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New Hampshire Returns to Garvee Market for I-93 Highway Upgrades

New Hampshire will return to the market with Garvee bonds for the second time in two years as work to widen Interstate 93 continues.

The state is expected to sell $100 million of federal highway grant anticipation bonds on Tuesday following a retail period that morning.

“This project has been a priority for our state for well over a decade,” said New Hampshire Treasurer Catherine Provencher. “It’s one of the major highways out of Boston into New Hampshire.”

The bond proceeds will be used primarily in the towns of Salem and Windham for reconstruction and widening of the prime commuter route.

Issuing Garvees — short for grant anticipation revenue vehicles — allows the project to continue at a faster pace, instead of financing projects on a pay-as-you-go basis.

“It would either take a lot longer or we wouldn’t have any money left to do anything else on other roadways in New Hampshire,” Provencher said.

Bank of America Merrill Lynch is lead underwriter. Edwards Wildman Palmer LLP is bond counsel and Public Resources Advisory Group is the financial advisor.

Provencher said the first Garvees issued in 2010 were back-loaded, due to demand, so these bonds will be front-loaded in order to have a fairly level debt service over 15 years.

The 2010 Garvees mature in 2020 through 2022. The 2012 Garvees will have five to seven year maturities, Provencher said.

The bonds will be the state’s special limited obligations secured solely by a first lien on New Hampshire’s federal aid highway program revenues, administered by the Federal Highway Administration.

On average, New Hampshire receives around $160 million in federal highway funds, with the past three years’ amount boosted by funds from the American Recovery and Reinvestment Act.

The federal highway program is funded by an 18 cent-per-gallon federal gas tax and other allocations.

The taxes that are dedicated to the fund in federal transportation legislation have expiration dates, which have been extended several times.

The most recent full federal transportation authorization is the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users — or SAFETEA-LU — which expired in 2009 without enactment of a new program. 

So far, Congress has extended the program nine times, most recently on March 29, 2012.

The most recent extension will expire in the end of June. Last week the Senate-House conference committee met for the first time to try to compromise on passing a new highway bill.

According to Eric Friedland, head of municipal credit research for Schroders Investment Management, the risk isn’t whether or not the program will be reauthorized — he believes it will likely be reauthorized — but whether the program will remain in its current form.

“The risk is that revenues may go down. That leads me to not indiscriminately buy all Garvees, but to look for the best in class,” Friedland said.

And in terms of security structure, New Hampshire’s is “definitely one of the strongest of the Garvee issues if you look across the different states,” he said.

Friedland looks for high coverage, so the Garvees could withstand decline in revenues; very strong anti-dilution provisions, so the programs can’t be leveraged in the future; an additional bonds test of three times, and good management.

“And in the case of New Hampshire, you can check off all those boxes.  It’s well structured, well managed, and they have good coverage,” he said.

Despite the uncertainty of future federal funding, the Garvee bonds have received high investment grade ratings of Aa2 from Moody’s Investors Services and AA from Standard & Poor’s. Both assign stable outlooks.

Moody’s analysts in a report said the rating reflects the state’s pledge to first obligate and use federal transportation funds for debt service, the solid trend of federal highway aid received annually, and an additional bonds test of three times maximum annual debt service.

The report cited uncertainty regarding future strength of the federal highway fund, but Moody’s analyst Julius Vizner said the agency believes “transportation infrastructure is essential to the functioning of the economy in the U.S.” and that the federal funding will continue.

Standard & Poor’s analysts also said they believe the program will be reauthorized, whether it’s short term or long term reauthorizations.

“We believe that the longstanding practice of having a federal highway bill in place will continue in some shape or another,” said S&P analyst Mary Ellen Wriedt.

On a wider scale, if uncertainty in federal funding continues, states could be forced to delay projects rather than risk funding changes come July, S&P said in a report last month. 

If funding is discontinued, which Standard & Poor’s does not expect, the whole sector’s credit quality would be called into question and rating changes would ensue, according to S&P analyst Peter Murphy.

Murphy said in that case, the credit impact would be applied on a case-by-case basis because, for example, some Garvee bond issuers have a back-up pledge and some issuers — like New Hampshire — do not.

Even if New Hampshire does not receive the same level of funding in the future, debt service payments have first priority.

“Debt service is going to be paid first and roads are going to get paved second,” Provencher said.

She added that, like the credit rating agencies, she’s fairly confident that there will be some kind of extension to the measure.

“We think it’s highly unlikely that the faucet would just be turned off,” Provencher said.

Work on the 20-mile segment of I-93 is expected to be complete in eight years. The total cost is estimated at $788 million.

New Hampshire spent $317 million on the highway project through the end of fiscal 2011. Approximately $236 million in expenditures is planned for 2012 to 2015, and $235 million is planned for 2016 to 2020.

Provencher said that the proceeds from this bond sale and the proceeds from the 2010 sale will keep construction going for quite some time.

For now, New Hampshire does not have any plans to issue Garvees in the near future.

Garvee sales in the next decade, however, are likely as the state’s 10-year transportation plan includes an amendment to increase the state’s Garvee authorization by $250 million.

The plan, which is adopted by the General Court, New Hampshire’s legislature, and signed into law by the governor every two years, passed through the General Court on Thursday after the House approved the Senate’s amendment to increase the authorization.

According to the preliminary official statement, the $250 million increase is equal to the estimated amount required to complete the currently unfunded remaining capacity improvements on the I-93 project.

The plan still needs approval from Gov. John Lynch.

Despite the legislation, Provencher said: “We would not contemplate issuing any additional Garvee bonds until there is more stability at the federal level on federal highway funding authorizations and a long term authorization was put in place.”

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