CHICAGO — The Illinois State Toll Highway Authority returns to the market Thursday to issue $400 million of new-money, toll-backed debt to kick off record infrastructure spending it plans in the coming year.
Ahead of the sale, Moody's Investors Service affirmed the tollway's senior-lien Aa3 rating and stable outlook that applies to about $5 billion of debt.
Fitch Ratings and Standard & Poor’s affirmed the authority’s AA-minus rating and stable outlook.
The ISTHA bonds are secured by toll revenues and the authority's pledges in bond covenants to charge a rate sufficient to repay debt, fund reserves and maintain a targeted debt-service coverage ratio.
The Illinois name will cost the authority some yield penalty as most issuers in the state pay more to borrow, especially ones with state exposure, given the state's well-known pension and budget problems.
"Everyone has to pay a penalty, but it should be modest, in the 10-to-15 basis point range," given solid bondholder protections built into the security, said Thomas Spalding, senior vice president and portfolio manager at Nuveen Investments, who added that the authority's more frequent debt issuance shouldn't affect demand.
The authority is promoting its solid credit and debt-service coverage ratios supported by already approved toll rate hikes to cover $5 billion in planned borrowing under a $12 billion, 15-year capital program launched in 2012 to expand and upgrade the 286-mile system.
The tollway enjoys a "strong market position as an essential part of the northern Illinois highway transportation system," said chief of finance Mike Colsch.
"It has a history of strong financial performance, a strong and diverse economic base robust traffic performance, a mature and growing traffic base and limited viable competing roads," he said.
While traffic is rising, ISTHA retains flexibility in shifting some projects in the capital program if needed should traffic growth fail to meet projections, Colsch said in an investor presentation.
The authority also reported that its previous capital program aimed at relieving congestion is about 92% completed and is expected to total around $5.7 billion when finished. The new-money proceeds will support $1.6 billion of capital spending, a record level for ISTHA, planned in 2015 under the budget unveiled earlier this month.
Projects planned in 2015 include the ongoing rebuilding of Interstate 90 and ongoing work on a western access to O'Hare International Airport.
"Our 2015 tentative budget commits the most capital funds in the agency's history and next year is expected to be our biggest construction year ever," agency executive director Kristi Lafleur said in a statement.
The tentative budget plan anticipates an additional $400 million of bond issues for new-money purposes in May and November, according to the authority.
"We also anticipate an advance refunding issue of approximately $250 million to refund" 2006 bonds in late 2014 or early 2015, said ISTHA spokeswoman Wendy Abrams. "The purpose of the refunding is debt service savings."
The capital program relies on the issuance of around $1.7 billion between 2015 and 2016, and $2 billion tentatively through 2022. The remaining cost of the program is paid with toll revenues on a pay-as-you-go basis.
The authority operates 286 miles of interstate tollways in 12 counties in Northern Illinois.
The new long-term capital program was approved by the tollway board in 2011 with work beginning in 2012.
The ISTHA projects an increase in revenues to $1.17 billion, almost all from tolls, next year from $1.02 billion this year, primarily due to a truck toll-rate increase previously approved by the authority board in 2008. About $300 million of toll revenues cover operations.
To support the agency's capital program, its board adopted a one-time 87% increase in passenger tolls that took effect in 2012 and a 60% increase in commercial vehicle tolls that will be phased in and then adjusted annually based on inflation in 2018.
ISTHA officials say they expect average annual traffic growth of about 1.5% in the coming years.
The program aims to reduce congestion and pollution, expand the more than 50-year-old system, improve roads, and create jobs and economic development. It is spending $8 billion for improvements to existing roads and $4 billion for new and expanded roadways.
Some funding is also allocated for planning purposes on future projects, including the state's controversial plan to build the Illiana toll road through a public-private partnership. It would link Interstate 57 in Illinois to Indiana's Interstate 65.
The toll authority's involvement with the project would be limited to operations and toll collections.
Rating agencies have described the authority's significant addition of debt to support both the capital program and additional debt-service reserve funding as a challenge, along with managing a big capital program and its high floating-rate and swap exposure.
Forecasted traffic growth rate is also higher than historic growth over the last decade, and if projected growth fails to come to fruition ISTHA's ability to meet projected debt-service coverage ratios could be pressured.
Positive factors that offset concerns include rapid debt amortization, forecasted over two times debt-service coverage ratios including all planned debt, maintenance of strong liquidity levels, and slightly better than forecasted financial results for fiscal 2013, according to Moody's analysts.
The rating agency also considers the authority's track record in delivering big capital projects on time and within budget a plus.
The authority enjoys strong liquidity that helps mitigate above-average exposure to variable-rate debt. Colsch said the agency in 2013 had $812 million of cash on hand.
After the issuance, the authority's portfolio will be 25.3% in floating-rate securities, although that percentage will continue to fall as ISTHA anticipates solely using fixed-rate structures in its borrowing for the $12 billion capital program.
All of the authority's floating-rate securities are swapped to a fixed rate under nine swap agreements with seven counterparties. The agency has no collateral posting requirements.
Morgan Stanley and Wells Fargo Securities are the joint bookrunning senior managers. Another eight firms round out the underwriting syndicate.
Public Financial Management Inc. and Columbia Capital Management LLC are advising the authority and Chapman and Cutler LLP is bond counsel.
Principal on the senior-lien bonds doesn't begin to mature until 2027 with a final maturity in 2039 as the agency debt is limited to 25 years.
Principal payments are further pushed off mostly to the later years to fit into its overall debt portfolio. They range between $8 million and $12 million until 2036 when they grow to between $70 million and $83 million.
