Despite Iffy Outlook, Texas Hopes To Take Out $150M of Tollway Bonds

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DALLAS - The Texas Turnpike Authority is preparing to refund $150 million of 2002 variable-rate bonds insured by formerly triple-A rated Ambac Assurance Corp. with uninsured bonds carrying triple-B-plus ratings.

The refunding was approved by the Texas Bond Review Board on Dec. 2, but market conditions have remained troublesome, especially for bonds rated below the double-A category.

The Texas Turnpike Authority is a division of the Texas Department of Transportation, both overseen by the Texas Transportation Commission, in whose name the bonds are issued.

TxDOT plans to issue the refunding bonds on Thursday through negotiation with Citi, Estrada Hinojosa & Co., and Southwest Securities Inc. RBC Capital Markets serves as financial adviser, with McCall Parkurst & Horton as bond counsel.

Jose Hernandez, director of debt management for TxDOT, expects most of the orders to be institutional, with no retail order period.

The $150 million of Series B bonds to be refinanced were sold in 2002 as part of a $2.2 billion package, including $900 million of bond anticipation notes. The Series B bonds were issued in the weekly variable-rate demand mode.

The new bonds will drop the Ambac backing and liquidity proved by Depfa Bank, both of which have suffered declining credit ratings for the past year. Since December, the variable-rate bonds have been resetting at about 9%, Hernandez said.

The new bonds will carry no insurance or letter of credit.

"Neither one of those are available - or, if they are, they're extremely expensive," Hernandez said. "We've been actively soliciting a solution to this problem for about a year now. We think the best solution is not to have any credit support."

The bonds will offer a fixed rate for two years, at which point they can be remarketed as put bonds under a different mode, if conditions improve. The structure is designed to give the issuer flexibility to adapt to changing market conditions.

Fitch Ratings and Standard & Poor's have both conferred BBB-plus ratings on the refunding issue. Moody's Investors Service rates the bonds Baa1, joining Standard & Poor's in its stable outlook. However, Fitch sees the outlook as negative given the uncertain outlook for toll roads, such as those operated by Turnpike Authority, as the economy has weakened.

"The negative rating outlook reflects the strong possibility for traffic growth to be significantly less than originally forecast, the increased cost of capital associated with the 2009 bonds, and the potential inability to retain financial margins commensurate with the current rating in the near-to-medium term," Fitch analysts observed.

Despite those difficulties, Fitch cited the fact that the Central Texas Turnpike Project - for which the original debt was issued - opened early and under budget, with fiscal 2008 toll revenue exceeding 2002 forecasts by 40%.

"Also, traffic ramp-up appears to have occurred much faster than expected," Fitch noted. "However, traffic growth appears to have leveled off well below expectations and as a result, future growth may not meet forecast expectations."

The Central Texas Turnpike Project consists of three elements: two sections in north Austin referred to as the northwest elements, and State Highway 30 that runs approximately 50 miles in a north-south direction, essentially parallel to the chronically congested Interstate 35. Unlike other turnpikes in the state operated by regional authorities, TxDOT operates the toll roads around the Austin area.

TxDOT itself is under stress as it faces scrutiny from the Texas Legislature under the state's process for sunsetting government agencies. On Dec. 16, the Sunset Advisory Commission recommended to the Legislature that the five-member Texas Transportation Commission be replaced with a single commissioner of transportation. If lawmakers allow the TTC to lapse, another state agency will be designated as the successor to the outstanding obligations under the indenture, including the covenant to cover operating and maintenance expenses.

Some rating analysts are bullish on the demographic trends that are likely to drive traffic onto the tollways.

"In addition, we believe the facility exhibits a favorable project structure with subordinate debt, and maintains adequate senior-lien debt service coverage levels under stress scenarios based on reduced traffic levels," according to Standard & Poor's. "In our opinion, key offsetting risks pertain to the inherent complexities and difficulty in generating reliable traffic forecasts and revenues for new tolled facilities, especially in regions unaccustomed to tolls."

Revenue uncertainty is hardly unique to Central Texas, however. The well-established North Texas Tollway Authority in the Dallas-Fort Worth area warned last year that its revenues would fall significantly this year as it continues the most ambitious expansion of any toll system in state history.

In a transportation sector overview issued Jan. 29, Standard & Poor's credit analyst Kurt Forsgren pointed out the challenges facing the nation's toll systems, despite a generally positive outlook for transportation issues in general.

"The recession's impact on all modes of travel in the fourth quarter - observed in the toll sector dating back to early 2007 in some instances - was clearly evident," he observed. "Reduced demand affected passenger and commercial vehicles at U.S. toll operators (mirroring an overall decline in vehicle miles traveled), enplaned passengers at airports, container volumes at ports, as well as deposits into the U.S. Highway Trust Fund derived from transportation-related taxes."

One possible light at the end of the tunnel is the federal stimulus package signed into law by President Obama last week.

TxDOT has identified $13 billion worth of construction projects that qualify for funding under the stimulus program, including some toll projects. The department expects to apply about $2.6 billion of the federal money to transportation projects throughout the state, creating more than 23,000 direct jobs and 69,000 jobs indirectly.

Gov. Rick Perry, who strongly opposed the stimulus package and had considered refusing the funds, last week conceded in a letter to Obama.

"Please allow this letter to certify that we will accept the funds in HR 1 and use them to promote economic growth and create jobs in a fiscally responsible manner that is in the best interest of Texas taxpayers," Perry wrote. "I remain opposed to using these funds to expand existing government programs, burdening the state with ongoing expenditures long after the funding has dried up."

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