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California Tollway Waiting on State Agency as it Plans to Refund $2.5B

LOS ANGELES — The Foothill/Eastern Transportation Corridor Agency in Orange County, Calif. wants to refinance $2.4 billion in debt on July 8, but first it has a couple of hurdles to hop.

F/ETCA officials began working toward the goal of refunding the senior lien toll road refunding revenue bonds last November.

The first challenge occurred shortly thereafter, when the California Debt and Investment Advisory Commission agreed to review the transportation agency’s bonds after receiving a letter of concern from a retired state legislator.

The commission, chaired by State Treasurer Bill Lockyer, aims to complete the review before the bonds head to market, according to spokesman Tom Dresslar.

The transportation agencies agreed to cooperate, even though F/ETCA doesn’t believe it falls under the state agency’s jurisdiction, said Lisa Telles, F/ETCA’s communications director.

The other hurdle Foothill/Eastern has to clear is getting the California Department of Transportation to sign an agreement extending the toll agency’s management of its 36 miles of highway, and extending its authority to toll them, by 13 years to 2053.

“We knew in December we would have to work with Caltrans to extend the cooperative agreement,” Telles said.

The current agreement that F/ETCA has with Caltrans expires in 2040, the final maturity on the current bonds.

Foothill/Eastern and its sister agency, the San Joaquin Hills Transportation Corridor Agency, have both struggled in their own ways since opening to traffic in 1998.

San Joaquin Hills TCA fell to speculative grade as predicted traffic never materialized. Foothill/Eastern has fought for years to build a southward extension.

The two agencies are run by a single management team. The twin tollways have been working on debt restructurings to create long-range financial plans that are more realistic.

Standard & Poor’s, Fitch Ratings and Moody’s Investor Services gave the planned Foothill/Eastern senior lien refunding bonds the lowest possible investment grade ratings, BBB-minus, BBB-minus, and Baa3 respectively, contingent on Caltrans signing the cooperative agreement.

“In our opinion, specific credit risks include the agency’s high debt levels and a debt service schedule that increases; recent negative operational performance; uncertainty regarding elasticity of tolls and the Foothill South toll road extension project, which may require substantial additional debt,” said Standard & Poor’s credit analyst Todd Spence.

“These risks are partially mitigated by the service area’s high wealth levels, high traffic on free highways, and population that is reliant on the highway network,” Spence said.

The series 2013 refunding would restructure debt service and extend the final maturity from 2040 to 2053.

“We believe these risks are partially mitigated by the service area’s high wealth levels, high traffic on free highways, and population that is reliant on the highway network,” added Spence.

The agency is also planning about $200 million in speculative-grade subordinate lien refunding bonds if market conditions are favorable.

They have ratings of BB-plus from S&P, BB from Fitch, and Ba1 from Moody’s.

Debt service is currently slated to increase at a 4.4% average annual rate through 2040 to a maximum annual debt service of approximately $298 million.

Under the proposed restructuring scenario, the final maturity is extended to 2053, and the aggregate senior and junior lien debt service grows at a slower, although still ascending, rate of approximately 3.5% through 2036, after which debt service is level at approximately $193 million through 2043, and then falls, after the junior lien bonds final maturity, to approximately $179 million through 2053.

A Caltrans spokesman said the agency is not trying to delay things.

“The California Department of Transportation is working cooperatively with the F/ETCA in the process of performing its due diligence responsibility,” said David Richardson, a Caltrans spokesman. “We are pleased to be moving forward with that task but do not have a target agreement date at this time.

The new arrangement is a significant financial package for both Orange County and the state, and Caltrans continues to work with purpose, Richardson said, but won’t shortcut a full analysis and review.

Officials at F/ETCA, whose board approved the agreement pending Caltrans' signature last week, say they are a bit perplexed by the hold-up.

F/ETCA started working with Caltrans last fall and brought the final agreement before its board for review in May 9.

“Our board approved the plan and started moving forward on finance plan,” said Amy Potter, F/ETCA’s chief financial officer. “We got a call saying that they had not signed the documents yet.”

F/ETCA officials had hoped to have the agreement signed by Caltrans before they took it to the board.

Instead the board ended up approving preliminary bond documents contingent on receiving Caltrans signature on the extended agreement.

If Caltrans doesn’t agree to extend the agreement, F/ETCA will not be able to refund the bonds, Telles said.

Extending the final maturity is the only way to slow annual debt service escalation to 3.5%, Telles said.

“The annual growth rate under the refunding plan would be 3.5% annually, but level off to 2.5% or 3% before 2040,” Potter said.

The refinancing would help to slow growth of the debt, because the bonds currently carry interest rates of 6.9% -- and officials expect to get a much better rate through a refunding.

The way the refunding is being structured, the board could choose to pay the debt off in 2040 depending on what revenues are achieved in the years ahead, Potter said.

Under the agreement with Caltrans, F/ETCA negotiated payments that it would make to Caltrans, which actually owns the road the toll facilities are set up on.

F/ETCA financed and constructed the roads, but once completed they fell under Caltrans jurisdiction.

“We have an encroachment permit,” Telles said. “It allows us to locate the toll facilities on their right of way. We manage the toll collection, but they are state highways built to Caltrans standards.”

Right now the encroachment permit ends in 2040 “and we need it to be amended to extend it to a later date,” Telles said.

Despite some of the interest rate turmoil in the market currently, Potter expects the bonds to price well.

And even if they are not able to hit their current goal of going to market on July 8, F/ETCA officials think they will achieve the pricing they want in the months ahead.

Barclays and Goldman Sachs are the lead underwriters on the deal.

“We expect the reception to the bonds from investors to be very positive,” Potter said. “Depending on market conditions we were originally targeting right after the Fourth of July. We will just have to see what happens.”

The agency plans to construct an extension, known as Foothill South, a 16-mile southern segment leading from the current Foothill toll road terminus to Interstate 5 near the San Diego County border. However, in 2008, the California Coastal Commission rejected certification of the project, a decision that the U.S. Commerce Department upheld. The agency has not abandoned its plans and is currently working with stakeholders and exploring options, including other alignments.

The agency is also currently evaluating a shorter, five-mile extension, referred to as the Tesoro Project, which extends the existing Foothill corridor to the south. In our view, the potential still exists for substantial new debt to finance extensions although details are very uncertain at this time, according to the Standard & Poor’s report.

The road toward a multi-billion dollar refinancing of the Transportation Corridor Agencies’ bonds has been long, winding, and filled with potholes and roadblocks.

In 2004, a plan to take out both agencies’ debt with a $3.9 billion financing to merge Foothill/Eastern and San Joaquin faltered after some members of the agencies’ boards, which are comprised of local elected officials, balked.

In 2011, holders of the speculative-grade San Joaquin tollway revenue bonds consented to changes that include smaller coverage-ratio requirements, reduced debt-service payments for the next 13 years, and extending some bond maturities.

Caltrans consented to those changes, which are similar to those being sought for the Foothill/Eastern, according to the agency.

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