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Arizona Transportation Board Offers Record $706M to Hungry Market

DALLAS — Arizona plans to price $706 million of highway revenue bonds Wednesday as the Legislature begins considering how to distribute the state’s rebounding revenues.

The negotiated deal is the largest in the Arizona Transportation Board’s history and comes after a lean year for debt from the economically recovering state.

The ATB sized the issue to take advantage of low interest rates in the current market and pent-up demand for top-rated debt, according to Kristine Ward, chief financial officer for the Arizona Department of Transportation.

The board, which supervises ADOT, did not issue any debt for new money in 2012 and does not expect any more issues in 2013, Ward added.

JPMorgan is book-runner on this week’s issue with a 40% stake, followed by Wells Fargo Securities as co-senior manager at 20%. Co-managers Bank of America Merrill Lynch, Citi, Morgan Stanley and Stifel Nicolaus & Co. each have 10% invested in the issue, according to board documents.

RBC Capital Markets serves as financial advisor, with Squire Sanders as bond counsel.

The subordinated revenue bonds will come in two series. The $593.6 million Series A is tax-exempt with final maturities in 2038. The taxable $112.7 million Series B reaches final maturity in 2021.

The bonds are backed by a second lien on state highway fund revenues, made up of motor-vehicle fees and fuel taxes. After this sale, the board expects to have about $502.9 million of senior-lien highway bonds and $1,276 million of subordinate-lien bonds outstanding, according to Standard & Poor’s.

While S&P rates the senior-lien debt AAA, the subordinate-lien bonds are rated AA-plus. In conjunction with this issue, Standard & Poor’s restored its outlook for the board to stable from negative.

“The outlook revision reflects our view of state changes in the allocation of highway user taxes to the pledged state highway fund,” wrote S&P ratings analyst David G Hitchcock.

Moody’s Investors Service rates the ATB one notch lower than S&P, with senior-lien bonds at Aa1 and the subordinate-lien bonds at Aa2, with a stable outlook.

The 2013A bond proceeds will provide about $230 million to fund various highway projects for ADOT’s five-year capital program, while the rest of the combined tax-exempt Series 2013A and taxable Series 2013B bonds will refund a portion of senior-lien and subordinate-lien debt into new subordinate-lien bonds.

In addition to lowering interest cost, the lengthening of maturities will match revenues more closely with debt service, Ward said.

Triple-A munis maturing in 2038 yield 2.71%, according to the Municipal Market Data index, while double-As yield 3.24%. The Arizona issue is the largest on the calendar this week, which started on a firm tone as light supply pushed prices higher Monday.

With a state income tax, Arizona has a home-grown retail market for high-net worth individuals looking for double tax-exempt income.

While this issue is the largest in the Arizona Transportation Board’s history, at its planned size it won’t be the state’s largest. Arizona issued $709 million of certificates of participation in 2010 to raise money for its general fund by mortgaging state office buildings, including the capitol complex.

When the state celebrated its centennial last year, Gov. Jan Brewer proposed buying back some of the buildings in her state-of-the-state address. However, the Legislature found other uses for the state’s increased revenue, which included a 1-cent sales tax that had been approved for three years to cover revenue shortfalls.

With a surplus estimated at $1.3 billion, the 2012 legislative session was the first since 2008 in which the state had not faced a deficit.

Brewer, a Republican, returned to the capital yesterday to deliver her 2013 address to open the current session of the Arizona Legislature. On Friday Brewer will release her proposed budget for fiscal years 2014 and 2015.

During the recession, the Legislature has tapped highway user revenues to ease general fund budget pressures, measures that rating analysts cite as a potential risk on the upcoming issue.

“A diversion in fiscal 2009 contributed, along with economic conditions, to a 22.3% reduction in SHF [State Highway Fund] revenues in that year,” noted Moody’s analyst Kenneth Kurtz. “Another diversion, in fiscal 2012, resulted in a 26.6% decline in SHF revenues, from $504 million to $370 million.”

Like other states, Arizona is facing severe challenges in funding new highway projects. Fuel taxes that make up the Highway User Revenue Fund are coming in at 2004 levels, but a revised forecast indicates a need to cut $350 million out of ADOT’s 2016 and 2017 construction plans, Ward told the State Transportation Board at a meeting in Nogales.

Ward told the board that the forecast model assumes the state will sweep funds meant for roads to pay for other services, including the Highway Patrol.

The drop in gas-tax revenue available for projects reflects inflation, improved fuel economy on vehicles, and reduced driving in a less robust economy, according to ADOT director John Halikowski. Fund sweeps are typically used to cover shortfalls in other state agencies, he said.

Analysts noted the impact of the sweeps and diversions on Transportation Board credit.

“Before fiscal 2007, Arizona experienced what we view as strong growth in highway user taxes due to growth in the state’s population and economy,” Hitchcock said. “Highway user taxes rose 28.4% between fiscal years 2002-2007.”

From its $1.38 billion peak in fiscal 2007, total highway user taxes declined 12.8% through 2011, Hitchcock noted, before increasing 0.5% in fiscal 2012 to $1.21 billion.

“However, because Arizona increased its prior diversion of highway user tax revenue for purposes of state general fund budget relief, deposits of highway user tax revenue to the pledged state highway fund declined 26.6% in fiscal 2012 to $369.8 million,” he said.

Arizona’s population rose 24.6% to 6.4 million between 2000 and 2010, according to the U.S. Census.

The state has continued to outpace the nation’s 9.9% population growth, even during the collapse of the credit and housing markets in 2008, analysts noted, adding pressure to state finances.

The state’s “age-dependency ratio” is the second highest in the nation at 67.7%,  reflecting a higher proportional share of demand for education and social services, according to S&P.

“For Arizona,” Hitchcock observed, “this ratio indicates both a relatively large portion of population under 18 as well as an above-average number of residents over 65, reflecting in part the state’s status as a retirement destination.

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