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Toll Road Courts Investors

APR 28, 2011 6:20pm ET
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SAN FRANCISCO — The restructuring of $2 billion of San Joaquin Hills toll-road debt appears to have bondholders on board since the alternative is a likely default.

The long-struggling San Joaquin Hills Transportation Corridor Agency in Orange County, Calif., announced last week that it is seeking a nod from investors to restructure its bonds to keep rising debt-service payments in check.

The TCA has $2.06 billion of outstanding toll road revenue bonds.

The agency is asking the most from holders of $430 million in convertible capital appreciation bonds, who are being asked to agree to extend the maturity dates on the debt.

All that paper is held by Franklin Templeton Investments; $390 million by the Franklin California Tax-Free Income Fund and $40 million by the Franklin High-Yield Tax-Free Income Fund, according to data from Ipreo and Morningstar.

Other bondholders include Eaton Vance Corp., Vanguard Group, Putnam Investments and Nuveen Investments, according to Brenda Shott, the corridor agency’s chief financial officer.

All bondholders are being asked to consent to indenture changes, notably changing the TCA’s debt-service coverage ratio requirement to 1.0 times from 1.3 times.

“I have not received any negative comments back” from bondholders, Shott said. “We are optimistic we will receive the necessary approvals.”

She said the agency has been in ongoing discussions with some of the bondholders about the restructuring plan. Shott anticipates a final agreement in one to three weeks.

The only incentive for bondholders appears to be the corridor agency’s ability to stabilize its long-term finances, as Shott said no other benefits are being offered.

The restructuring proposal puts bondholders in a tough spot since toll roads have generally had a bad record of meeting consultants’ revenue projections and gas prices are likely to rise, cutting into traffic, according to Howard Cure, head of municipal research at Evercore Wealth Management in New York.

“From the bondholders’ perspective, what would be more liquid, having a partial default or having something that has reasonable chance of being paid in full?” Cure said. “They are in a tough position; they don’t have much leverage to demand something.”

Interest rates will remain the same in the new bond structure.

“We started looking at ways to restructure the debt so that we would not face a point when we would be unable to reach our coverage ratios or even our debt service in the future,” Shott said in a phone interview. “By doing this and reducing debt service in the next 13 years, we have created some flexibility.”

The TCA has struggled for years with its heavy debt burden amid weak traffic that has been made worse by the recession and real estate bust.

The San Joaquin Hills agency was formed in 1986 along with the Foothill/Eastern Transportation Corridor Agency to plan, finance, and operate Orange County’s 67-mile public toll road system.

Both joint-powers authorities are legally separate operations but are jointly run by the same management team.

The San Joaquin Hills toll highway, opened in 1996 as the State Route 73 toll road, runs 16 miles from the southern end of the county toward Newport Beach and John Wayne Airport.

The San Joaquin Hills TCA has $220 million of outstanding 1993 current interest bonds, $604 million of 1997 current interest bonds, $680 million of 1997 convertible capital appreciation bonds, and $559 million of 1997 capital appreciation bonds.

The agency issued the debt in 1993 to help fund construction of the toll road and refunded most of the debt through the 1997 issue.

Deferring the maturities of the 1997 capital appreciation bonds, currently scheduled between 2018 through 2024, would reduce debt-service burdens for the next 13 years, according to an agency statement.

Shott said they have done a tax analysis on the changes and that there would be no tax impact on investors.

San Joaquin’s annual debt service in fiscal 2012 will increase $15.9 million to $115 million, or 16%, from a year earlier, according to a filing by the TCA to the Municipal Securities Rulemaking Board. Without restructuring, annual debt service is set to peak at $225 million in 2033.

As debt service has risen, the agency’s revenue projections have fallen, reaching only 69% of its original forecasts in fiscal 2010, according to Moody’s Investors Service.

The restructuring could save the toll road agency $550 million in debt service costs from fiscal 2012 through fiscal 2024, but debt service in each fiscal year from 2025 through 2036 would rise by $43 million, according to the MSRB disclosure filing.

Todd Spence, an analyst with Standard & Poor’s, said the debt restructuring is unsurprising and could potentially weaken the credit.

“Operating revenues have been less than debt service, so it is not a trend they could continue,” Spence said in a phone interview. “There are positives and negatives to what they have done.”

Spence said restructuring and changing maturities has some negative connotations but the end result is going to offer some relief in the early years. He added that the TCA will have to hire a toll consultant every year to maximize revenues as part of the new agreement, compared to doing so only when they missed the rate covenants.

Following the restructuring announcement, Standard & Poor’s put San Joaquin Hills’ BB-minus rating on negative credit watch.

Moody’s has an underlying rating of Ba2 on San Joaquin Hills bonds with a negative outlook, while Fitch Ratings rates them an equivalent BB, also with a negative outlook.

The agency maintained its 1.34 times debt-service coverage ratio in fiscal 2010 only because of a $28.7 million transfer from a backup account funded by mitigation payments from its Foothill/Eastern sister agency. Without the transfer, the ratio would have been 0.94 times.

The San Joaquin Hills TCA inked the mitigation and loan agreement with the Foothill/Eastern agency to offset the impact from a planned southern highway extension by Foothill/Eastern that would divert some traffic from its sister agency’s toll road.

Foothill/Eastern has paid $120 million since 2007, but its extension has stalled in the regulatory process, and its mitigation payments turn into loans if it fails to build the extension by the end of 2015.

Foothills/Eastern has also struggled with declining traffic due to the recession and real estate bust. Managers of the two agencies have twice tried to engineer a bond-financed merger to combine them. The most recent effort fell apart in 2009 because of the weak economy.

Toll road spokeswoman Lisa Telles said the merger could still happen if revenues recover.

The restructuring also needs approval from National Public Finance Guarantee Corp. because it insures many of the bonds. The insurer has indicated its intent to provide that approval.

 

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