DALLAS - The Harris County Toll Road Authority serving the Houston area expects a good reception when it takes $250 million of senior-lien revenue bonds to market next week.
With a rating in the double-A category, the HCTRA hits the segment of the municipal market that has seen success this year, as lesser credits have struggled to find investor demand.
"I think it will be well received," said Edwin Harrison, director of financial services for Harris County. "It's a system bond, not one for an individual toll road."
The April 21 pricing will be the first of two this year for new money covering two projects: completion of the Sam Houston Tollway and extension of the Hardy Toll Road to downtown Houston. Some money will also go toward the existing system, Harrison said.
The county will use an underwriting team that has worked on previous issues and that took part in a long-term study of financing the toll system created and supervised by the Harris County Commissioners Court.
Senior co-managers will be Siebert Brandford Shank & Co. and JPMorgan. Co-managers are Citi, Jeffries & Co., Loop Capital Markets, Piper Jaffray & Co., and RBC Capital Markets.
First Southwest Co. serves as the financial adviser, with Andrews Kurth as bond counsel.
The toll bonds are rated AA-minus by Standard & Poor's and Fitch Ratings, with Moody's Investors Service at Aa3. All three agencies affirmed their existing ratings and stable outlooks.
The senior-lien bonds are secured by toll revenues. The authority also has about $665 million in outstanding subordinate-lien unlimited tax revenue bonds which are secured by property taxes as well as a subordinate lien on net revenue of the toll system. Because of the tax pledge, the subordinate-lien bonds carry higher ratings: AAA from Standard & Poor's, AA-plus from Fitch, and Aa1 from Moody's.
"In our view, the AA-minus rating reflects an extremely strong historic growth in traffic and revenues, which have contributed to the toll road's healthy financial position; and management's conservative policy of not funding new road projects unless it can provide a minimum 1.25 times net revenue debt service coverage," said Standard & Poor's credit analyst Laura Macdonald.
The HCTRA's issue would coincide with New Jersey Turnpike Authority's $650 million deal, which includes $250 million of taxable Build America Bonds.
Jeffrey Timlin, vice president and portfolio manager for Sage Financial Advisors, does not expect a conflict between the two issues.
"Both deals should be fairly well received if they come in at appropriate spreads," he said. "You really have two different dynamics with New Jersey and Texas. Given New Jersey's tax environment, you're going to have more people in state buying the bonds, whereas the Texas issue will appeal to investors nationally looking for more general issues."
Texas has no state income tax, so investors there do not receive a double tax exemption.
Risk-averse investors are also more dubious about ratings, an attitude that benefits issuers such as the Harris County toll authority, according to Timlin.
"A Texas double-A is trading better than a Nevada double-A, even though they have the same rating," he said. "The street is going to dictate the market, not the ratings. Who really trusts the ratings agencies anymore?"
With this issue, the HCTRA will have about $1.95 billion of debt outstanding.
"While currently planned projects will likely reduce coverage ratios in the short to intermediate term, Fitch expects that revenue generated from these projects and cost-conscious management of expenses will keep coverage ratios and other financial metrics well within comfortable levels for the existing rating category," analysts wrote.
The authority collects tolls on 103 miles of roadway in the Houston-Harris county area, including the Hardy Toll Road, Sam Houston Tollway, Sam Houston Ship Channel Bridge, Westpark Tollway, and Spur 90A.
The toll system has experienced heavy usage as an alternative to the Houston area's notoriously congested freeways. Houston is a late arrival to light rail but is expanding its system beyond a single line this year, helped in part with federal stimulus funds.
The toll authority, meanwhile, is in the midst of a five-year capital plan worth an estimated $5.4 billion.
Among the projects under consideration is an outer loop around the Houston metro area called the Grand Parkway. The loop would pass through seven counties, with only 10% of the road in Harris County. However, that 10% would account for 90% of revenue, Harrison said. Because of that, Harris County is the lead negotiator with the Texas Department of Transportation that would decide funding for the project.
Harris County's Segment E of the Grand Parkway qualifies for $181 million of federal stimulus funding, but Harrison said the county has never used federal funding for any of its toll projects.
"The challenge is that, anytime you take federal money, there are a lot of additional hoops you have to jump through," he said. "There's no question that it will slow you down. As it stands right now, we have not petitioned for the money."
Average annual growth in traffic and revenue on the toll system from fiscal 1999 to 2009 has been 5% and 9%, respectively. However, the rate of growth has slowed as congestion has increased, according to analysts.
In fiscal 2009, which ended Feb. 28, transactions declined 5.8% as result of Hurricane Ike. The HCTRA waived toll collection from Sept. 10 through Sept. 27 throughout the system, and on the Houston Ship Channel Bridge through Oct. 28. The authority estimates that the waiver resulted in about $20 million in lost toll revenue for fiscal 2009.
Standard & Poor's considers the HCTRA's tolls relatively high at 14-18 cents per mile on the Sam Houston and Hardy toll roads and 15 cents per mile on the Westpark Tollway.
The tollway expansion comes as the Texas Legislature is writing into law the existing process for awarding toll-road projects to either a public authority or a private contractor.
Under Senate Bill 792 passed in the 2007 session, regional toll authorities such as the HCTRA get first rights to build turnpikes in their region. If they reject the project, it can be bid out to private toll-road developers or built by the Texas Department of Transportation as a free highway.
SB 17, sponsored by Sen. Robert Nichols, R-Jacksonville, passed in the Senate last month on a 30-1 vote. It would require that contracts with private developers include a buy-back price to be paid by the state if it chooses to end the contract early. Texas law now requires the state to pay "fair market value" under a formula that has not been clearly defined.
The bill would also prohibit the state from building roads within four miles of existing toll roads for 30 years, instead of the 50-year terms in current state law.
Sen. John Carona, R-Dallas, who brokered SB 792 in 2007, won Senate passage of another bill - SB 404 - that would allow the state or local tolling agencies to contract with private companies to build, operate, and profit from toll roads until 2015. The new law would effectively end a two-year moratorium on privately owned toll roads passed in the 2007 session. That moratorium exempted projects that were already underway.