BRADENTON, Fla. — Kentucky is in the market this week to partially fund its $1.3 billion bridge project across the Ohio River informally known as the "Downtown Crossing" because it traverses Louisville.
Some $207.7 million of grant anticipation revenue vehicle notes, or Garvees, are being sold through the Kentucky Asset/Liability Commission.
Book-runner Citi planned a retail-order period on Wednesday and final pricing with institutional sales on Thursday.
Proceeds will go toward Kentucky's portion of the Louisville-Southern Indiana Ohio River Bridges project, or LSIORB, which includes renovating the existing Interstate 65 "Kennedy" Bridge though downtown Louisville, adding a new, adjacent Interstate 65 bridge, and reconstructing interchanges that converge in downtown Louisville.
The new bridge will have six lanes and carry northbound traffic. The renovated and reconfigured existing Kennedy Bridge will have six lanes and carry southbound traffic.
The deal is structured with sizeable serial blocks maturing from 2017 to 2025.
No term bonds are currently anticipated, according to Ryan Barrow, executive director of Kentucky's Office of Financial Management.
The notes are secured solely by Federal Highway Administration funds appropriated by the General Assembly to the Kentucky Transportation Cabinet.
The Commonwealth uses a lease agreement to provide security for the debt.
"The financing team expects the project notes to be issued with a traditional 10-year par call feature," Barrow said.
The Garvee notes are rated A-plus by Fitch Ratings, Aa3 by Moody's Investors Service, and AA by Standard & Poor's. Those ratings also apply to $348 million of outstanding Garvees.
"The Office of Financial Management and the underwriters believe that investor demand will be strong from both retail and institutional buyers due to the high-quality rating of the project notes, established structure, and the concentration of maturities shorter on the yield curve where investor interest has been strong," said Barrow.
However, according to a trader who is familiar with the transaction, Garvee bonds are not in great demand.
"A lot of investors are a bit skittish because they fear the subsidies from the federal government will be cut at some point in time," said the trader. "That being said, as long as [Kentucky's Garvees] are priced cheap enough, there should be some good demand."
On Tuesday, the trader said the market "definitely feels queasy and there is just a ton of customer bid wanted.
"I think most people are not bidding very much," she said. "The feeling is the market is only going to get weaker, especially with some new deals for this week yet to be priced."
Though yields have increased somewhat in recent weeks, Barrow said the offering should be attractive to investors.
"While interest rates have been volatile in recent weeks, we expect strong demand and aggressive pricing for the projects notes," he said.
The $2.6 billion bi-state LSIORB Project has been planned for years to improve safety, alleviate traffic congestion, connect highways, and create economic development. The Kennedy Bridge in Louisville, where several Interstate highways converge, is also a major thoroughfare for moving goods via ground transportation.
The Downtown Crossing is Kentucky's primary responsibility while Indiana is working on a new bridge to the east.
The Bluegrass State is doing its portion of the project with a traditional design-build approach with the state conducting the financing. Toll revenue bonds are expected to be sold, and a low interest federal loan is being sought under the Transportation Infrastructure Finance Innovative Act.
The state issued $100 million of Garvees in 2010 for the project, and this week's sale of $207.7 million exhausts the Garvee funding authorized by the Legislature.
"The Commonwealth is currently working with [the Federal Highway Administration] and its financing team to structure the toll revenue bonds and a TIFIA loan for the remaining Kentucky debt components of the bridge's financing program," Barrow said. "The remaining debt financing components are expected to be complete late this calendar year."
Indiana is building the other $1.3 billion half of the project called the East End Crossing, which consists of a new bridge between Prospect, Ky., and Utica, Ind., as well as highways that connect I-265 in both states.
In March, the Indiana Finance Authority reached financial close on a $702 million tax-exempt, private-activity bond transaction to finance the bulk of its project using a public-private partnership.
Both states began holding hearings on toll rates this week since the new and improved bridges will be tolled, and those revenues are part of the respective financings.
The hearings, required by the federal approval process, are related to a report assessing the impact tolls will have on low-income and minority populations and mitigation efforts.
While the bridges involved in the LSIORB Project will be tolled, the Sherman Minton Bridge on I-64 and the Clark Memorial Bridge on U.S. 31 will not be tolled, providing two free river crossing options.
The toll-free bridges are in close proximity to the largest concentrations of low-income and minority populations, according to state officials.
The states plan to use all-electronic tolling to keep traffic flowing without toll plazas and coin buckets. Overhead cameras and electronic receivers will record all the vehicles that cross with and without transponders.
Tolls on the new and improved bridges will not be collected until 2016, and final toll rates have not been determined.
However, Kentucky and Indiana preliminarily set rates for transponders at $1 per crossing for "frequent commuters" in passenger vehicles or on motorcycles, $2 per crossing for cars, trucks, SUVs and motorcycles crossing the bridges infrequently, $5 per crossing for panel or box trucks, and $10 per crossing for semi-trucks or tractor trailer rigs.
"The $1 toll is a target rate for a 'frequent commuter,' and that has not yet been defined," said Chuck Wolfe, spokesman for the Kentucky Transportation Cabinet. "The two states will have to figure a way to hit that target."
Rates for other collection methods would be higher, though how much higher has not been determined, he said.
The last legal challenge in federal court to the bi-state project was dismissed last week by U.S. District Judge John Heyburn. Two suits had been filed by organizations protesting various aspects of the project.
Along with Citi on Kentucky's Garvee sale this week, other underwriters are Goldman, Sachs & Co., J.J.B. Hilliard, W.L. Lyons LLC, Fifth Third Securities, Raymond James & Associates Inc., PNC Capital Markets LLC, First Kentucky Securities Corp., Edward D. Jones & Co. LP, and Stern Agee & Leach Inc.
Kutak Rock LLP is bond counsel. Peck, Shaffer & Williams LLP is underwriters' counsel.
