Grand Parkway's $2.4 billion refunding will be its largest deal

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Grand Parkway Transportation Corp. plans to refund about $2.4 billion of bonds — the largest deal in its history — as it continues construction of a 184-mile loop around the Houston metro area.

The board of the nonprofit corporation created by the Texas Department of Transportation approved the deal Thursday, with plans to price the bonds in early February.

The bonds are expected to come in three tranches. A $1.3 billion taxable Series B is a subordinate tier. Another $1.1 billion coming to market as Series A and C are first tier toll revenue bonds.

This month, Moody's Investors Service affirmed their ratings on the first-tier debt, A2 from Moody's and A-plus from Fitch. Both assign a stable outlook. The subordinate tier bonds, which are enhanced by a Toll Equity Loan Agreement with TxDOT, were affirmed at Aa1 by Moody’s and AA by Fitch.

S&P Global Ratings last reported in January, when it revised its outlook to positive from stable on the BBB rating of the first-tier bonds. It rates the subordinate bonds AA-plus on the strength of the TxDOT enhancement.

TxDOT’s Toll Equity Loan Agreement, or TELA, covers debt service and certain other eligible expenses due in a given year.

The TELA kicks in only if project revenues fall short of debt-service requirements. Advances by TxDOT under the TELA are subject to legislative appropriation and certain other limitations.

The corporation has also received federal government financing under the Transportation Infrastructure Finance and Innovation Act.

About $274 million of first-tier series 2020A refunding bonds may refund all of the first-tier series 2013A bonds and a portion of the second-tier 2013 TIFIA loan for estimated savings of about $16.5 million without extending the final maturity of the refunded bonds, according to Fitch.

About $823 million of first-tier series C bonds would refund the remainder of the second-tier 2013 TIFIA loan for estimated savings of about $27.7 million.

“Should the 2013 TIFIA loan be refunded, the debt would shift to the first tier and there would be no second-tier obligations outstanding,” according to Fitch senior director Marcy Block.

TELA-supported bonds make up is 62% GPTC’s outstanding debt before this deal. TxDOT's total TELA commitment through 2053, the final maturity of TELA-supported bonds, is $9.2 billion, according to Moody’s. The average TELA maximum available annual amount is $264 million.

Available annual amounts not drawn upon in any given year are not rolled forward under the agreement.

The Grand Parkway Transportation Corp. is a public, nonprofit corporation created in 2012 by the Texas Transportation Commission and operated by officials from TxDOT.

The Grand Parkway Project, also known as State Highway 99, is a 184-mile highway in various phases of development that will circle the greater Houston area spread across seven counties: Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty and Montgomery.

Construction began in 1994. When completed, it will be the longest ring road in the United States and the third longest in the world.

The Grand Parkway is divided into 11 segments, several of which are in the GPTC’s system. Segment E and the tolled portions of Segment D in Harris County opened to traffic in December 2013, and tolling began in February 2014.

Segments F-1 and F-2 opened to traffic on Feb. 5, 2016, and both began tolling on Feb. 15, 2016.

Segment G opened March 29, 2016, with tolling beginning April 4, 2016.

I-2A, a portion of Segment I-2, opened in 2008 and began tolling in November 2011. GPTC will become responsible for the operations and maintenance of Segment 1-2A when the other portions of Segments H and I have reached substantial completion, expected in 2022.

“Once all of segments H and I are open, revenues from the existing portion of segment I will flow to GPTC, as will the operating and maintenance responsibilities,” Fitch noted. “These revenues and costs have been factored into Fitch's analysis, though Fitch notes positively that revenues from existing segments are already more than sufficient to cover the senior lien debt service and operating costs of the new segments.”

There was talk in Austin earlier this year that the TTC would cut sections B-D from the state’s 10-year Unified Transportation Plan under Gov. Greg Abbott’s goal of reducing tolling in the state. But, to the relief of local officials, that section remained in the UTP.

Anti-tolling fever has ebbed in Texas since a legislative push to halt it over the past decade but still overshadows discussions of financing transportation in a state that has not raised the fuel tax since 1991 when it was set at 20 cents per gallon.

The funding levels in the UTP are based on a forecast of transportation revenues anticipated over the next 10 years. The plan authorizes TxDOT and local partnering agencies to prepare projects for construction based on a reasonable expectation of future cash flow.

“For decades, state and federal fuel tax revenues were sufficient to pay for the state highway system,” the 2020 UTP says. “However, over time, the rates on these taxes remained unchanged while Texas’ population continued to boom. In the mid-2000s, as the state’s transportation needs began to outpace its financial resources, the Texas Legislature gave TxDOT the authority to finance projects with bond debt.”

The State Highway Fund is TxDOT’s largest fund. Most of the taxes and fees deposited in the SHF are dedicated by the Texas Constitution to support state highways. The primary sources of revenues are the state motor fuels tax, vehicle registration fees, sales taxes under Proposition 7 authorized by voters in 2015, and the oil and gas production tax authorized by Proposition 1 approved in 2014. Revenues from Propositions 1 and 7 are held in special subaccounts of the State Highway Fund.

Critics and advocates of Grand Parkway agree that the massive loop around the outskirts of Houston’s suburbs will promote growth and development. Environmentalists fear destruction of natural habitat, while business interests see new opportunity. Some conservatives feared that the project would not attract sufficient traffic to support tolls.

“Risks tied to the system's limited operational history are offset by the lack of growth needed to support its first- and second-tier obligations and continued traffic outperformance,” Fitch said. “As a newer facility, major maintenance requirements are expected to be minimal and other maintenance needs are anticipated in the current budget. GPTC's liquidity is strong, and should continue to increase even under conditions of modest growth.”

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Toll revenue bonds Primary bond market Texas Transportation Commission Texas