CHICAGO — The Illinois State Toll Highway Authority will sell $500 million of toll-backed revenue bonds next week in the agency's first market outing for a $12.1 billion, 15-year capital program that relies on $5 billion of new-money issuance.
The agency will return to the ranks of frequent new-money borrowers as the MOVE Illinois capital program — approved in August 2011 — kicks into high gear following the near completion of its previous $6 billion program. It wrapped up debt issuance for the prior program in 2009.
JPMorgan and Loop Capital Markets LLC are senior managers with JPMorgan running the books. RBC Capital Markets and Wells Fargo Securities are co-senior managers with another six firms rounding out the team as co-managers. Chapman and Cutler LLP is bond counsel with Public Financial Management Inc. and Acacia Financial Group Inc. serving as financial advisors.
The bonds mature in 2038 and will include serial maturities and possibly term bonds. Ahead of the sale, Fitch Ratings revised its outlook on the authority's AA-minus credit to stable from negative. Moody's Investors Service affirmed its Aa3 rating and stable outlook and Standard & Poor's affirmed its AA-minus and stable outlook.
The agency has $3.9 billion of outstanding senior-lien toll-backed debt. The bonds are secured by a pledge and lien on the net revenues of the tollway system after operating expenses are paid.
Tollway officials and their advisors have courted investors with individual and group meetings and are planning an upcoming investor roadshow to both coasts. "This is the first issuance for MOVE Illinois so we are doing a little more investor outreach," said the authority's executive director, Kristi LaFleur.
The agency stresses bondholder protections that isolate bond repayment from the state's fiscal woes which include aid payment delays and have hurt the ratings of public universities and some local government entities. Even with little state exposure, most Illinois-based issuers still typically pay some interest rate penalty simply for their location in Illinois.
"It's a chance to educate investors on the new program and the toll rate changes in place that support the debt," said the authority's chief of finance, Michael Colsch. "We make it clear that our credit is supported by revenues of the tollway and there's a set of protections that bondholders have. We want them to be aware of that security structure."
Gov. Pat Quinn holds significant sway over the agency's leadership with control over board appointments and the board chairmanship — currently held by Paula Wolff.
The sale — slated for April 18 — marks the first in a series transactions planned for this year. The authority's board has approved an additional $500 million in new money to support $1 billion of projects planned this year. That sale is expected in the fourth quarter or early next year.
The board also has approved the restructuring of up to $570 million of floating-rate bonds, shifting them to a fixed rate and eliminating swaps. The agency currently has a swap portfolio of $1.3 billion with a negative valuation of $308 million. The board also has authorized a refunding of up to $1 billion of fixed-rate securities from issues in 2005 and 2006 for traditional present value savings. The timing of both depends on market conditions, Colsch said.
To fund MOVE Illinois, the authority will return to the market to sell another $2.2 billion between 2014 and 2016 and then $1.8 billion between 2020 and 2022. Structural details have not been decided and will depend on the market conditions.
While the agency believes its capital program is on sound fiscal footing based on approved toll increases, LaFleur said officials are exploring alternative financing options such as applying for loan assistance through the federal Transportation Infrastructure Finance Innovation program.
Public-private partnerships are not under consideration at this time.
The authority and its board have so far have been inclined to rely on a fixed-rate structure, which would reduce its overall exposure to floating-rate risks in its portfolio. Projected traffic and operating revenues — if they remain on course — support the use of a senior lien structure, Colsch said.
To support the MOVE Illinois construction program, the board adopted a steep one-time 87% increase in passenger tolls that took effect last year and a 60% increase in commercial vehicle tolls that will be phased in and then adjusted annually based on inflation in 2018.
After the toll hikes debt service coverage rose to 2.84 times in 2012 from 1.81 a year earlier and it is scheduled to remain above 2 times over the course of construction. Debt service coverage has historically been at least 1.8 times.
"We thought maintaining two times coverage for our debt was a key aspect to maintaining our credit quality…..which was incredibly important to us" to keep borrowing costs down, LaFleur said.
While Standard & Poor's warned that the new capital program and additional debt weakens the credit, the authority's financial metrics lend stability. "The ratings reflect our view of the system's essentiality and strong financial risk profile," said Standard & Poor's analyst Adam Torres.
"The stable outlook reflects our expectation that, in the next two years, ISTHA will continue to manage its capital program effectively, maintaining a sound cash position and what we consider to be strong DSC levels," Standard & Poor's added. A downgrade could occur if the authority's liquidity position deteriorates. No rating upgrade is expected in the near-term.
"The stable outlook reflects sound approaches developed by management to implement a significant $12 billion capital program," Fitch wrote, noting that it believes the toll hikes and traffic and revenue projections should be capable of maintaining the strong two-times debt service coverage ratio.
The credit benefits because the 286-mile system provides a critical transportation link in the Chicago and northern Illinois region, and from strong coverage ratios and strong liquidity of 917 days cash on hand in fiscal 2012, according to Fitch.
Its most significant challenges stem from the difficulties of managing a massive construction program although the authority does benefit from the near completion of its previous congestion-relief program.
Floating rate exposure of more than 30% in its debt portfolio also poses some risk although the percentage will fall as more fixed-rate bonds are issued. Floating-rate securities are expected to account for 27% of the debt portfolio after this year's issuance and that should drop to 21% by 2015.
Moody's noted as a challenge an increased concentration of commercial traffic which is influenced by economic conditions and the risk of achieving forecasted traffic and revenue growth to support coverage ratios as "elasticity of demand may moderate over time."
The agency saw a less severe drop in passenger levels after the 2012 toll hike. Passenger traffic actually dropped 4.2%, though it had been projected to fall by 5.2%. Toll revenue grew by 41% in fiscal 2012 to $923 million. Operating expenses increased by 3% to $253 million. Forecasted growth is higher than historic growth over the past 10 years.
Colsch and LaFleur said the agency believes that a projected annual traffic growth rate of 1.5% between 2012 and 2040 is conservative given that the program calls for new toll roads to be brought on-line. The capital plan also allows for overall financing costs of up to 5.5%. The agency, however, does have the flexibility to delay some projects should revenue projections fall short.
"The outlook is also based on the assumption that the authority will maintain its independence from the state despite the state's current fiscal pressures and that approved commercial toll increases will be implemented as planned," Moody's wrote.
The new program is aimed at reducing congestion and pollution, expanding the more than 50-year-old system, improving roads, and creating jobs and economic development in the region. The MOVE Illinois program funds $8 billion for improvements to existing roads and $4 billion for new and expanded roadways.
The major projects include the reconstruction of the Jane Addams Memorial Tollway, the reconstruction of a portion of Interstate 294, and a new Elgin O'Hare West Bypass. The program also funds planning studies on the extension of Route 53 and the Illiana Expressway, and funding for road and bridge maintenance.
