DALLAS — Harris County, Tex., is considering two options for refunding $205 million of toll-road put bonds on Thursday.
One option is another issue of put bonds that would cost the county 0.4% interest over the course of a year, said Edwin Harrison, chief financial officer for the county.
A second option is called “window variable-rate demand bonds” that are offered by the deal’s sole underwriter, Citi. The window VRDBs offer an investment similar to the virtually defunct auction-rate securities but provide investors a certain exit if they decide to sell the bonds, according to Harrison.
Under provisions of the window VRDBs, investors would be required to own the bonds for a maximum of six months if they could not be sold on the market.
If neither the investor nor Citi could find a buyer for the bonds, the issuer would be required to refund the issue after six months, Harrison said.
Interest rates on the windows bonds would reset weekly at SIFMA swap index plus 40 basis points, Harrison said. Issuers of the bonds can avoid the liquidity requirements that are typical of variable-rate deals, Harrison said.
Investors can avoid the potential for long-term ownership of a bond that was bought for liquidity and failed to find buyers, as happened with ARS in the market meltdown of 2008.
“Right now, the put bond would be better,” Harrison said. “With the other deal, the market is not as big and you could be doing something else in six months.”
Either way, the short-term financing is expected to be cheap and provide Texas’ largest county with plenty of flexibility in managing its debt, Harrison said.
The toll-road bonds carry ratings of AA-minus from Standard & Poor’s and Fitch Ratings. The window VRDBs require a rating of AA-minus or higher.
The ratings also apply to the Harris County Toll Road Authority’s $1.9 billion senior-lien toll road revenue long-term fixed rate bonds.
If the put bonds are issued for a year, they will carry short-term ratings of A-1-plus from Standard & Poor’s and F1-plus from Fitch. If they are issued for two years, they will carry the long-term rating.
For the first three months in fiscal 2011, HCTRA’s traffic and toll revenues, excluding the Katy toll road, are up 0.1% and 2.5%, respectively.
“Fitch believes that the increased yield from the toll rate increase signals that the assets have additional rate-making ability,” analysts wrote.
While toll revenues have increased every year, traffic has declined twice, in fiscal 2004 by 1.5% and 2009 by 5.8%.
The drop in traffic in fiscal 2009 was a result of weather-related road closures from Hurricane Ike in September 2008. Net operating revenues have declined by 5% and 3.5% in fiscal 2009 and 2010.
The authority’s toll revenues come from 115 miles of roadway and other assets in the Houston-Harris County area.
Harris County, including Houston, is the third largest in the nation with a population of 3.9 million, according to 2010 estimates.
