New Hampshire Thursday will enter the market with its first-ever Garvee sale, a $77.1 million deal that includes $60 million of taxable recovery zone economic development bonds.
The state tends to finance highway projects through pay-as-you-go financing, but to move forward with its ongoing road-widening project on Interstate 93, officials decided it was time to securitize New Hampshire’s federal highway reimbursement funds into grant anticipation revenue vehicle debt.
“I-93 is a main corridor for commuters and for tourists from Boston through New Hampshire and it’s become imperative that we get the widening completed,” said state Treasurer Catherine Provencher.
“So rather than wait and complete the project on a pay-as-you-go-basis, it is advantageous to get more work done now,” she added. “Construction costs are down, the market is favorable, and so the state is really motivated to move forward on the project.”
Bank of America Merrill Lynch will price the bonds on Thursday. Citi is co-senior manager. Edwards Angell Palmer & Dodge LLP is bond counsel and Public Resources Advisory Group is the financial adviser.
The transaction includes $17.2 million of tax-exempt Series 2010A bonds that will mature in 2020, 2021, and 2022, and $59.9 million of taxable Series 2010B recovery bonds that will mature annually from 2022 through 2025.
The state will receive a 45% subsidy on the interest rate for the RZEDBs from the federal government.
The Garvee bonds are secured by federal highway funds that Washington allocates to states every year. New Hampshire has received an average of $160 million of such funds each year since 2004, according to Provencher.
Funds from the American Recovery and Reinvestment Act boost that average to $170 million annually. The state will not extend its general obligation pledge to the Garvee bonds.
“In working with Public Resources Advisory and the underwriter, we were confident that because the coverage level is overly sufficient ... we did not need a state backstop nor did we need a debt-service reserve fund,” the treasurer said.
Moody’s Investors Service calculates that the $157.6 million of federal highway funds the state receives in fiscal 2010 provides 9.6 times coverage at projected peak debt service for the current issue.
New Hampshire has the capacity to issue up to $240 million of Garvees.
Moody’s anticipates debt-service coverage to be 7.8 times if the state chooses to issue $240 million of the grant-backed debt.
If the federal government were to eliminate its 45% interest subsidy for RZEDBs, coverage would be 7.4 times, according to Moody’s.
Moody’s rates the Garvees Aa2, one notch below the state’s Aa1 general obligation credit rating.
Standard & Poor’s rates the Series 2010A and Series 2010B bonds AA, the same as New Hampshire’s GO credit.
Fitch Ratings does not rate the Garvees, but rates the GOs AA-plus.
“To enhance bondholder security, all eligible federal highway funds received by the state are pledged to the bonds, and the New Hampshire Department of Transportation is required to annually reserve the first available obligation authority for debt service,” Moody’s said in a report.
While Washington has historically supported state aid for highway infrastructure needs and Congress continues to extend funding, it has yet to enact new funding legislation for the Federal Aid Highway Program.
“I think that federal funding for infrastructure is probably the least certain that it’s been for 10 years,” said Matt Fabian, managing director of Municipal Market Advisors.
“It’s not about the amount of aid that’s being pledged, it’s just about the program under which it’s going to be dispersed. There are advocates for the [proposed] National Infrastructure Bank and one option for that would be that the federal portion of the infrastructure bank’s funding might come out of existing grant programs like this, like the highway programs.”
New Hampshire officials opted to issue two bond deals earlier this year, one a refinancing and the other a new-money sale, via competitive bid.
Given that this is the state’s first time selling Garvees, and since the transaction includes RZEDBs, officials decided to sell the debt through a negotiated deal.
Bank of America is set to hold an investor road show Monday.
Provencher and Monika Jarecka-Conley, senior managing director at Public Resources Advisory Group, said they are looking to institutional investors in taxable debt.
They do not anticipate holding a retail order period.
The overall cost of the road-widening is pegged at $612 million.
It will double capacity on I-93 to four lanes in each direction from two along the stretch from the Massachusetts border to Manchester. State officials anticipate selling an additional $115 million of Garvee debt for the project next fall.
New Hampshire has already spent $145 million to date on the project.
The state Legislature and the administration are working on a joint study to determine how to finance highway construction in the future, including identifying funds to finish the I-93 project, which is set to be completed in 2020.
“Will it come from additional bonding, will it come from other revenue streams in the future, will it come from re-aligning our priorities?” Provencher asked.
“We absolutely recognize that there are additional resources needed in the future to complete the project. It just hasn’t been determined yet where those will come from.”
New Hampshire is looking to issue the debt in the same week as the Nov. 2 election.
Meanwhile, the Federal Open Market Committee will hold a meeting on Nov. 2-3.
Fabian said that the municipal market could be volatile or quiet, depending on the election and whether the Fed decides to purchase a hefty amount of U.S. Treasury bonds through its quantitative easing program.
“If the Feds come through and give a more watered-down version of QE, then taxable bonds generally would struggle because there is an expectation with QE that if the Fed does begin to buy most of the available Treasuries in the market, then accounts would be buying other things instead,” Fabian said.
“There was an assumption that everything taxable would rally around QE and if QE is less potent, then there would be less of an effect there, less of a rally.”
