BRADENTON, Fla. — The Kentucky Turnpike Authority plans to begin pricing $334.2 million of new-money and refunding revenue bonds Monday for in-state retail investors. Final pricing is expected Tuesday.
Some $50 million of the proceeds will fund highway projects authorized in 2008 to deal with growth around the Fort Knox military base related to the Defense Department’s Base Realignment and Closure program. The remainder will fund various road projects authorized by lawmakers in 2009.
The refunding portion will restructure $79.5 million of outstanding debt to provide fiscal relief for the state’s operating budget and accelerate funding for road projects that otherwise would have been paid for with cash, said Tom Howard, executive director of Kentucky’s Office of Financial Management.
The negotiated offering, led by Goldman, Sachs & Co., is expected to be sold as $148.6 million of Series A new and refunding bonds maturing between 2013 and 2020. About half of the $185.6 million of Series B taxable Build America Bonds being sold will mature serially between 2021 and 2025, while the rest will sell as a $95.4 million term bond maturing in 2030.
The bonds will be secured by various revenues, including taxes on gas and motor fuels. The BABs are subject to extraordinary redemption should the 35% subsidy from the federal government be reduced or eliminated, according to the preliminary official statement.
“The transaction has been structured to accomplish two objectives,” Howard said. “One is to smooth debt service and two, to maximize state-funded road construction within budgetary parameters established by the Transportation Cabinet.”
A worrisome factor for some issuers is the fact that the Internal Revenue Service can offset the BAB subsidy if the federal government is owed money. That concern has prompted states such as Florida and South Carolina to stop using them.
Howard said the offset flap is not a big concern for Kentucky because the state will “gross fund the initial debt-service payment and apply the subsidy to the next semiannual payment, providing us with six months to work out any potential problems.”
But another developing controversy over whether the IRS will audit a large number of BAB deals is a concern, he said, adding that the state is not taking any special measures to prepare for that eventuality because of “limited resources.”
Howard said he believes the transaction will be attractive to investors for several reasons.
“State transportation is an essential part of state government, especially in a developing state like Kentucky,” he said. “The bonds are secured by a constitutionally dedicated revenue stream that provides very strong coverage ratios. Finally, we believe that the commonwealth offers investors an excellent opportunity to diversify their portfolios.”
Ratings for the bonds had not been released by press time. Howard said Tuesday that he had not received verbal confirmation of the ratings.
The Turnpike Authority last sold debt in 2009. At that time, the bonds were rated AA by Fitch Ratings, Aa3 by Moody’s Investors Service, and AA-plus by Standard & Poor’s.
Next week’s offering is the first of several new-money and refunding transactions that were postponed after the General Assembly ended its regular session April 15 without approving a biennial budget, prompting Gov. Steve Beshear to warn lawmakers that a partial government shutdown loomed. He also made it clear that if a spending plan wasn’t approved before June 30, the state would miss opportunities to restructure some debt on which the budget was based.
Beshear then released a revised budget that top lawmakers accepted and a successful special legislative session was held the week of May 24. He signed the budget bill into law last week. The delay in approving the budget is not expected to affect next week’s sale, according to Howard.
“Investors understand that these are very difficult times and the decisions aren’t easy,” he said. “The important thing is that we have a budget that allows us barely enough time to implement the governor’s revised budget proposal.”
However, there are unknown factors that could affect the issuance.
“While interest rates in general have fallen since the originally scheduled sale date, what we don’t know is what the ratings will be or the credit spreads that investors will require for our bonds,” Howard said.
In addition to Goldman, the syndicate includes Bank of America Merrill Lynch, Citi, Edward D. Jones & Co., First Kentucky Securities Corp., J.J.B. Hilliard, W.L. Lyons LLC, Morgan Keegan & Co., Morgan Stanley, PNC Capital Markets LLC, Ross, Sinclaire & Associates LLC, Sterne, Agee & Leach Inc., and Stifel, Nicolaus & Co.
Bond counsel is Peck, Shaffer & Williams LLP. Underwriters’ counsel is Stites & Harbison PLLC.
Another issuer that postponed a deal due to the budget fracas was the Kentucky State Property and Buildings Commission, which plans to sell $149.7 million of new and refunding revenue bonds on June 30.
