of-its-kind plan for debt under a $15 billion federal pilot program. The program, established in 2005, allows private companies to benefit from the issuance of private-activity bonds to finance construction of transportation projects and rail-to-truck freight facilities.
The state had picked the Missouri Bridge Partners as the best-value contractor for the program under a design-build-maintain model. The bond proceeds would have covered the costs of replacing and rebuilding the bridges over the next five years. The company would then maintain the bridges for 25 years. In addition to the bond proceeds, the plan relied on a roughly 10% equity contribution from the contractor to help finance the repairs and reconstruction.
The worsening credit crunch sapped any potential financial benefits of using the private-activity bonds as the costs for the contractor of raising the private-equity contribution rose. That in turn would have driven up the state’s costs, and officials last September decided to finance the plan through Garvees.
The commission is using a design-bid-build model for the first 250 bridge projects, grouping them together based on their geographic location and the upgrades needed. Work began last winter and the first project was completed in the spring.
The state is using a universal design-build model with one contractor managing the final 550 bridge projects. The benefit of such a model is that allows the state to get the work completed more quickly and for less money than with the traditional method of designing one project at a time and bidding it out individually.
“We remain on target to spend about $700 million for the Safe and Sound Bridge program,” Broeker said. About one-third of the state’s federal bridge funds, or $50 million, will go annually to repay debt service.
Fitch Ratings rates the state’s Garvees AA-minus, Standard & Poor’s rates them AA, and Moody’s Investors Service rates them Aa2. The 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.” The pledged revenue provides a coverage level of 9.4 times once all of the planned Garvees are issued, Moody’s wrote.
The long maturity planned for the upcoming issue was noted by analysts last year, especially given concerns over the solvency of the federal highway trust fund. Moody’s warned in its report that the 24-year bond term “poses significantly greater reauthorization risk relative to similarly rated bonds in other states, and could result in a downgrade of the current issue.”
“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.
The backup pledge is all the more significant given the federal trust fund’s problems. The trust fund receives most of its revenue from gasoline and diesel fuel taxes and the Treasury Department makes payments to states from the fund as reimbursements for their eligible transportation-related expenses. Revenues have not kept pace with spending needs and the fund is expected to dip below a critical $1 billion marker sometime in late August and run dry by early September.
U.S. Senate Finance Committee chairman Max Baucus, D-Mont., recently introduced a bill that would prevent the federal government from delaying payments to states for transportation projects and provide $7.3 billion to replenish the trust fund. The Obama administration has proposed restoring about $20 billion to the trust fund by making unspecified changes to the federal transportation program.
Missouri used proceeds from its $150 million Garvee sale last fall to help finance the $536 million rebuilding of Interstate 64 through the St. Louis area. A third sale is expected next spring for $85 million to fund construction costs for a new interchange being built as part of a new Mississippi River span between Missouri and Illinois near St. Louis.
