DALLAS — Amid a flood of municipal issuance in the last six weeks of the year, the North Texas Tollway Authority will bring around $1.5 billion of debt to market, starting with nearly $500 million of tax-exempt refunding revenue bonds this week.
The first-tier revenue bonds are expected to price Wednesday through negotiation with senior managers Bank of America Merrill Lynch and Loop Capital Markets, with First Southwest Co., Jefferies & Co. and M.R. Beal & Co. as co-managers.
While the NTTA managed to avoid a downgrade ahead of this issue, Moody’s Investors Service maintained a negative outlook on the A2-rated credit.
Assigned on July 30, 2009, the outlook “reflects the authority’s highly leveraged position, and a debt profile characterized by increasing debt service in the out years to fiscal year 2037, which depends heavily on continued traffic growth,” Moody’s analyst Laura Barrientos wrote.
Standard & Poor’s affirmed its A-minus rating on the bonds with a stable outlook. The NTTA’s “highly leveraged system of toll facilities will have an increased reliance on higher traffic and revenue-growth levels to support adequate senior- and subordinate-lien projected debt-service coverage under moderate downside stress scenarios,” said Standard & Poor’s credit analyst Joseph Pezzimenti.
The bonds come to market at a time of uncertainty in transportation funding and changes in how the NTTA does business.
Under newly elected board chairman Victor Vandergriff, the tollway is considering ways to open up bidding for its contracts that have been in the hands of so-called legacy contractors for years.
The NTTA’s financial adviser on this week’s deal, RBC Capital Markets, is among the so-called legacy contractors who could be replaced under a new bidding process. Bond counsel McCall Parkhurst & Horton is another legacy contractor whose relationship with the agency is up for grabs. McCall Parkhurst is working with Mahomes Bolden & Warren as co-bond counsel on the offering.
With issuers rushing to market with Build America Bonds before the program’s expiration at the end of the year and Republican plans to roll back transportation funding in the soon-to-be GOP-controlled House, record low rates on muni bonds began to rise last week. The yield to par call on The Bond Buyer 40 index is up 39 basis points since Oct. 29.
On the buy side, mutual funds have declined as their muni bond holdings lost ground to higher yields. The Pimco Municipal Income Fund II lost 7.5% in the downturn but is still up 6.75% for the year.
In terms of volume, California is pumping nearly $14 billion of debt into the market before the end of the year because of delays in enacting a budget. Other issuers are also in a hurry.
Colorado’s Regional Transportation District will issue $310 million of lease-purchase debt this week after completing a $400 million deal last week. State issuers jammed the last quarter of the calendar in fear that voters would approve severe restrictions on debt issuance beginning Jan. 1. However, the anti-bond ballot initiatives failed.
Dana Gibson-Boone, director of cash and debt management at the NTTA, called the tone of the market weak on Friday following the Veterans Day holiday.
“There’s been some turbulence in the market and the calendar is pretty heavy,” she said. “There’s a rush to issue BABs, and this is tax-exempt, so we think that will work in our favor. We’re very optimistic that they will be well received.”
Proceeds from this week’s sale, expected to be about $490 million, will be used to refund the $200 million Series 2008H-1 and $120 million Series 2008L-1 put bonds with long-term fixed-rate bonds. About $100 million of the Series 2008J floating-rate bonds will be refunded with fixed-rate debt. The deal will also refund $43 million of Series 1997A and portions of the $22 million Series 1998 for debt-service savings.
The NTTA must refund the put bonds by Jan. 1 or face a reset interest rate of 12%, according to Gibson-Boone. On the 1997 and 1998 refundings, officials expect savings of $2.8 million or 4.5%, well above the authority’s 3% savings threshold for a refunding.
By combining the refunding of the 1997 and 1998 bonds with the takeout of the put bonds, the authority is able to achieve economies of scale, the debt manager said.
“It doesn’t really cost us any more to add these bonds,” she said. “We’re getting almost a free ride with this issue.”
After this week’s deal, the NTTA is planning to issue up to $1.1 billion of bonds for its State Highway 161 and Southwest Parkway projects the first week of December. The agency had sought to do the deal as early as July, but the complexity forced a delay, Boone-Gibson said.
The December bonds will be issued under the heading of “Special Projects System,” whose debt service comes from specific tollways rather than the NTTA’s system revenues. The 11.5-mile SH 161 project that runs north-south on the west side of Dallas County is known as the President George Bush Turnpike Western Extension. Currently under construction, the tollway provides access to the new Dallas Cowboy Stadium and Ballpark in Arlington.
Another off-system project to be funded by the December issue is the Southwest Parkway/Chisholm Trail Parkway south of Forth Worth in Tarrant and Johnson counties. The first part of the road is expected to be completed and operating in 2013. The NTTA will contribute $400 million of equity towards the projects along with TIFIA — Transportation Infrastructure Finance and Innovation Act — loans.
The special projects are supported by a Toll Equity Loan Agreement from the Texas Department of Transportation, which covers potential shortfalls in revenue for debt service or maintenance.
Any future cost overruns that cannot be covered with toll-rate increases or the TELA will be the responsibility of the NTTA system.
“Moody’s believes this to be a remote possibility given the experience of NTTA as operator and the willingness in recent past to raise tolls as necessary,” Barrientos wrote. “Once these projects are operational, Moody’s will closely monitor their performance and what effects their expenses could have on the NTTA system.”
With the economy gradually improving, the authority has seen toll revenues rise steadily this year.
