WASHINGTON — Citing market turbulence, the Metropolitan Washington Airports Authority said late Friday it would delay its second deal to finance construction of a Metrorail extension that will ultimately link downtown Washington, D.C., with Washington Dulles International Airport.
Pricing of the bonds was supposed to begin Monday with a retail order period for Series A and B bonds. Institutional investors were expected to place orders for the remaining Series A and B bonds plus Series C and D on Tuesday.
The delay was also done “as a courtesy to investors to give them additional time to react to recent changes in the market,” a spokesperson for MWAA said in an e-mail late Friday. Officials still expect the deal to price this week.
The $650 million deal includes four series of tax-exempt and taxable bonds, including Build America Bonds.
The deal follows a $963 million deal last August when the MWAA first issued debt for the Metrorail extension.
Construction on the extension project is expected to cost $5.26 billion and will be funded with $2.9 billion of debt to be issued over three years. The bonds are backed by tolls collected on the 13-mile Dulles Toll Road, which runs adjacent to the new rail line.
The deal includes $47.5 million of Series A second senior-lien capital appreciation bonds. Interest payments for the bonds accrue and will come due, with the principal, when the bonds mature, said Andrew T. Rountree, acting vice president for finance and chief financial officer at the MWAA.
Rountree assumed the vice president’s post last Wednesday’s board meeting. Formerly the deputy CFO, Rountree took Lynn Hampton’s position when she was named interim chief executive officer last month. Hampton is temporarily replacing Jim Bennett, who retired as CEO on May 8 after 14 years.The tax-exempt Series A bonds are expected to mature between 2025 and 2031, Rountree said. The bonds are rated Baa1 by Moody’s Investors Service and BBB-plus by Standard & Poor’s.
The $158 million of second senior subordinate-lien Series B bonds are expected to mature between 2040 and 2045. This tax-exempt series is also second senior-lien bonds and the bonds are rated the same as Series A bonds.
Bonds in Series B will be capital appreciation bonds until about 2019, when they will convert to current interest bonds, Rountree said. The MWAA issued second senior-lien bonds in its August deal.
The second senior lien is the authority’s “working lien,” where it expects to issue the majority of its debt for the project, Rountree said.
The agency’s August deal also included $198 million of senior bonds, a tranche higher than the second senior lien, that were rated A2 by Moody’s and A by Standard & Poor’s. The deal does not include any bonds rated at that level.
The Series C and D bonds make up a new, subordinate lien that was not included in the August deal.
The bonds make up the remainder of the deal, with specific dollar amounts for each series to be determined at pricing, according to Rountree. Both the Series C and D bonds are rated Baa2 by Moody’s and BBB by Standard & Poor’s.
The Series C bonds are tax-exempt current interest bonds. The Series D bonds will be issued as taxable BABs. Both Series C and D are expected to mature between 2042 and 2047.
“We’ve left ourselves the option to determine when we get into the market exactly what we want to issue under the [Series] C bonds versus the BABs,” Rountree said.
In August, Morgan Stanley priced $400 million of BABs for the authority. The August BABs mature in 2046 and yielded 7.46% priced at par, or 4.85% after the 35% federal subsidy.
Portions of the second senior-lien bonds issued in August were insured by Assured Guaranty Corp. Rountree said the MWAA has commitments from Assured to cover some of the bonds in the current deal.
He said the price of insurance has come down from what the authority paid in August.
It paid Assured 165 basis points to insure some second senior-lien bonds, which were also rated Baa1 by Moody’s and BBB-plus by Standard & Poor’s, Rountree said. For the same second senior-lien bonds in this deal, Assured offered to insure the bonds for 150 basis points.
The MWAA has a commitment from Assured to insure almost all of the Series A and B bonds, Rountree said.
“When we’re in the market, we will determine whether or not it is financially viable to use [insurance],” Rountree said.
Assured also committed to insuring up to $100 million of authority’s BABs, Rountree said. The agency did not insure its 2009 BABs.
The BABs in this deal could be marketed overseas for the first time as international investors are growing more comfortable with the new securities. The POS for this offering, unlike the August deal, includes language for regulatory requirements in about 20 countries and Hong Kong.
Pauline Schneider, an attorney with Orrick, Herrington & Sutcliffe in Washington who is representing the underwriters, said some foreign investors are finding BABs attractive because they pay a taxable rate. The language in the POS does not necessarily mean the BABs will be sold overseas, but the underwriters thought “it would not hurt” to include the language for foreign investors, Schneider said.
“The purpose of all this disclosure is to say exactly what an investor needs to do to satisfy the requirements in those jurisdictions,” she said.
All the BABs will be issued in U.S. dollars. Some corporate bonds are issued in foreign currencies to attract international investors. Rountree said he expects a majority of the BABs to be sold domestically.
Rating agencies said the bonds’ payment schedule “introduces some additional risks” to the credit, said Maria Matesanz, Moody’s analyst on the MWAA. The challenge is “related to the fact that you have to grow your revenues through either rate increases or organic growth to match the structure of the debt service as it escalates over time,” she said.
The authority raised rates on the Dulles Toll Road in January and will continue to gradually raise rates over the next couple years. Moody’s noted that the toll road has been servicing commuters for 26 years in a high-traffic metropolitan area.
“In the current recession, the D.C. area hasn’t really been affected as significantly by the recession,” Matesanz said. “It has been pretty well insulated by the government presence.”
Still, the MWAA’s debt-service coverage “is quite narrow,” Matesanz said. It has a coverage covenant of 1.60 times for the second senior bonds and 1.31 times for the subordinate bonds.
Last month, the agency received good news about a legal challenge questioning its right to levy tolls. A U.S. district court judge dismissed a lawsuit filed by the Dulles Corridor Users Group. The plaintiffs have filed a notice of appeal to a federal appellate court in Richmond, Rountree said.Moody’s said it is “aware” of the continuing legal challenges, but believes that they do not pose a threat to the MWAA’s credit.
Citi and Morgan Stanley are the lead underwriters on the deal with 12 co-managers. Nixon Peabody LLP is bond counsel and disclosure counsel. Frasca & Associates LLC and Mecator Advisors LLC are MWAA’s financial advisers.
