Ariz. Sets $440M of Rev. Debt

DALLAS - Amid severe financial pressure on state coffers, the Arizona Transportation Board is preparing to price $440 million of excise-tax-backed revenue bonds for projects, primarily in the Phoenix area.

The board expects the bonds to sell through negotiation in early June with Morgan Stanley as senior manager with seven co-managers. RBC Capital Markets Inc. is board's financial adviser, with Squire Sanders & Dempsey as bond counsel.

The bonds are backed by the Maricopa County regional area road fund. Revenues for the fund come from a dedicated sales tax collected within Maricopa County at the rate of about 6.67% of the state sales tax rate.

The pledged tax is collected by the state on behalf of the county, which includes Phoenix and its suburbs, representing the largest share of Arizona's population. Voters authorized the tax for 20 years through Dec. 31, 2025. The state treasurer's office holds pledged tax revenue in trust for the bondholders.

The bonds earned AA-plus ratings from Standard & Poor's and are awaiting the opinions of Moody's Investors Service and Fitch Ratings. Moody's last rated Maricopa sales tax bonds at Aa2, with Aa1 ratings for a 2008 issue of bonds backed by the state highway user revenue f. Fitch rated this year's grant anticipation notes AA.

John McGee, chief financial officer of the Arizona Department of Transportation, said the size of the upcoming deal dictated the use of a large syndicate to market the bonds.

"If we price this issue in one tranche, it will be the biggest issue the board has ever done," he said.

ADOT works under the Arizona Transportation Board. Its second biggest deal was the initial $370 million of Maricopa County regional area road fund bonds issued in 2007.

"As this is such a large issuance, and due to the still somewhat uncertain nature of the markets, when we price this issue, if it appears that trying to push that amount of bonds through the market at one time doesn't seem to be in the best interest of the issuance, we would more than likely break it up into at least a couple of pieces," McGee told the board last month. "This would be similar to what we did last year with the [highway user revenue fund] 2008A and 2008B issuances, which worked out very well for us."

As senior manager, Morgan Stanley will have 40% liability with the upcoming issue, followed by Citi and Goldman, Sachs & Co. with 15% each. JPMorgan will have 10%. Piper Jaffray & Co., Samuel A. Ramirez & Co., Stone & Youngberg, and Weedbush Morgan Securities will each have 5% liability.

"The percentage of liability simply states that should there be, for example, $100 million that we don't have orders for, each entity would be obligated to take those bonds down in proportion to their liability," McGee explained to the board. "So, Morgan Stanley would have to take down $40 million, Citigroup $15 million, etc. That doesn't equate to how much profit any one of these firms can make on this deal. Firms that get out and sell or bring in orders can make substantially more than their liability percentage, particularly in this environment, where retail sales are a much bigger component of most deals than they have been in the recent past."

With ratings in the double-A category, the Transportation Board's debt is expected to hit the sweet spot of a risk-averse market. Nearly three-fourths of the bonds successfully marketed this year have been rated double-A or better, according to industry experts.

While Standard & Poor's noted the sharp decline in sales tax revenues in Arizona this year, analysts expect debt service coverage to remain at high levels.

"In Standard & Poor's opinion, strong economic growth boosted pledged sales taxes until the fiscal year ended June 30, 2008, when pledged sales taxes fell 3.2%," analysts wrote. "Since November, pledged monthly tax revenues have fallen 12% or more in each month compared to the previous year's period, including a 17.8% decline in each of February and March 2009, which the Arizona Department of Transportation attributes partially to high Super Bowl-related retail activity the year before."

The Transportation Board projects that pledged revenue will show a yearly decline in fiscal 2009 of 9%, due partially to declines in auto and home sales, with a slight increase in 2010, and gradually increasing sales taxes in following years, analysts noted.

While the regional area road fund is made up of sales tax revenue, the highway user revenue fund is derived from fuel taxes, vehicle registration, and other fees. In March, those revenues fell 4.4% below the same month in 2008 and 9.2% below planning estimates. For the fiscal year to date, those funds were down 6.8% from last year and 8.6% below the estimate, McGee said.

Road fund revenues were down even more sharply, falling 15.6% in February and 17.8% below the estimates.

"Year-to-date collections now stand at $225.3 million, which is down 12% from last year and 10.6% from the forecast," McGee said.

Board member John Halikowski said that the state's general economic distress does put pressure on ADOT because funds from the transportation agency are routinely "swept" for use in other state functions to cover budget gaps.

"I have never seen anything like the magnitude of what's happened this year," Halikowski said last month. "This is causing a lot of stress on the department and its ability to continue business as usual."

Last week, Gov. Jan Brewer approved the second budget-balancing measure of the current fiscal year, reducing spending and shifting outlays to the tune of $650 million. The cuts in the $9.9 billion budget became an emergency when the state came up $300 million short on payments it was required to make to K-12 public schools by last Friday.

The Arizona Legislature must find a way to close another $3.3 billion budget gap in the fiscal year beginning July 1.

For reprint and licensing requests for this article, click here.
Transportation industry
MORE FROM BOND BUYER