DALLAS — The Arizona Transportation Board will join the year-end rush to the refunding market this week with a $457 million issue expected to bring net present value savings of $25 million.
The bonds are backed by excise taxes deposited in the Maricopa County Regional Area Road Fund approved by voters in 2004.
Kristine Ward, chief financial officer for the Arizona Department of Transportation, said the board has not issued any bonds backed by the excise tax in three years.
"We currently do not plan to issue this credit again for another couple of years," Ward said. "As a result, the 2014 refunding issue presents a great opportunity for investors to add the Department's sales tax credit to their portfolios during this sale."
Ward said the net savings are expected to exceed 5%.
The bonds come to market as major issuers, particularly those with strong credits, seek savings from the low interest rates still available. The nearly $7.9 billion on this week's muni primary calendar is well above the $5.5 billion weekly average and the variety of deals will be numerous, according to Municipal Market Data.
Other large issuers in the market this week include Connecticut with $550 million of general obligation bonds, Baltimore with $409 million of revenue and refunding bonds, Dallas Area Rapid Transit with a $402 million refunding, and Houston Independent School District with a $358 million refunding.
"There's a lot of volume in the market but this is a high-credit issue that should attract a lot of attention," said the ADOT financial advisor Kurt Freund, managing director at RBC Capital Markets.
The bonds are rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's. Outlooks are stable.
The bonds are expected to price Tuesday through negotiation with bookrunner JPMorgan and co-managers Barclays, Baird, Piper Jaffray & Co., Morgan Stanley and Ramirez & Co.
Jamison Feheley, managing director at JPMorgan, is lead banker on the deal. Feheley joined JPMorgan in 2010 from Citi to co-head the transportation team and expand the firm's reach into the Southwest.
The Arizona Transportation Board pricing date is contingent on market conditions and volume in the market, Ward said.
"We expect to see strong demand from both retail and institutional investors on this deal," she said.
"The rating reflects what we consider strong maximum annual debt service
coverage and four years of increased pledged revenues," said Standard & Poor's
credit analyst Kate Burroughs. "Further supporting the rating is our view of
Maricopa County's very large and diverse economic base."
With this deal, ADOT will have $867 million of outstanding senior-lien excise tax debt outstanding, according to Moody's.
The transportation excise tax is levied in Maricopa County, the fourth largest county in the U.S. with nearly 4 million residents, or roughly two-thirds of Arizona's total population.
After pledged revenues declined for three years from 2008 to 2010 including a large drop of 14% in 2009, revenues and the local economy recovered. The unemployment rate for the county has also fallen.
"We expect the diverse and improving economy which is firmly in its fourth year of expansion will support continued growth of pledged revenues," lead analyst Dan Stead wrote in Moody's Oct. 31 report.
"Moody's notes notable historic revenue volatility in pledged revenues during the great recession, which is a material credit negative," he added. "However, the gradual and consistent recovery of pledged revenue collections since 2010 has led to very strong coverage that provides a cushion against potential future volatility."
In fiscal year 2014, total pledged revenues were $243.8 million, providing 2.38 times coverage of maximum annual debt service, according to Moody's.
"Board officials report solid year-to-date collections of pledged revenues," Stead said. "Year to date collections are tracking very close to prior projections and, going forward, Moody's views the board's pledged revenue projections as reasonable; collections are projected to increase steadily averaging just under 5% annually through 2019."
Arizona enters 2015 with a new governor and legislature chosen in the Nov. 4 election.
Governor-Elect Doug Ducey, a Republican, will face a $520 million budget shortfall in the current fiscal year and an estimated $1 billion gap the next year.
Amid the 2008 recession, the legislature cut school funding 15%, a move that led to a court fight and a recent court ruling that lawmakers must repay $336 million a year to match funding required under a voter-approved formula. The state told State District Judge Katherine Cooper in October that it cannot afford the payments.
A $336 million for the current year has not been paid as the state appeals Cooper's ruling. Attorneys for the state argue that it should get credit for years when schools received more than the minimum required for inflation. The schools counter that the state should still pay the money.
In his campaign against Democrat Fred DuVal, Ducey said he wants to simplify the Arizona tax code and decrease regulation to attract more companies to Arizona. He also called for more belt-tightening by the state.
"My goal is to speed economic growth, not impede it," Ducey said in a written statement after his election. "We can best do that by limiting government spending and making government more efficient. We won't pay our bills with borrowed money. And if anyone needs to cut back, it won't be Arizona's hard-working taxpayers - it will be government."
Ducey, who won election with nearly 54% of the vote, replaces Republican Gov. Jan Brewer. Brewer, who was term-limited after five years in office, succeeded Gov. Janet Napolitano when the Democratic governor was named to President Obama's cabinet in 2009.
Brewer guided the state through its worst economic dilemma since the Great Depression, winning voter approval of a temporary 1-cent sales tax increase to spare schools and social services from even deeper cuts than they had already suffered. The end of that temporary tax created the structural budget deficit facing lawmakers in January.
Ducey, previously state treasurer, enters office ostensibly armed with new powers as a result of Proposition 122, which passed with 51% of the vote. The amendment to the Arizona constitution gives the state sovereignty over federal law if the state deems the actions of the federal government to be unconstitutional.
Ducey supported the measure, despite the fact that legal experts said that the amendment itself was clearly unconstitutional.
"I support Prop 122 because Arizona needs to decide how it will best spend its own budget," Ducey said in a written statement.
