WASHINGTON — The Virginia Resources Authority will execute the largest deal in its nearly 30-year history next week, when it plans to sell $350 million of bonds to help 15 local issuers finance infrastructure projects and refund previously issued debt.
Pricing is scheduled for May 23, said Peter D’Alema, the VRA’s director of program management. There is a retail priority-order period on May 22 for some of the bonds, followed by institutional sales the next day.
The agency will sell two different types of debt. It will issue $240.8 million of infrastructure revenue bonds that are rated triple-A by Standard & Poor’s and Moody’s Investors Service, and backed by a first lien on loan payments from participating local issuers.
The VRA will also sell $109 million of bonds secured by Virginia’s moral obligation pledge. The bonds carry ratings of Aa2 from Moody’s and AA from Standard & Poor’s.
Wells Fargo Securities will be lead underwriter. Other firms working on the deal are Bank of America Merrill Lynch, BB&T Capital Markets, Citi, Goldman, Sachs & Co. and Siebert Brandford Shank & Co.
The large group of national firms reflects the fact that this is the VRA’s largest issue since it assumed its current form in 1984, D’Alema said.
The authority originally came into being in 1950. It is governed by an 11-member board of directors, seven of which are appointed by the governor. The remaining four are the state treasurer, the state health commissioner, the director of the Department of Environmental Quality, and the director of the Department of Aviation.
The debt will be issued for 11 local governments and four infrastructure authorities under the Virginia Pooled Financing Program. Seven of the participants are new to the program, which is seeing its 22nd issuance.
Following the deal, there will be 211 loans to 117 different borrowers. The proceeds will allow five of the issuers to refund obligations from the financing of government buildings, while the rest will be used for water and sewer projects.
In the pool program as a whole, the top five borrowers account for about 25% of the outstanding loan amount, while the top 10 borrowers represent roughly 42%.
The largest local borrower participating in the pool program is Prince William County in the northern portion of the state. It accounts for more than 7% of all local bonds in the program, but is not among the 15 issuers taking part in the deal.
D’Alema said next week’s deal will generate about $138 million in new revenue, with the remaining being refunding bonds.
Localities participating in the upcoming issue are the Amherst County Service Authority, Dinwiddie County, the city of Fairfax, the town of Farmville, Fauquier County, the Halifax County Service Authority, the city of Hampton, King George County, Middlesex County, Nelson County, the Rivanna Water and Sewer Authority, the Rockbridge County Solid Waste Authority, the RSW Regional Jail Authority, Stafford County and Warren County.
The pool program allows local issuers who may be unrated or carry less favorable ratings to benefit from the strength of a more strongly rated issuer, according to VRA executive director Suzanne Long.
“It’s a market access enhancer,” she said.
Localities have different goals for their refundings, and Long saidthat though the VRA officially strives for the “standard” 3% present-value savings, some localities are looking for double-digits.
Long took the top post at the VRA on March 1 after her appointment by Gov. Robert McDonnell.
Before becoming executive director, Long was an associate at McGuireWoods LLC in Richmond. Long said she worked extensively with the VRA as bond counsel during her time at McGuireWoods. That firm has been the near-exclusive bond counsel to the agency for years, including every issuance since 2007. During that time, the VRA went to the market 26 times and issued $2.298 billion of debt.
Long has also worked for Christian & Barton LLP and Hirschler Fleischer.
The local issuers within the pool rely on taxes or project revenues to secure their pledges to the VRA, though in some cases the local obligations are backed by a moral obligation pledge of the locality. The authority itself has no taxing power.
The agency can survive defaults of around 30% and still repay bondholders, according to Moody’s and S&P. If a locality is in danger of defaulting to the VRA, a state aid intercept program allows the Virginia comptroller to withhold funds from the local government until the authority is repaid.
The intercept program has never been used, Long noted.
The VRA also maintains an operating reserve of over $7 million to provide a further guard against defaults, but Standard & Poor’s said the reserve will not increase with the new issue.
The authority has used the same structure of infrastructure and moral obligation bonds in the past, but never on this scale. In 2010, for example, the VRA executed a $168 million deal in the same fashion.
In 2009, the General Assembly increased VRA’s statutory moral-obligation debt limit to $1.5 billion from $900 million. Moody’s said that though it adds strength to the pool program, the moral obligation pledge is not as strong as the legal pledge that secures Virginia’s lease appropriation debt.
“With lease debt, there is a legal contractual obligation to pay debt service once it has been appropriated, which makes that debt relatively stronger than moral obligation debt, even though both types of debt payments are subject to appropriation,” Moody’s said in its rating report. “It is this distinction that provides the basis for the Aa2 rating on the subordinate bonds.”
Standard & Poor’s has assigned a stable outlook to both the infrastructure revenue bonds and the moral obligation bonds.
Moody’s has assigned a stable outlook to the infrastructure revenue bonds, but has pegged the moral obligation bonds with a negative outlook.
“The moral obligation bonds are notched off the commonwealth’s Aaa general obligation rating and therefore carry the commonwealth’s negative outlook,” Moody’s said.
Moody’s has assigned Virginia a negative outlook because it is closely tied to the federal government, to which Moody’s has also assigned a negative outlook.
The VRA last sold bonds for its pooled financing program in November. The offering consisted of $185.3 million of tax-exempt bonds and $40.7 million of taxable bonds. In one series, $129.6 million of 30-year bonds priced with yields ranging from 1.01% with a 3% coupon in 2015, to 2.98% with a 5% coupon in 2025, to 3.78% with a 5% coupon in 2041.
The bonds are scheduled to close June 13, D’Alema said.
