SAN FRANCISCO - California's Bay Area Toll Authority prices $814 million of revenue bonds next week in a deal structured with an eye to the market's concerns about the potential for rising rates.
Michael Ginestro, head of municipal research at Bel Air Investment Advisors in Los Angeles, said the deal would likely get done at a very tight level.
"It's a strong credit," he said. "With gas prices down and with the economy in the Bay Area so strong, the credit's improving, so I can see good demand — particularly with the floating rate notes that are being offered."
The deal structure includes $431.1 million of variable rate senior bonds with a final maturity in 2034. Around $143.7 million of the variable rate bonds will price with rates tied to the Securities Industry and Financial Markets Association municipal swap index.
Another $82.5 million of senior bonds will be serial bonds with maturities in 2019 through 2021.
The remaining $300 million portion will be subordinate bonds with a final maturity in 2054.
"The floating rate notes will be interesting to look at, particularly because a lot of folks foresee some kind of curve flattening or Fed hike over the next two years," Ginestro said. "If you get some floating rate notes in there, that might entice demand."
Ginestro said his firm might participate in the deal, depending on how it prices. If it comes expensive, which he thinks is likely, it is likely to pass.
"I think the deal next week will go very well," said Michael Johnson, managing partner and co-chief investment officer at Gurtin Fixed Income Management, LLC. "The market is starved for AA-category paper in large maturity sizes. Moreover, with a 30-day visible supply of almost $19 billion and approximately $40 billion redeemed 12/1/2014, demand will certainly outstrip supply, making the Bay Area Toll Authority bonds even more sought after."
The deal will be priced by Bank of America Merrill Lynch on Tuesday, with a retail order period scheduled for Monday.
Orrick, Herrington & Sutcliffe LLP is bond counsel and Public Financial Management Inc. is financial advisor.
The senior bonds are rated Aa3, AA, and AA-minus by Moody's Investors Service, Standard & Poor's, and Fitch Ratings, respectively. The subordinate bonds are rated A1 by Moody's and A-plus by Standard & Poor's.
All agencies assign stable outlooks.
"Overall, we see the Bay Area Toll Authority's senior lien security as a very sound credit," Johnson said. "Revenues continue to generate solid debt service coverage and the authority has strong cash reserves, both contribute to a significant cushion against volatility and to sound credit quality."
Proceeds from the subordinate bonds will go toward construction projects, and the other portion of proceeds will refund outstanding debt from 2009, according to Brian Mayhew, BATA's chief financial officer.
"The refunding part has a cash flow positive of $50 million over four years," he said. "After that, we're going to sweep it into variable mode."
Mayhew said the variable rate structure on the refunding bonds helps to generate the cash flow until the call date of 2017 on the outstanding 2009 bonds.
"The new money portion is relatively standard, long-dated project proceeds, with a small $50 million piece with a step-up coupon built in," Mayhew said. "This is the first time we've sort of experimented with a step-up coupon."
This means that if there are insufficient funds to purchase the variable rate bonds upon the mandatory tender, the bonds will "step-up" to an increased interest rate. No letter of credit or liquidity facility will be in effect for these bonds.
Mayhew said that this deal is the last scheduled financing the authority is doing under Regional Measure 1, which Bay Area voters approved in 1988 to authorize the authority to raise tolls to pay for specific bridge corridor improvements.
Voter-approved RM1 projects included a new span for the Benicia-Martinez Bridge, a replacement for the west span of the Carquinez Bridge, and widening the San Mateo-Hayward Bridge.
Caltrans, which owns and operates the toll bridges, is responsible for the construction of the projects. BATA is responsible for funding and overseeing the programing.
The RM1 program was completed at the close of fiscal year 2013.
"This is the last of the scheduled financings for what has been our legislative mandate," Mayhew said. "Our job was to do $12 billion worth of projects, open up these bridges, and do it all with $5 tolls and we've managed to achieve it, so we're pretty happy."
New money proceeds will also go toward the authority's separate seismic retrofit program, which aims to strengthen and reinforce bridge structures and roadways in the event of a major earthquake, and Regional Measure 2 capital projects.
All of the seismic retrofit program's projects have been completed, except for the close of the construction contract for the new east span of the San Francisco-Oakland Bay Bridge, the demolition of the old east span, and the completion of the pedestrian and bike pathway on the new span.
The program has an approved budget of $9.1 billion and is expected to remain within that budget upon completion, according to management.
RM2 increased tolls on the Bay Area's seven state-owned bridges to fund transportation projects, including new mass transit options and improvements to highway bottlenecks.
"What's important about BATA is that they've completed a major project—one of the most expensive and complex projects that I've ever seen," said Ginestro. "They're now in a position of trying to reduce some of the longer debt refunding."
One of the major credit strengths of BATA, he added, is the very experienced management team that finds efficiencies, maintains liquidity, and has an ability and willingness to increase rates.
BATA's board approved a toll increase in January 2010 that increased most passenger car tolls by 25%, to $5 from $4, instituted a new $2.50 toll on previously free rush-hour carpools, and substantially increased tolls on commercial vehicles over a two-year period.
"I almost think of them as not so much of an operator of bridges, but as an asset liability company," Ginestro said. "When they have these liabilities that are out there, they increase their rate, and they issue the debt, and they get the project done."
The credit rating agencies also noted the near completion of ongoing projects as a credit strength.
"With the seismic retrofit program for BATA's bridges 95% complete, construction risk has been largely mitigated and the unallocated project contingency reserve of $89.5 million is expected to be sufficient to cover remaining construction costs, barring any unforeseen delays or cost overruns," Moody's analysts wrote.
Other credit strengths include an inelastic demand for the authority's services, a recovering Bay Area economy, good coverage of debt service obligations, and very strong liquidity.
Challenges include increased exposure to variable rate debt with next week's deal, earthquake risks in the area, and high debt leverage as measured relative to annual operating revenues.
Moody's said BATA's total amount of debt is the highest among its rated established toll roads. The authority has around $5.7 billion of senior debt and $3.7 billion of subordinate debt outstanding, including next week's deal.
