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Deal in Focus

Washington Eyes First Garvee Sale

SAN FRANCISCO — Washington will sell its first ever Garvee bonds next month as it works to raise more money to pay for a replacement floating bridge to help ease traffic in the Seattle region.

The state is expected to sell $432 million of grant anticipation revenue vehicles bonds backed by federal highway grants.

The deal, tentatively set for the week of May 22, has gained high marks from rating agencies mainly because of the high debt-service coverage. But concerns still surround Garvees because Congress has been delaying enacting a new highway funding bill.

Deputy treasurer Ellen Evans said the state has incorporated several strategies to strengthen the bond security.

“The State Finance Committee adopted a policy which includes a more restrictive additional bonds test and limits amortization of Garvee bonds to 12 years to reduce reauthorization risk,” Evans said in a statement. “If necessary, the state will de-obligate funds on existing programmed projects and then re-obligate those funds for the payment of debt service.”

Washington has also planned a second Garvee financing of $412 million for 2013. Evans said additional bonds are not currently authorized for any other transportation projects.

The state has also enacted a memorandum of understanding with the Federal Highway Administration that allows them to use federal aid for debt service.

The main concerns many analysts have over Garvees is the congressional dithering that has left the exact future funding up in the air.

Congress has yet to pass a new transportation funding bill and has extended the most recent six-year bill that expired in Sept. 2009 — the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, or SAFETEA-LU — several times, most recently until the end of June.

The program is funded through an 18 cents per gallon federal gas tax and other allocations because the tax doesn’t cover the full costs.

The House of Representative has proposed funding the Garvee program for five or six years only through collected taxes, which could lead to a roughly 30% drop in funding.

In contrast, the Senate has proposed only a two-year program but it would include additional funding beyond the tax collections.

Howard Cure, head of municipal bond research at Evercore Wealth Management, said these days any time you have a program tied to the federal government, investors will scrutinize it closely.

“We look at this and say people are a little scared about this and spreads may widen out a bit, and then the yield could be more attractive because of the taint since the federal government is involved,” Cure said. “We have been selectively buying these for different states.”

Even amid a measure of uncertainty, Standard & Poor’s rates the bonds AA with a stable outlook.

“The rating reflects our view of good future debt-service coverage based on historical federal grant receipts, and a sound bond structure,” Standard & Poor’s analyst Mary Ellen Wriedt said in a report Tuesday.

Analysts did not the state’s “narrow” pledge of transportation funds and potential changes in federal funding in the future. But S&P said the changes are unlikely to impact the credit rating.

Moody’s Investors Service gave the bonds a Aa2 rating along with a stable outlook.

Moody’s said the expectation is that the federal highway program will remain a national priority and will be reauthorized.

The lead manager on the deal is Citi. Washington’s financial advisors are Montague DeRose and Associates LLC and Seattle Northwest Securities. Foster Pepper PLLC is bond counsel.

Washington will use the proceeds to help pay the $2.4 billion anticipated cost through 2019 for a new SR 520 floating bridge and related projects. The plan is to expand the bridge to six lanes from four, include space for pedestrians and add capacity to light rail.

The state Department of Transportation said $2.2 billion is still needed to complete the overall project.

Officials have put the total cost at $4.65 billion for the floating bridge project, which is expected to open to traffic by December 2014.

As it stands, the current plan includes $800-$900 million of Garvee bonds, $112 million of toll revenue bonds and $550 million of triple-pledge bonds.

In October, Washington sold more than $500 million of general obligation bonds that were backed by the triple pledge of toll revenues, fuel tax collections and the state government to help fund the project.

The rest of the money will come from federal, state and local funds as well as toll revenues.

The state DOT said tolls are expected to raise $1 billion toward the cost of the project.

Tolls are already slated to increase this July to $3.59 during peak times and $1.13 during weak traffic as part of a plan to raise collections annually. It is the first rise of four increases through 2015, after which tolls will jump by 15% in 2016.

Drivers on the old bridge are now charged through transponders attached to their car, and if they lack the electronic pass, a camera will record their license plate and they will be mailed a bill plus a $1.50 surcharge.

At the end of March, traffic monitoring by the department found that average daily volume had fallen 33% since tolls were instituted.

The DOT has said tolling will continue on the bridge until at least the 30-year and 40-year bonds are paid off. Lawmakers have only authorized the toll revenues for bond payments, operations and maintenance within the bridge traffic corridor.

It won’t be the first time the 520 crossing has been tolled. The state set up tolling on the original 520 bridge on the day construction finished in 1963 until its debt was paid off in 1979.

In 2007, the state also revived tolling to pay for the upgrade of the Tacoma Narrows Bridge.

In calculating its ratings, Standard & Poor’s said the Department of Transportation has a strong history of delivery very large projects, including the $735 million Narrows Bridge and the $500 million Hood Canal Floating Bridge.

Washington has more floating bridges than anywhere in the world, and the four longest and heaviest floating bridges: the current 520 bridge, the two Interstate 90 bridges across Lake Washington, and the State Route 104 Hood Canal Bridge.

The bridge funding has not been without controversy.

Anti-tax advocate Tim Eyman filed a lawsuit in October that claimed the state finance committee acted outside of its authority when it approved the triple-pledge bond sale and asked the court to declare the bonds invalid.

A Washington judge dismissed the lawsuit in December.

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