Massachusetts next week plans its first-ever bond sale from the Commonwealth Transportation Fund, a new credit that grabbed triple-A ratings last week from Moody’s Investors Service and Standard & Poor’s.
The state’s CTF credit carries higher ratings than the commonwealth, which Standard & Poor’s and Fitch Ratings rate AA and AA-plus, respectively. Moody’s rates the state Aa1.
The CTF special obligation revenue bonds are secured by the commonwealth’s 21-cent gas tax and registrar of motor vehicle fees for licenses and registrations. The new credit stipulates that pledged revenues must equal four times maximum annual debt service, a factor that both Moody’s and Standard & Poor’s noted in assigning the gilt-edged ratings to the initial bond sale.
JPMorgan plans to price Dec. 13 $576.2 million of Series 2010A CTF revenue bonds. Bond counsel is Edwards, Angell Palmer & Dodge LLP.
All the Series 2010A bonds will be offered as taxable Build America Bonds as the state is looking to take advantage of the federal BAB program, set to expire on Dec. 31 unless Congress extends it. BABs offer issuers a 35% federal subsidy on interest costs.
At the same time, the commonwealth will sell $100 million of new-money grant anticipation notes secured by future federal grants and $390 million of refunding Gans. Jefferies & Co. is book-runner on the Gan transactions. Nixon Peabody LLP is bond counsel.
About $1.9 billion of CTF bonds and another $1.1 billion of Gans secured by future federal grants will finance the state’s $3 billion Accelerated Bridge Program.
Bond and note proceeds will over eight years help pay for repairs and upgrades to more than 200 structurally deficient bridges. The program includes bridge replacements and a handful of larger-size projects that will cost about $300 million each.
The new CTF credit is part of the state’s transportation reform enacted last year. Officials abolished the Massachusetts Turnpike Authority and merged most surface transportation systems under one agency, the Massachusetts Department of Transportation. MassDOT has the ability to refinance outstanding MassPike debt.
The overhaul included the creation of the CTF, with revenue from the state’s 21-cent gas tax and RMV fees flowing into that fund.
It also enabled the commonwealth to bond against those revenues. Officials anticipate that pledging those revenue streams as a special obligation as opposed to issuing general obligation bonds will generate a lower cost of borrowing as the state carries double-A ratings, said Jay Gonzalez, Massachusetts’ secretary of administration and finance.
“Instead of using it to just pay GO bonds that would have had higher debt service, we’ve now structured this special-obligation credit in a way to make that debt service — that we determined that we could afford — cheaper than it otherwise would be,” Gonzalez said.
Officials anticipate the triple-A CTF credit will save the state an estimated $60 million of interest costs over the life of the debt.
When lawmakers crafted the transportation reform initiative in 2009, there was a focus on creating a fund and structuring it with a high-coverage ratio for bondholders in order to potentially secure triple-A ratings.
“We thought that if we could structure a high-quality, limited credit that would likely achieve a triple-A rating — and thereby allow us to finance transportation infrastructure improvements much cheaper than we otherwise would and save millions of dollars — that would allow us to invest in more infrastructure,” Gonzalez said.
The first 6 cents of Massachusetts’ 21-cent gas tax goes to pay down $413.9 million of outstanding gas tax bonds from the state’s 1994 trust agreement. That 1994 lien is now closed. Once debt service on those previous bonds are met, all remaining gas tax revenue and RMV fees repay CTF debt.
“Even if authorized issuance is doubled and in a weaker revenue scenario, pro forma coverage of approximately four times can be maintained,” according to a Moody’s report.
While debt service for the CTF bonds is subject to appropriation, lawmakers cannot use the pledged revenues for other purposes unless the state first meets principal and interest costs on CTF debt. Moody’s notes that CTF’s total debt limitation is statutory, and the state could increase that ceiling in the future.
Fitch does not rate the CTF credit.
