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New Mexico Transportation Panel Sets Sale, Side-Steps NMFA Woes

NOV 19, 2012 9:37pm ET
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DALLAS — The New Mexico Transportation Commission recently has sought to distance itself from the troubled New Mexico Finance Authority, which next month will sell $215 million of refunding bonds for the commission.

The bonds will bear the NMFA name even though NMTC bond manager Marcus Trujillo said the two agencies have “no relationship.”

The NMFA, the primary issuer of state and local debt, has itself been locked out of the bond market since July when it reported that its audit for the previous fiscal year was a fake.

Former NMFA controller Greg Campbell is scheduled to stand trial in February 2013 on 12 felony counts of forgery and securities fraud related to the fake audit, which was cited as authentic in a preliminary official statement last spring.

NMFA chief executive Rick May was fired shortly after the scandal broke, and chief operating officer John Duff also left the agency.

The state Transportation Commission’s bonds are expected to price Dec. 6, when a state auditor releases findings in the NMFA investigation.

RBC Capital Markets is senior manager with Bank of America Merrill Lynch and Wells Fargo Securities as co-managers. Public Financial Management Inc. is financial advisor with Sutin Thayer & Browne as bond counsel.

Trujillo said he expects strong demand for the bonds because the commission’s rating was recently upgraded by Standard & Poor’s to triple-A, albeit with a negative outlook.

To ease concerns about how the NMFA probe might affect the new bonds, underwriter RBC Capital hosted a conference that was recorded to answer investors questions, according to Trujillo.

“We’re expecting good impressions from the market,” he said.

The state Department of Transportation took the first step toward dissolving its fiscal relationship with the NMFA and taking over management of its own debt portfolio in July.

DOT attorney Dan Greshon told the Albuquerque Journal that the issue was significant enough to merit the emergency decision. “To be passive and wait another month could be detrimental,” Greshon said, adding that any action taken would not be final, but would begin the process. “It needs to be done to take back control of the bonding program.”

With the separation of the two agencies, Trujillo was assigned responsibility for the Transportation Department’s $1.63 billion bond portfolio.

At the time, the NMFA was on watch for a possible downgrade by S&P and Moody’s Investors Service.

With the upcoming issue, S&P reinstated NMFA’ AAA senior-lien rating while conceding that “the potential lack of oversight and-or fraud regarding the authority’s financial position raises credit concerns.” Moody’s rated the bonds Aa1 with a stable outlook.

“We do not believe that the lack of a 2011 audit or related questions about NMFA’s internal controls and financial management affect the credit quality of the transportation revenue bonds,” wrote Moody’s analyst Kenneth Kurtz.

In October, Moody’s extended its ratings watch for $1.17 billion of NMFA revolving loan debt, explaining that the watch period exempted transportation bonds.

“Although pledged revenues flow through the NMFA, controls are adequate to prevent the comingling of the pledged monies with other NMFA funds and-or any disruption of the transfer to the trustee on a timely basis,” Kurtz noted.

Upon receipt, the NMFA deposits the monies transferred from the DOT in a separate bank account. The transfer to the trustee requires action or approval by four separate NMFA staff members, according to Moody’s. Every month, the NMFA investment manager reconciles and confirms that all accounts are correct and all funds expected have been received and paid out by the trustee.

With its recent ratings actions, S&P took the NMFA off of its watch list for a possible downgrade, while retaining the long-term negative outlook.

“The negative outlook reflects Standard & Poor’s concern that the authority’s potential lack of oversight and internal controls could result in a deterioration of credit quality,” analyst James Breeding wrote. “While it does not appear that funds related to the public project revenue fund bonds are affected, should a restatement of the fiscal 2011 audit show a considerable change to loan-payment receipts or reserve levels available to cure defaults or delinquencies, we could lower the ratings accordingly.”

With this issue, the Transportation Commission will refund all of its prior-lien or “closed-lien” bonds for debt service savings. The prior-lien bonds were issued before 2004 and secured only by state highway revenues. Bonds issued after that are secured by state and federal revenues on a senior- and subordinate lien basis.

Following this deal, the state will have about $970 million in parity senior-lien transportation revenue bonds, including the current offering, and $640 million of subordinate-lien transportation revenue bonds outstanding.

For the transportation bonds, S&P’s AAA rating represents an upgrade from the previous AA-plus, a boost the commission quickly embraced.

“The commission is committed to capturing any interest-rate savings to increase system maintenance funds for New Mexico roads,” commission chairman Pete Rahn said in a prepared statement. “We are particularly pleased with the AAA rating upgrade on our senior-lien debt by S&P, which reflects not only our strong debt covenants but the intense management of the department finances.”

Based on New Mexico Department of Transportation projections, fiscal 2013 will see a 10.2% drop in total revenue due to a 22.9% decline in federal revenues, and a 3.6% increase in state revenue, according to S&P. That should put revenues at 2.16 times maximum annual debt service.

The department has swaps with a notional amount of $220 million with JPMorgan Chase Bank, two swaps with UBS with a notional amount of $220 million, a $100 million notional swap with RBC, and two swaps each with a notional amount of $50 million with Goldman Sachs Mitsui Marine Derivative Products.

As of Oct. 18, the combined swap termination cost for all of its swaps was $137.1 million, and under the agreements NMDOT was required to post collateral of $34.6 million. The department has arranged a $50 million line of credit with Bank of America, in addition to the availability of about $8 million in other available funds from its own cash resources, to help manage potential liquidity needs associated with future collateral posting requirements.

Meanwhile, the NMFA is hoping to get back into the market with bonds for local governments after the audit mess is cleaned up.

“I do feel optimistic,” interim chief executive John Gasparich told Capitol Report New Mexico last week. “I do think that this is all going to work out well. I suppose it’s possible I could be proven wrong, but I do feel optimistic.”

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