DALLAS — A new issuer known as the Colorado Bridge Enterprise joins the December rush to market next week with $300 million of taxable and tax-exempt debt.
The negotiated deal led by RBC Capital Markets is expected to include $290 million of taxable Build America Bonds and $10 million of Series B tax-exempt debt, but that ratio could change depending on market conditions, said Ben Stein, chief financial officer of the Colorado Department of Transportation.
“At this point we think we will have a mostly BABs issue,” Stein said. “We also have some flexibility as to when we go to market. If I need to shift my sale date, there’s no day-to-day impact.”
Stein has been working with financial adviser Stifel, Nicolaus & Co. on structuring the deal, which got pushed to the end of year by a ballot initiative.
The ballot initiative, Proposition 101, was soundly defeated in November, eliminating a potential threat to the Colorado Bridge Enterprise’s only revenue source, a bridge safety surcharge on car registrations.
“If Proposition 101 had passed, it would have effectively eliminated this fee,” Stein said. “That largely drove our timing of this issue. We decided to not go to the rating agencies until the election.”
In its rating report, Moody’s Investors Service validated that approach.
“The defeat of Proposition 101 in November of 2010 also indicates popular support for the program,” wrote lead analyst Marcia Van Wagner. “Proposition 101 would have significantly reduced vehicle registration fees and classified them as 'taxes’ for the purposes of TABOR [the Taxpayers Bill of Rights], thereby eliminating funding and borrowing authority for the projects.”
The TABOR Amendment, passed in 1994, another year of tax protest, applies strict limits to how much tax revenues state and local governments in Colorado can retain, even if it comes without a rate increase.
Fearing a Tea Party revolt among voters considering three ballot initiatives at the polls, issuers and executives in the debt market wondered if voters would outlaw state bond issuance and sharply lower car registration fees to a maximum of $10. However, the three ballot initiatives, Proposition 101 and Amendments 60 and 61, gained little support.
Delaying the first Bridge Enterprise bonds threw the state in with issuers who have flooded the market with BABs recently amid fears that the lame-duck Congress might not approve an extension of the federally subsidized bond program set to expire at the end of the year. That and other factors drove interest rates on long-term municipal bonds sharply higher over the last two weeks.
“That’s a timing thing that we just have to deal with,” Stein said. “It would have been great if we could have gone to market in September, but it didn’t work out that way.”
With Republicans taking over the U.S. House in January, economic stimulus programs face an uphill battle. Republicans also gained control of the Colorado House, with an advantage of one representative.
Sen. Chuck Grassley, R-Iowa, has also called for a General Accountability Office investigation of BABs, which were approved when Democrats controlled both houses of Congress.
Among the more than $15 billion of taxable and tax-exempt debt issued last week were California’s $3 billion of BABs, an issue that grew by $1.3 billion as another deal planned for this week was trimmed. California’s 30-year BABs yielded 7.52%, or 325 basis points over Treasuries on Friday.
So far, $13.6 billion of BABs have been issued in November, the heaviest month for the bonds on record.
“Whether spreads return to relationships of a few weeks ago is not certain because we would anticipate issuers will still be anxious to sell before the year is out, and the Street can quickly turn risk averse as the year-end gets closer and shops choose not to gamble profits made to this point,” noted Randy Smolik, analyst with MMD Daily.
The bonds earned a AA from Standard & Poor’s and a Aa3 from Moody’s.
“The rating reflects our view of growth in both population and vehicle registrations, and the fact that the surcharge does not depend on the value of vehicles or consumption of fuel, as well as very strong projected coverage,” said Standard & Poor’s analyst Matthew Reining.
The Colorado Bridge Enterprise is a product of SB 09-108, signed into law last year by outgoing Gov. Bill Ritter. The bill created a program called “Faster,” an acronym for Funding Enhancement for Surface Transportation and Economic Recovery.
The legislation created the first new dedicated and sustainable funding source for transportation in 20 years.
Included in the new law was funding designated specifically for Colorado’s most deficient state bridges. Safety engineers have identified 128 bridges across the state highway system considered structurally deficient or functionally obsolete.
Revenues from the newly established bridge safety surcharge are to be phased in over three years, and were estimated to total approximately $100 million by the third year.
Because it was constituted as a government-owned business, the enterprise may issue revenue bonds to accelerate construction of Colorado’s poor bridges without voter approval.
“No other state has the enterprise structure within its constitution,” Stein noted. “Absent this program, we have 128 poor bridges that we need to fix to provide safety for our citizens and our economy. We’re a mountain state, so if you have a bridge go out, the detours could be hundreds of miles.”
Under a resolution, CDOT intends to allocate $15 million a year to the enterprise.
In the four years through 2009, Colorado vehicle registrations have increased by an average of 2.3% annually, despite a 0.8% decline in 2007. Growth in vehicle registrations follows the state’s population, which has also increased steadily in recent years.
Current plans call for another bond issue for the Bridge Enterprise in 2012, followed by another in 2014, Stein said. Analysts saw a level of comfort in that schedule.
“The stable outlook reflects our expectation that pledged revenues will provide strong debt-service coverage, and that the enterprise will not issue additional bonds more aggressively than currently anticipated,” Reining wrote. “The relative stability of state revenues provides for less volatility in coverage. If debt-service coverage levels differ materially from those currently projected by management, we could lower the rating.”
