The $233 million issue of toll revenue debt sold earlier this year by the Central Texas Regional Mobility Authority continues to trade well in the secondary market, the project is on track for an on-time completion, and, buoyed by that success, nearly a dozen regional mobility authorities from other counties are planning similar issuances.
The picture was not always so rosy for the CTRMA, which won this year's Bond Buyer's Southwest Deal of the Year award and is responsible for the financing and implementation of transportation projects in Travis and Williamson counties. On March 1, just as the agency's maiden issue - and the first debt issuance ever by a regional mobility authority in Texas - was scheduled to close, anti-toll activists filed a lawsuit against the CTRMA. In the suit, the plaintiffs, People for Efficient Transportation, and a co-plaintiff, Austin cab driver Hannah Riddering, argued that the terms of office served by authority board members did not comply with Texas constitutional law.
Therefore, they maintained, all business conducted by the authority, including the bond issue, was invalid. The plaintiffs asked for a temporary restraining order halting the closing of the Feb. 16 debt sale. The judge ultimately denied the request, but allowed them to move forward with a lawsuit concerning their constitutional claim.
The Texas Constitution requires terms of office for regional entities to be two years or less. However, the 2003 state law that allows the creation of regional mobility authorities, or RMAs, provides for six-year terms by board members. At the time the lawsuit was filed, Texas lawmakers were already working on bills that would correct the disparity between the law and the constitution. However, no consensus had been reached about how to do that.
"That was a difficult time, when we were concerned about the outcome of the TRO request," said CTRMA executive director Mike Heiligenstein. "Everybody dropped everything else they were doing for two days. I was at the rating agencies discussing the situation, and everyone else from our staff to our consultants were putting everything they could into the effort."
Heiligenstein said that if the authority had not won the TRO portion of the case, the underwriters could have pulled back from the already-priced deal, and the authority would have been forced to put together a whole new issue. At the time, the bond market was moving away from the issuer, and a later sale could have spurred higher interest rates.
Heiligenstein said that a higher issuance cost would have affected coverage levels, which in turn could have affected insurance and other issues associated with the transaction.
Although authority officials expected the bonds to be upheld as legal whatever the ultimate decision was about the constitutional question - both the attorney general and the comptroller had signed off on them, per Texas law - they opted to file a bond validation lawsuit. A favorable ruling in a bond validation case, they stated, would put any questions about the outstanding debt to rest, allowing it to be marketed and traded more easily.
On March 30, the CTRMA won the bond validation lawsuit, though it later lost in the constitutional challenge by PET and Riddering on the length of its board terms. By that time, the authority - and other RMAs throughout the state - had amended their board terms to two years to comply with the constitution.
They had hoped to win a second chance at longer terms, which they believe creates more stability for RMAs, but a proposed constitutional amendment on the statewide November ballot asking that RMA board terms be extended to six years failed to win voter approval.
Even as CTRMA officials were working to resolve the issues surrounding the lawsuit, Travis County district attorney Ronald Earle was completing a criminal investigation of the CTRMA. That investigation was ultimately closed with no finding of fault by Earle, but the authority postponed the sale for about two weeks while the investigation was concluded.
Travis County sources say that the allegations being investigated by Earle were presented by PET, which claimed conflicts of interest on the part of board members who own property near the path of planned CTRMA projects. Earle's investigation found that the road projects were planned before those board members took office.
"We never had any concern about whether there was any merit to the allegations," said Brian Cassidy, a partner with Locke Liddell & Sapp who serves as general counsel to the authority. "We were very certain of our position on the issues of possible conflicts, and knew that there were none."
He said, however, that the major concern for the authority was how the investigation would affect its credibility with the community it serves.
"We were a brand-new organization, and a new type of organization," Cassidy said. "As such, the two issues that were really critical to us are credibility and creditworthiness. These issues had the possible effect of damaging our reputation in the community."
A similar issue arose when Texas Comptroller Carole Keeton Strayhorn - who is running as a Republican candidate for governor and is endorsed by PET - on March 9 released a report calling for the resignation of two authority board members, Robert Tesch and Johanna Zmud, whom she claimed had conflicts of interest that made it inappropriate for them to serve.
Tesch owns 254 acres of land near the site of one of the CTRMA's planned roads and Zmud owns a research firm that has contracted in the past to the Texas Department of Transportation.
The CTRMA issued its own report several weeks later disputing Strayhorn's charges.
"Again, this was an issue that had the potential to impair the authority's credibility," said Cassidy. "However, I believe the thorough, fact-based response from the authority helped to preserve the integrity of the organization."
He said that the fact that the authority's operations have always been very transparent has helped to offset any damage to its reputation.
In addition to political pressures from anti-toll road activists, the CTRMA, being the first RMA to go to market with debt, had to pave the way for such issuances.
"We just couldn't go to the shelf to see how RMA deals were done," Cassidy said. "There were a lot of firsts with this deal - the first RMA to issue debt, the first TIFIA loan to an RMA - the deal really was cut from whole cloth."
The deal was issued to finance construction of the authority's first toll road project, U.S. 183-A. The plan of finance included a combination of $182 million of fixed-rate toll revenue bonds and $66 million of bond anticipation notes backed by a loan awarded to the state under the federal Transportation Infrastructure Financing and Innovation Act.
The senior-lien toll revenue bonds will reach final maturity in 2045 and the subordinate-lien bond anticipation notes will mature in 2008, and are expected to be taken out by the proceeds of the TIFIA loan. The Series 2005 bonds will be structured as a combination of current interest bonds and capital appreciation bonds. The CABs are convertible in 2014, minimizing costs for the CTRMA while maintaining strong coverage levels. Because CABs are more expensive to issue that current interest bonds, the authority will be able to convert the debt to CIBs or another structure when revenue to do so is available.
"Thinking back - and it seems like years ago now, after all we went through - we had a lot of work to get the traffic and revenue forecasts right and making sure we had all of our facts straight before going to the rating agencies," Heiligenstein said. "There was a lot of complexity to this whole deal ... Do we use Bans or not? Will the TIFIA people want to loan us $66 million if that money will sit on the sidelines for a while? Frankly, it was like herding cats for a while."
Not only did the authority receive a TIFIA loan, but it also received two toll equity grants worth $12.7 million and about $65 million from the Texas Department of Transportation. TxDOT also gave the authority a $13 million grant to help get the project under way.
Those were all factors in the strong debt coverage for the deal, which starts at 1.755 coverage and increases to about 6 times over the lifetime of the deal.
Standard & Poor's gave the senior bonds a BBB-minus rating, while the Bans won an AA thanks to the promise of repayment via the TIFIA loan. Moody's Investors Service rates the senior bonds Baa3 and the Bans Aa3.
The project is also supported by a development agreement in which contractors would pay the authority $20,000 per day if the project is not completed in 730 days. Conversely, an early completion would result in the award of a $10,000-per-day incentive payment. The incentive payment would be capped at $1 million. There is no cap on the late payments.
UBS Financial Services Inc. served as the lead manager for the transaction, with J.P. Morgan Securities Inc., Southwest Securities, Siebert Brandford Shank & Co., Morgan Stanley, First Albany Capital Inc., and Estrada Hinojosa & Co. serving as co-managers. Vinson & Elkins is the CTRMA's bond counsel, and Winstead Sechrest & Minick served as the underwriters' counsel for the transaction.
First Southwest Co. and Ladd Patillo & Associates are co-financial advisers for the authority, and Financial Guaranty Insurance Co. insured the deal. JPMorgan Chase Bank is the trustee for the bonds.
