Virginia Commonwealth Transportation Board Set to Price $600 Million Offering

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BRADENTON, Fla. — The Virginia Commonwealth Transportation Board prices the biggest deal of the week Thursday, selling $600 million of capital projects revenue bonds.

The competitive offering is expected to benefit from a light calendar in this holiday-shortened week, high double-A ratings, and the low interest rate environment, according to traders.

Bond proceeds will be used by the Virginia Department of Transportation to pay for various projects, including transit and rail capital needs.

“The VDOT deal should command a great deal of interest from investors,” said Joseph Paucke, senior vice president of municipal trading and underwriting at Davenport & Co. “It’s the largest competitive sale on the calendar this week, and with tax-exempt to taxable ratios very favorable to tax-exempts, the opportunity for investors to buy block-size quality issues should be very appealing.”

The offering has serial maturities from 2013 to 2037, though bidders can designate term bonds in consecutive maturities.

The structure is designed to provide level debt service, said John Lawson, VDOT’s chief financial officer.

Bonds maturing on and after May 15, 2023 will be subject to optional redemption.

The debt is a limited obligation of the commonwealth and the Transportation Board, secured solely from the revenues, receipts, and funds appropriated by the General Assembly. Some $1.1 billion of capital project revenue bonds is outstanding.

The Transportation Board’s financial advisor is Public Resources Advisory Group.

Bond counsel is McGuireWoods LLP.

The bonds are rated AA-plus by Fitch Ratings and Standard & Poor’s, and Aa1 by Moody’s Investors Service. Analysts noted Virginia’s conservative fiscal management, low debt burden, and an economy that has fared better than the nation’s.

The capital projects revenue bonds are rated are one notch below Virginia’s triple-A ratings, and that strength is expected to help lower borrowing costs, Lawson said.

“What we have found, and what we hope to continue to see, is that with these types of credit ratings there’s good demand any time we go to market,” he said. “We’re trying to take advantage of near historical low interest rates.”

Lawson said most of Virginia’s capital projects revenue bond sales see good participation from institutional investors.

“There have been similar deals in the street over the past few weeks and similar credits within Virginia that have come over the past few weeks so it gives an idea of where this deal will come,” an Atlanta trader said. “So bids will be pretty close together.”

He said a similar AA-rated credit in Virginia with a 5% coupon was trading at 25 basis points off the MMD scale in the 10- to 15-year range.

“A trade posted was plus 25 to 30 basis points on the 10- to 15-year,” the trader said Tuesday. “Discount bonds of 3% coupons are trading a lot wider.”

With yields on the MMD scale at or near historic lows, many issuers can claim they are getting all-time low yields, though they may not be getting record-low spreads, the trader said.

“Anyone coming to market can claim they get record lows, but spreads will give you a better idea of how they are trading,” he said. “We’ve recently seen some widening on the spreads between the triple-A and single-A, so spread widening is possible.”

Davenport’s Paucke said his firm also has seen several local issues price at spreads wider than historical norms.

“I think it’s a function of low absolute rates and what it takes for issues to clear the market,” he said. “I think it’s more important for issuers to focus on the low cost to borrow in this environment as opposed to whether the spread is tighter or wider than it’s been in the past.”

This week’s Virginia is the second of three tranches totaling $1.8 billion for capital projects in the state’s aggressive transportation financing schedule from 2011 to 2013.

The first tranche of $600 million sold last year, and there are plans to bring another $600 million to market next year.

The plan of finance also includes selling up to $1.2 billion of grant anticipation revenue vehicle bonds by 2015. The Garvees are being used to finance several major projects, according to Lawson.

The state’s first Garvee deal was a $289 million transaction in February for an all-in interest cost of 2.4%. Proceeds provided a portion of the financing for two tunnels and expansion of the Martin Luther King Expressway in Norfolk and Portsmouth.

Despite questions about future federal transportation funding, Lawson said Garvee bonds continue to be well-received by the bond market.

“We actually did have good retail participation on the Garvee sale in February,” he said.

The Transportation Board will sell its second negotiated Garvee deal in June.

The transaction will be sized between $150 million and $200 million to finance all or portions of Interstate 95 express lanes and additional work related to the Norfolk and Portsmouth tunnels and expressway expansion project.

Citi will be the book-runner. The remainder of the syndicate had not been selected at press time.

Lawson said the structure of the deal in June has not been determined.

“When the underwriters start putting it together they will come up with what they see as the lowest combination of serial and term bonds to get us the overall lowest cost of borrowing,” he said.

The Transportation Board is authorized to have $1.2 billion of Garvees outstanding at any time.

Future bonds will be sold as projects need financing. The state is phasing out its former federal highway reimbursement anticipation note program.

VDOT plans to use Garvees as a revolving financing program. New bonds will be sold as capacity is freed up when outstanding debt matures, Lawson said.

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