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North Carolina DOT Closing on Garvees

BRADENTON, Fla. — The North Carolina Department of Transportation next week closes on a $145.5 million deal believed to be the first of its kind to use stand-alone, grant anticipation revenue vehicle bonds as interim financing.

The Garvee bond proceeds are part of the financing for the $725 million, 19.7-mile Monroe Connector, which is the state’s second toll-road venture and is under construction.

North Carolina officials say the use of Garvees as part of the financing strategy is expected to save more than $600 million over the life of the toll road, compared to a greenfield financing backed by as-yet-unknown toll revenues.

The Garvees, rated in the double-A category, priced Dec. 16, yielding an interest rate of 2.1% with 2% and 4% coupons in 2023.

The bonds are callable at par in 2017, when they are expected to be taken out with long-term toll-backed bonds after the road opens and develops a traffic and toll revenue track record.

The Garvees were over-subscribed several times at pricing, and netted a better yield than the state had hoped for, said Mark Foster, NCDOT’s chief financial officer.

The high investor demand and the low interest rates were a result of pre-marketing efforts designed to explain the new structure and its security features, which included using the highly rated, federal grant-backed bonds with an early call feature as a form of initial financing, according to Foster.

“We anticipate that after building the toll road and it goes through its ramp-up period, that we will refund the Garvees with more traditional toll-road financing,” he said.

“Using this particular structure, we borrowed less, obtained a much lower interest rate, and ultimately we’ll save users well over $600 million over the life of that toll road,” he added.

The Garvees saved about 150 basis points compared to a financing for a start-up toll road with ratings just above investment grade, according to Foster, who developed the financing scheme and refined it in consultation with the department’s financial advisor, Public Financial Management Inc.

“The use of Garvees for interim financing allows us to avoid substantial amounts of capitalized interest if toll revenue bonds were issued now, in addition to lowering interest costs due to stronger credit ratings,” said PFM managing director David Miller.

“Once Monroe Connector construction is complete and there are two to three years of operating history, [the state] plans to sell the bulk of the project toll revenue bonds, and presumably the credit should be more solid by that time,” Miller added.

The structure also required NCDOT to put less in reserve, allowing the state to borrow about $100 million less than under a traditional toll financing.

“You take the risk out of the upfront financing because when we ultimately refinance, we’ll have built the road, we’ll know what the traffic is after ramp-up, and we’ll have a much better credit,” Foster said.

“It was a true use of innovative finance. We are already getting feedback from around the country from those intrigued by this new structure,” he said, while declining to discuss particular issuers that have made inquiries.

The Kentucky Transportation Cabinet has issued Garvee bonds to fund preliminary costs associated with the Louisville-Southern Indiana Ohio River Bridges project, and expects to issue more of the securities in 2012.

Unlike North Carolina, Kentucky has no plan to refund its Garvees early with toll-revenue bonds.

“At this time, I don’t know of any other entities using Garvees as interim financing to be taken out early by toll project revenue bonds,” Miller said. “But it is a good idea to lower financing costs, and I wouldn’t be surprised if others consider it.”

The bonds are rated AA-minus by Fitch Ratings, Aa2 by Moody’s Investors Service, and AA by Standard & Poor’s.

Fitch placed a negative outlook on the NCDOT’s Garvee rating.

The agency has a negative outlook on all standalone Garvee bonds to reflect the heightened risk of a negative rating action should the federal government not address long-term transportation funding issues next year, Fitch said in a Dec. 15 special report.

Foster said the transaction was not penalized in pricing because of the negative outlook, and noted that Fitch affirmed its AA-minus rating on $373 million of Garvees.

NCDOT plans to sell another $182 million of Garvees with a seven-year amortization schedule the second week of January.

Proceeds will be used for traditional transportation projects.

“Hopefully, in January, we’ll see similar results,” Foster said, referring to this month’s pricing.

The Monroe Connector will provide a bypass for drivers from U.S. 74 at Interstate 485 in eastern Mecklenburg County to U.S. 74 near the town of Marshville in Union County.

In November, the North Carolina Turnpike Authority issued $214.5 million of state appropriation revenue bonds for the Connector project.

The first tranche of financing was came in the form of $233.9 million of taxable Build America Bonds sold in October 2010.



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