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North Texas Tollway Authority Goes Big With Build America Bonds

DALLAS - The North Texas Tollway Authority yesterday increased the size of its commercial paper refinancing and sold $1.4 billion in bonds, including $825 million of taxable Build America Bonds.

For the latest available details on the complete pricing of the three-pronged deal that also included revenue bonds, see the market column.

The NTTA had planned to allocate $733.2 million for new projects, and refinance $90.9 million of outstanding commercial paper. A total of $302.1 million is earmarked for refunding and restructuring of outstanding debt.

The remaining proceeds will finance a $10 million swap termination payment, with $116.1 million funneled into the debt service reserve fund as capitalized interest.

The bonds, which are not insured, are rated A-minus with a stable outlook by Standard & Poor's and A2 with a negative outlook by Moody's Investors Service. Standard & Poor's assigned a BBB-plus to the NTTA's existing subordinate-lien debt. Moody's rated the subordinate bonds A3.

The BABS were priced yesterday morning, with an institutional period set for Monday afternoon.

Morgan Stanley is the lead manager and book-runner on the $360.9 million of tax-exempt debt. Team members include JPMorgan, Merrill Lynch & Co., M.R. Beal & Co. and Ramirez & Co.

Goldman, Sachs & Co. is lead manager and book-runner on the $810.4 million of BABs. Others include Morgan Stanley, Citi, Wells Fargo Securities, BOSC Inc., Estrada Hinojosa & Co., Jefferies & Co., LOOP Capital Markets LLC, Morgan Keegan & Co. and Rice Financial Products Co.

Co-bond counsel for both tranches are McCall, Parkhurst & Horton LLP and Mahomes Bolden Warren Sigmon PC. RBC Capital Markets Corp. is the financial adviser, with TKG & Associates as co-financial adviser.

Doug Hartman, managing director at financial adviser RBC, said the BABs will carry 40-year maturities. Municipal Market Data reported that the BABs due in 2049 were being priced yesterday at 235 basis points over Treasuries. The tax-exempt bonds were being offered with yields of 6% in 2025 and 6.375% in 2039.

The BABs are being issued as direct-pay debt, with the NTTA receiving payments of 35% of the interest costs directly from the U.S. Treasury.

The authority said it intends to make the initial debt service payments on the BABs from its toll revenue, and will use the Treasury payments for debt service in later years.

Chief financial officer Janice Davis said the NTTA expects the BABs to carry a lower net-interest rate than the tax-exempt debt due to the direct 35% subsidy.

"The rebate, given where the market is, makes it lower than our tax-exempt rate," she said. "It will require that we submit a rebate request or return much like a taxpayer submits a tax return to receive a tax refund."

BABs are attractive to issuers despite their newness and still-evolving regulations, according to Davis.

"The final regulations governing the BABs have not been issued, so the actual process is still somewhat undefined," the CFO said. "It is an opportunity for us to reach a new group of investors."

The debt is supported by tolls on the NTTA's system in the Dallas-Fort Worth area. Two of the toll roads, the North Dallas Tollway and the President George Bush Turnpike, account for 93% of its revenues. Over the past five years, traffic on the system is up 7%, with toll revenue up by 10%.

In July, the NTTA board raised tolls by 25%, or 3.5 cents per mile, on the two main facilities, to align its schedule with one proposed by the local transportation-planning agency.

Davis said the increase was necessary to protect the NTTA's bond rating. Revenue collections are below estimates developed two years ago when the local economy was more robust, she said.

Although fiscal 2008 revenue was almost 19% above 2007 revenue due to the opening of the second phase of the Sam Rayburn Tollway, collections were 8.2% below expectations. Toll revenue in fiscal 2008 totaled $240.8 million.

Failure to increase rates could have imperiled the authority's bond rating, according to Davis.

"In these challenging times, the rating agencies want to know that the NTTA board is committed to maintaining the authority's financial strength," she said. "NTTA has already imposed cost-cutting moves, and the only other way to further increase financial capacity is through a toll rate increase."

With the higher tolls, revenues are expected to increase at an average annual rate of 8.3% from 2010 through 2020, and 4.8% from 2020 through 2030.

With the sale and subsequent partial refundings of its 1997 and 1998 first-tier bonds, the NTTA will have approximately $6.1 billion of outstanding first-tier revenue bonds and $1 billion of second-tier bonds.

The authority's annual debt service will go from $120 million in fiscal 2009 to a peak of $808 million by fiscal 2037. The debt service schedule anticipates the sale of $287 million of revenue bonds in 2011 and $234 million of convertible capital appreciation bonds in 2012.

The NTTA's current five-year projection includes $521 million of first-tier bonds and $400 million of subordinate bonds supported by revenue deposited into the capital improvement fund.

Later this year, the agency plans to issue approximately $360 million of either fixed-rate long-term debt or variable-rate demand bonds to refund portions of its 2008 bonds that are subject to mandatory redemption on Jan. 1.

The remaining portions of the NTTA's 2008 put bonds likely will be refunded on or before the mandatory tender dates from 2011 to 2016.

The authority's commercial paper program, which is authorized at $200 million by the NTTA board, will be reduced to zero with this week's sale. The board has authorized an additional $500 million of commercial paper to fund road projects, but that program is not yet in place.

The agency said it expects to secure letters of credit for the additional CP authorization. However, it noted that due to the current difficulty in getting the credit at reasonable rates, the NTTA will likely obtain the letters of credit "in phases, if and when available."

Proceeds from this week's sale will refund $161.1 of variable-rate demand bonds issued in 2005 and insured by Financial Guaranty Insurance Co. Due to failed remarketings, all but $5.5 million of the bonds are currently being held as bank bonds by Depfa Bank.

The net rate on the bank bonds is currently 9.73%.

Another $178.3 million of outstanding 2005 bonds not being refinanced by the sale will be remarketed in September into fixed-rate mode.

A portion of the September refunding is expected to be variable-rate demand bonds backed by a letter of credit.

The NTTA will use $10 million of the proceeds from this week's sale to terminate a portion of two outstanding interest swaps. T

he 2004 agreement called for the authority to pay a fixed rate of 3.673% and receive a floating rate of 67% of the London Interbank Offered Rate on $202 million notional amount of debt, with a 2005 agreement calling for a fixed rate of 3.533% and 67% of Libor on a notional amount of $131 million.

The swaps are currently valued at a negative $22 million.



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