WASHINGTON — The South Carolina Infrastructure Bank, the state’s main issuer for highway project funding, expects to competitively sell $225 million of new-money and refunding bonds on Tuesday, following a downgrade by Moody’s Investors Service to A1 from Aa3 due to weakened debt-service coverage.
The deal includes $191.9 million of revenue bonds and $33.4 million of advanced refunding bonds for debt issued in 2001. The new bonds will mature between 2034 and 2040 and the refunding bonds will mature between 2012 and 2024.
The bank generates most of its revenue from vehicle fees and loan repayments from local borrowers. Both sources were hurt by the economic downturn. Subsequently, the bank’s debt-service coverage has slipped, triggering the downgrade.
The bank was initially rated A1 by Moody’s in 1998, but the rating was recalibrated to Aa3 in April as part of the migration of municipal credits to its global scale. Bank revenues covered debt service 1.19 times in fiscal 2010, down from 1.26 times in 2009, according to Moody’s. The bonds are rated A by Fitch Ratings.
The bank “has fairly narrow coverage from the pledged revenues,” said Ted Hampton, Moody’s lead analyst on the credit. Debt-service coverage “in recent months has deteriorated because of truck registration and other fees revenues,” he said.
Truck registration fees fell 4.1% in fiscal 2010, the second straight annual decline. Those fees, along with vehicle registration fees, comprise about half of the bank’s revenue. Its revenue bonds have a junior lien on truck and motor vehicle registration fees. The state’s general obligation highway bonds have the first lien on those fees. The bank also collects one cent from the state’s 16.8 cents tax on gasoline and a portion of the state’s tax on electricity.
About one-third of the bank’s revenues in fiscal 2010 came from loan repayments from local borrowers. Some of the repayment guarantees these borrowers had securing their obligations to the bank have come under stress. Horry County has its obligation to the bank insured by Ambac Assurance Corp., whose parent company, Ambac Financial Group, filed for bankruptcy protection last week. Separately, a loan payment from Lexington County was guaranteed by SCANA Corp., a South Carolina electricity and gas producer, which has seen its ratings fall to Baa2 with a negative outlook from Moody’s.
In addition, the bank has $360 million variable-rate debt outstanding, or 18% of its total debt. The bank has had to pay $44.25 million in collateral on interest rate swaps used to hedge the variable-rate debt. The mark-to-market value of two swaps, with Wachovia NA and Bank of America NA, is negative $80 million, Moody’s said. Letters of credit providing liquidity will expire in June 2011.
Created in 1997, the infrastructure bank currently is approved to fund 14 projects totaling about $4 billion. McNair Law Firm is bond counsel and Public Financial Management Inc. is the financial adviser.