Tax collections on gasoline and diesel will fuel debt service payments on a $730 million deal to fund highway improvements expected to spur economic development in West Alabama.
Lead underwriter J.P. Morgan is slated to price the Alabama Highway Authority special obligation revenue bonds Dec. 11.
The bonds, rated Aa2 with a stable outlook by Moody's Ratings, are supported by strong debt service coverage, a mechanism for the state to increase the fuel taxes that support the bonds every other year, a full year's debt service reserve fund and other factors.
Bond proceeds will fund a project to convert 80 miles of U.S. Highway 43 and State Route 69 from Thomasville to Moundville from a two-lane road to a four-lane divided highway. It will complete a four-lane highway corridor of roughly 200 miles
"The highway authority is one of the state's main transportation credits," said John Hallacy, president of John Hallacy Consulting LLC. "The coverage has been quite high for an extended period. I would anticipate a lot of keen interest in these bonds."
Frazer Lanier and Goldman Sachs & Co. are co-senior managers. Blaylock Van, PNC Capital Markets and Stifel, Nicolaus & Co. are co-managers.
The bonds will have serial maturities from 2026 to 2045 and an optional par call in 10 years.
The municipal advisor is PFM Financial Advisors LLC and the bond counsel is Bradley Arant Boult Cummings.
"This project can be seen as economic development given that it's designed to serve the Black Belt which has been historically underinvested in. I would expect plenty of interest," said Joseph Krist, publisher of Muni Credit News.
"For decades, residents, business leaders, and public officials have called for construction of the West Alabama Highway as a way to ease travel, improve safety, and increase economic opportunities in West Alabama," said John Phillips, communications coordinator for the Alabama Department of Transportation. "The project is expected to have a significant economic impact by stimulating trade, creating new opportunities, and generating jobs. Additionally, when complete, the West Alabama Highway is expected to become an important route for transportation of goods north after being unloaded from the recent expansion and widening at
Moody's said its Aa2 rating incorporates the state government's Aa1 rating, the relationship of the state to the Alabama Department of Transportation and the authority, and the bonds' pledge of state motor gasoline and diesel taxes. In 2025, 75% of the revenue came from gasoline taxes and the remainder from diesel taxes.
In fiscal 2025 pledged revenue was $128 million, which was 2.2 times the annual debt service, Moody's reported.
"The rating incorporates our expectation that pledged revenue will provide at least two times coverage of annual debt service going forward," Moody's said. "Achieving this metric will be aided by a provision of the Rebuild Alabama Act that enables an increase in the act's authorized motor fuel taxes every two years."
The Rebuild Alabama Act, passed in 2019, raised fuel taxes in 2019, 2020 and 2021, and allows increases or decreases of no more than 1 cent per gallon every subsequent two years, based on a National Highway Construction Cost Index, according to an online investor presentation about the deal.
After 1-cent increases in 2023 and 2025, the next window for a change in fuel taxes would be July 2027.
Debt service coverage is projected to go from 2.22 times in 2022 steadily upward to 2.79 times in 2030, according to the presentation.
Moody's said the state's Aa1 rating is based on "the expectation that leverage and fixed costs will remain below average, financial management and governance will remain strong and financial reserves will remain healthy. The state's economy remains stable, with employment growth generally in line with that of the U.S. over the past several months."
However, "the state will continue to lag other states on key metrics such as population and income growth, and labor force participation, despite recent improvement," Moody's said.
The economy is a factor in understanding the highway authority credit "but this is a major artery in the state," Hallacy said.
Moody's said its stable outlook reflects the state's stable outlook, which stems from its ability to weather possible future downturns in revenue.
The bonds come to the market at a time when gasoline consumption has leveled off. United States gasoline consumption usually increased from 1954 to 2007 but has gone down and up and down again since then and is now below the 2007 level, according to a post by Lucas Davis, Jeffrey A. Jacobs Distinguished Professor of Business and Technology at University of California at Berkeley, to the
The Gulf Coast was the only one of five national regions where gasoline consumption was up since 2008.
While the spread of
The Trump administration has
The U.S. Energy Information Administration in 2024 projected U.S. demand for gasoline would decline from a 2024 level of 8.74 million barrels a day to a 2030 level of 8.12 million barrels a day. However, several factors make the prediction tricky and EIA said 2030 gasoline use could be anywhere between 7.85 million barrels and 8.57 million barrels a day.
The EIA projected a further 21% decline in U.S. gasoline consumption to 2040 from 2030.
The highway authority says in its investor presentation the bonds' goals are to improve access around the road, increase economic development and add safety by adding the two extra lanes and the divider between the opposing traffic.
The bonds' preliminary official statement says Alabama gasoline and diesel consumption grew 8.8% from fiscal 2005 to fiscal 2025. Consumption in 2025 was up 0.6% from the last pre-COVID year, fiscal 2019.
The POS also reports that daily vehicle miles of traffic on the state system highway and road system is up 7.1% since 2005 and 1.1% from fiscal 2019.
The statement projects that the money available for paying the bonds will increase steadily from fiscal 2025 to fiscal 2030. Available revenues should increase by 25.6% in the period, according to the POS.
The bonds' flow of funds starts with the collection of the gasoline and diesel taxes, followed by the withdrawal of expenses and an annual $11.76 million contribution to the Alabama Highway Finance Corp. What remains is split, with 25% going to the state's counties, 8.3% going to its municipalities and the remainder going to something dubbed the "RAF share of remaining proceeds."
From this fund, each year at least $10 million is devoted to grants for city and county bridge projects, at least $30 million is given to projects of local interest on the state highway system and $27 million is handed to the state's counties.
The remainder is called the "remainder RAF share of remaining proceeds." A sum from this equal to no more than 50% of the "RAF share of remaining proceeds" is the pledged revenue for each year's bonds.
After issuance of the planned bonds but before bonds for new capital projects could be issued, the state director of finance would have to certify 50% of the RAF share of net proceeds received by the department of transportation in preceding fiscal year exceeded 100% of the maximum annual debt service coverage requirement of the series 2025 bonds, additional bonds to be issued, and any other additional bonds for the current and future fiscal years.
The bonds' underwriters counsel is Maynard Nexsen.
