DALLAS — The Arizona Transportation Board will complete its pricing of $180 million of revenue bonds Tuesday in a deal that will finance construction of highways in Maricopa County, including Phoenix and its suburbs.
The institutional pricing on the tax-exempt bonds followed a retail order period on Monday.
JPMorgan will lead the negotiated deal with Citi, Goldman, Sachs & Co., Morgan Stanley, and Ramirez & Co. as co-managers. RBC Capital Markets is financial adviser and Squire, Sanders & Dempsey LLP is bond counsel.
The underwriting team was selected for this deal from a pool of qualified firms, said John Fink, finance director for the Arizona Department of Transportation.
While the deal has been in development for several months, the state is coming to market at a time when interest rates hover around record lows.
“It looks like this deal is shaping up pretty nicely in terms of timing,” Fink said. “We’ll see.”
The bonds are backed by a half-cent sales tax under the Maricopa County Regional Area Road Fund that was approved by voters in 2004. The RARF tax, passed as Proposition 400, will remain in effect until Dec. 31, 2025.
With the tax support, the bonds carry ratings of AA-plus from Standard & Poor’s and Aa1 from Moody’s Investors Service.
Retail investors Monday were offered bonds due July 1, 2012 with a 3% coupon and a yield of .55%. A final maturity in 2025 featured 3% and 5% coupons and a yield of 3.13%.
While Standard & Poor’s has a negative outlook on the state’s AA-minus issuer credit rating, the outlook on the RARF bonds is stable.
“The stable outlook reflects what we view as Maricopa County’s large and diverse economic base generating the pledged tax, combined with very strong [debt-service] coverage, although we believe this is slightly offset by declining pledged sales taxes and $500 million of expected additional parity or subordinate bonding in the next two years, and potentially much more in following years,” said Standard & Poor’s analyst David Hitchcock.
Working with financial adviser Kurt Freund, managing director at RBC, Fink decided to bypass taxable Build America Bonds in favor of traditional tax-exempt debt with maturities from 2011 to 2025.
“We have never issued BABs,” Fink said. “Since BABs have been in existence, we have only done one prior bond issue and that was when BABs were a relatively new product. And at that time the economics didn’t point to that being the right solution for us.”
ADOT’s decision on when to sell RARF bonds is based on pledged revenue growth, which was robust until the Great Recession came along.
Moody’s analyst Dan Steed said his agency’s rating and stable outlook “recognizes the severe economic stress currently experienced in the state and region, resulting in unprecedented declines in pledged revenues from 2008 to the present; nevertheless, reduced borrowing has resulted in weakened but still sound debt-service coverage above two times.”
Before fiscal 2008, annual transportation tax revenues had not declined since enactment in 1985, growing at an average annual rate of 8.1% from 2003 to 2007. As the economy contracted, pledged revenue declined for the first time in 2008 as collections dropped 3.2% from fiscal 2007. They fell even further in fiscal 2009, by 13.7%, followed by a third annual decline in fiscal 2010 of 8.9%.
Moody’s calculated coverage based on another drop of 8.9% in the current fiscal year, which would still leave pledged revenues running at 2.06 times debt service.
“Given recent collection trends, management recognizes and acknowledges the original September 2009 excise-tax revenue forecast no longer reflects revenues expected to be received through 2014,” Steed wrote. “Although the new official forecast will not be completed until December 2010, management expects FY11 revenues will approximate FY10 levels.”
Maricopa County is the fourth most populous county in the nation. It has four million residents and more than 60% of Arizona’s population, Until recently the fastest growing state, Arizona has seen its unemployment grow to 9.7%, slightly higher than the nation’s 9.6% average. In Maricopa County, the jobless rate is lower, at 8.8%.
With the decline in revenues, ADOT reduced its five-year capital program by nearly a third. The original plan that runs through 2013 anticipated $1.5 billion of additional borrowing beyond this week’s deal. Officials now expect to borrow about $1 billion.
Another $400 million issue is expected in this fiscal year, which runs through June 30, and subsequent borrowings will be determined based on pledged revenue growth, according to Moody’s.
“The outlook reflects the expectation that management will continue to prudently respond to challenging economic conditions, adjusting its borrowing plans as necessary to maintain sound coverage of debt service,” Moody’s said. “Future credit evaluations will monitor economic trends and revenue collections. While the regional economy will remain under stress in the near term, over the longer run it should benefit from its strong research base and affordable living and business costs.”
While the bulk of the RARF tax revenues go toward road construction, light rail is also eligible for the funds under Proposition 400. A light-rail system runs from downtown Phoenix to Sky Harbor International Airport in the East Valley, financed by the individual cities that participate in the rail line.
The Maricopa Association of Governments manages transportation projects in the county that overlap city boundaries and serves as the conduit for federal funds.
This summer, MAG approved a draft five-year transportation improvement program to run through 2015. The plan includes all regionally significant projects, regardless of their funding source, to be built over the next five years. The program includes $7.4 billion in project funding, $6.15 billion of which is for street and highway projects and $1.3 billion for transit projects.
The list includes 568 street projects, 208 transit projects, 166 freeway projects, 82 Intelligent Transportation Systems projects, 75 bicycle and pedestrian projects, 92 air quality or travel demand management projects, 11 bridge projects, 10 safety projects, and 20 maintenance projects.
