DALLAS - Colorado's E-470 Public Highway Authority tomorrow plans to refund all of the $423 million of auction-rate debt it issued less than a year ago.
The deal follows a parade of issuers from Colorado and other states seeking an exit from the auction-rate market as its promises of flexibility and liquidity have all but vanished.
With this week's issue, E-470's debt will shift from a mostly retail market to one that is largely institutional, said John McCusky, the authority's finance director. The deal is one of the largest in a pre-holiday week, but McCusky and others involved in the deal expect healthy demand.
"E-470 is well known as a government enterprise, and we're expecting a good response," he said.
With expected weekly volume of about $5.42 billion in new muni issues, down from last week's $7.50 billion in supply, auction-rate conversions, including E-470's, represent the three largest deals.
The authority, which financed the eastern segment of a tollway that nearly loops the Denver metro area, has outstanding one of the larger chunks of auction-rate securities in Colorado, where issuers ranging from hospitals to student loan organizations had more than $4 billion of ARS outstanding at the beginning of the year.
The E-470 deal comes less than two months after Denver refunded $456 million of ARS for the Denver International Airport. McCusky said E-470 decided to rid itself of the debt as quickly as possible, calling on Jonathan Heroux at Piper Jaffray & Co. as financial adviser.
"We were very happy with auction-rate debt," McCuskey said. "But once we realized the market was irretrievably broken, we immediately made a decision to convert."
In March, the E-470 authority estimated that maintaining the ARS would add about $24 million to the cost of finance.
McCusky said that rates on the securities soared as high as 12% when auctions first began failing but have lately come down to the 5-6% range. That is still high and creates uncertainty going forward, he said.
"You don't know what they're going to be in the future," McCuskey said. "There's no safety net."
To cover the higher costs of finance on the auction-rate securities, the authority dipped into its rainy-day fund. The new deal comes with a surety bond from MBIA Insurance Corp. that will replace a portion of the authority's cash-funded debt service reserve fund. Cash released from the reserve fund will defease Series 1997 bonds.
In issuing the ARS last June, E-470 was seeking to level off debt payments for the next several decades while allowing greater flexibility and more financial options. Splitting the issue into four series, the authority divided the auction-rate debt into put bonds and long-term, synthetic fixed-rate bonds.
The Series 2007A bonds consist of two subseries: $52.2 million of 2007A1 bonds, which will have a mandatory tender date in 2011, and $53.3 million of Series 2007A2 bonds, which are fixed rate and mature between 2008 and 2024.
The Series 2007B bonds consist of two subseries: $52.2 million of 2007B1 bonds that will have a mandatory tender date in 2011, and $53.3 million of 2007B2 bonds that are fixed rate and mature between 2008 and 2024.
The Series 2007C bonds consist of two subseries: $52.2 million of 2007C1 bonds that will have a mandatory tender date in 2013, and $53.3 million of 2007C2 bonds that are fixed rate and mature between 2008 and 2024.
The Series 2007D bonds consist of two subseries: $52.2 million of 2007D1 bonds that will have a mandatory tender date in 2013, and $53.3 million of Series 2007D2 bonds that are fixed rate and mature between 2008 and 2024.
The deal retains insurance from MBIA and swap agreements with George K. Baum & Co. and Morgan Stanley. JPMorgan replaces Bear, Stearns & Co. as a swap partner. JPMorgan is in the process of acquiring Bear Stearns after the latter banker's brush with financial collapse due to the subprime mortgage crisis earlier this year.
In tomorrow's deal, Morgan Stanley serves as senior manager.
The bonds will carry MBIA's enhanced triple-A ratings from Standard & Poor's and Moody's Investors Service but only a double-A from Fitch Ratings.
E-470 earned an upgrade on its underlying credit from Moody's in advance of the last June's ARS deal, lifting the authority to Baa2 from Baa3. Standard & Poor's and Fitch maintained their BBB-minus ratings.
In confirming the rating on this week's deal, Fitch analysts Chad Lewis and Mike McDermott cited a stable outlook that "reflects the established and stable traffic demand along E-470, solid historical financial performance, continued strong liquidity, and track record of prudent financial management. The rating also reflects the risks associated with toll revenue that is sensitive to economic cycles and a debt structure that is still dependent upon traffic growth within the E-470 corridor, and periodic toll increases."
The E-470 highway agency was established as a state authority in 1988 to build the 47-mile tollway that would connect Colorado 470 in Denver's booming southern suburbs to the eastern perimeter of Aurora and Denver International Airport. Aurora, Colorado's third-largest city, straddles two counties, Arapahoe and Adams, that are members of the authority. Aurora holds a board seat, along with the cities of Brighton, Thornton, Commerce City, and the town of Parker. Douglas County, south of Denver, is also a member.
Although growth continues in Denver's suburbs, soaring fuel costs and rising foreclosures have hampered traffic on the tollway. Falling traffic at DIA is another factor, according to Fitch.
Traffic and revenue growth have ranged from 88% to 98% of the forecast made earlier in the decade.
Tolls grew by 23% annually between 2001 and 2006 to $92.2 million, then softened to a 2.4% growth rate to $94.4 million in 2007. Traffic during this period grew at a 13% annual rate. In the first four months of 2008, traffic is up less than 1%.
With its annual report coming out this week, the authority is in the midst of a new investment-grade traffic and revenue study by Wilbur Smith and Associates, with results expected this summer, according to McCusky.
With traffic patterns firming up, E-470 no longer sees itself as a start-up organization, he said.
The establishment of a base on the eastern edge of the Denver metro area means the tollway is not likely to face the kind of financial pressure that caused the sale of another section of the metro loop - the Northwest Parkway - to a private operator.
