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Infrastructure

Wells Fargo : Look to Indirect Garvee Bonds

WASHINGTON — Long-term pressures continue to plague bonds backed by the federal highway trust fund, but investors can offset their risk by investing in debt also secured by other revenue, according to a Wells Fargo analysis released Monday.

Wells Fargo analyst Randy Gerardes authored the new paper, which attempts to offer insight to investors hoping to navigate the stresses on grant anticipation revenue vehicles known as Garvee bonds.

Although Garvees generally continue to maintain very high investment-grade ratings, rating agencies slapped downgrades on many of these bonds after Congress failed to pass a long-term transportation bill in 2012. Moody’s Investors Service downgraded about $10 billion of Garvees in November after Fitch Ratings announced it would downgrade 11 Garvee issues in its portfolio. Standard and Poor’s revised outlooks on 11 of its Garvee bond issues as well.

The two-year bill that was approved offered no comfort to those fearing for the long-term health of the highway trust fund, keeping it solvent only with transfers from the U.S. general fund. The Congressional Budget Office projects the trust fund will run dry in 2015 without additional policy help, thanks to falling gas tax revenues and stricter fuel economy standards.

Gerardes said investors should look to indirect Garvees, which are typically issued by state transportation agencies and secured by local revenue streams in addition to federal revenues. When buying direct Garvees reliant on federal revenue, Gerades said investors need to be more discriminating.

“Within the direct Garvee space, we would recommend issuers with strong debt service coverage from grant revenues, a track record of managing their federal grants, strong additional bond tests and closed indentures that prevent excess grant revenue from flowing outside the Garvee bond indenture,”  he wrote.

The new paper also concludes that Moody’s may have been overly aggressive in its approach to downgrading Garvees.

“We believe the bottom-up approach taken by [Standard & Poor’s] and Fitch was clearer than Moody’s more top-down approach, which, in our view, discounted the availability and stability of other revenue streams to offset a reduction in grant funding. In our view, Moody’s undervalued some credits with this approach,” Gerardes asserted.

Increased general fund transfers to the trust fund, reduced trust fund spending, and a gasoline tax increase all could help relieve pressure on Garvees, according to the Wells Fargo paper. However, attempts to reduce surface transportation spending brought widespread condemnation last year and the increased general fund transfers violate the principle that user fees should pay for roads, sources have said.

Although transportation organizations like the American Association of State Highway and Transportation Officials and legislators like new House Transportation and Infrastructure Committee Chairman Bill Shuster, R-Pa., have said boosting revenue streams could be on the table in the near future, Gerardes said it was unlikely.

“Ultimately, we appear at a point of inflection as it relates to the HTF and its funding sources,” he said in his analysis. “The longer a suitable solution is delayed the more challenging it will be to address the issue.”

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