WASHINGTON - To fill the void left by bond insurers, highly rated states and authorities should consider providing a temporary guarantee or credit enhancement to lower-rated issuers that cannot access the municipal market at reasonable rates for transportation projects, market participants said at a conference here last week.
Speaking at an International Bridge, Tunnel and Turnpike Association conference, Susan Buse, director of project evaluation for the North Texas Tollway Authosrity, and Dan Heimowitz, a managing director at RBC Capital Markets, said higher-rated entities could create a guarantee program that would move much-needed infrastructure projects forward without adding significant risk to their ratings.
"I think it probably fair to say that done properly, states probably have sources using their own credit to wrap or support worthy projects that they want to get done when the market alternatives are just not there," said Heimowitz, who previously served as executive vice president and director of public finance at Moody's Investors Service.
He and Buse cited, as an example, a loan agreement that the Texas Department of Transportation and the NTTA reached in October for a state highway project.
Under that agreement, TxDOT - whose state highway fund revenue bonds are rated Aa1 by Moody's - is providing a loan of up to $3.5 billion that the NTTA can use if it does not have sufficient funds to pay for design, construction, operating, and other costs for the State Highway 161 project, a $1.3 billion, 11-mile north-south turnpike.
The loan - which would rely on state gas tax revenues, vehicle registration fees, and other revenues in the highway fund - will be subordinate to TxDOT's existing bonds and will effectively act as a line of credit, similar to that offered by the federal Transportation Infrastructure Finance and Innovation Act. The loan should allow the NTTA to obtain higher credit ratings for the bonds it plans to issue to finance the project, Buse said.
NTTA officials expect to be able to issue bonds with ratings of single-A or double-A because the loan adds another level of security to bondholders. Without it, the debt would likely garner triple-B ratings, according to project officials. The NTTA's ratings now stand at A2 from Moody's and A-minus from Standard & Poor's.
Officials from both TxDOT and the NTTA are hoping that the loan will not be needed and say it should not adversely affect the department's credit rating. If the authority needs to use the loan, it would have to pay it back with interest.
Transaction participants say the loan, which will be available to the NTTA over the life of the bonds, will have flexible repayment terms based on project performance. Once the project is producing revenues of its own, the bonds could be refinanced and the loan may no longer be required, they said.
"We have the opportunity to advance a project that a lot of people are counting on," said Chris Lippincot, a TxDOT spokesman. "It's the opportunity for two agencies to pair their resources."
The loan agreement between TxDOT and NTTA is unique in the transportation sector, market participants said. But Heimowitz and Buse think that other highly rated states and authorities should consider similar action now that the bond insurers are nearly obsolete.
"You have every one of the former triple-A bond insurers no longer triple-A in a market that doesn't necessarily feel comfortable with a financial guarantee like they used to," Heimowitz said. "And then you have lots of people who would like to get projects done. Certainly as we're hearing in the stimulus package, people are coming up with lots of infrastructure projects that would be put forward, except for the lack of funding."
Heimowitz and Buse said that transportation projects with a ramp-up period in the early years, like SH 161, could especially use some form of a guarantee or loan to help credit ratings before project revenues begin flowing. In previous instances, the issuer of the bonds would purchase that enhancement from bond insurers.
Heimowitz said he believes the concept is gaining traction because current market conditions are so unattractive to lower-rated issuers. In addition, states would benefit from moving infrastructure projects because they would help stimulate their economies.
"At the moment, it's an interesting idea," he said, adding that the agreement between NTTA and TxDOT is the furthest any authority has come in this area as far as he knows. But the idea has "gotten people's attention," he said.
"I think the question is, is this appropriate use of [state] funds? Are [states] adequately protected? Can they do this in such a way that they really can pick and choose the projects that truly are likely to be self sustaining, and even though credit risk is there, the state is unlikely to be called upon [to pay out on the bonds]?" Heimowitz said.
He said if a state provides a lower-rated issuer coverage similar to that provided by a bond insurer, the state could charge fees.
Standard & Poor's analyst Kurt Forsgren agreed the concept has legs, but said that because of the current unfavorable market overall, even the highest-rated issuers may be hesitant to enter such agreements.
"As a result of the current market, the inability of the insurers to provide what they have in the past, that triple-A wrap, there may be other entities that have the solid investment-grade ratings or close to it that they can provide to infrastructure issuers or toll-road operators the same kind of protections that bond insurers would offer," Forsgren said. "I think the question going forward is: Would the state be willing to take on something like this since they have a lot of other needs and pressing matters that are facing them?
"That being said, there's merit, I think, to the concept of states providing a form of a guarantee, or a limited guarantee, for projects that may have uncertainty associated with them, at least as it relates to the initial years of the project until such time that the projects are generating revenue and are able to support themselves," he said.
The risk taken on by would be worth it because the state would be investing in projects that would benefit it, without actually having to allocate direct funding to the project, according to Heimowitz.
Even if a state with a large budget for debt service had to actually pay out any money to an issuer, it would make a "small dent" overall in the state's financial condition, he said.
"I think that in some ways it is a good use of state resources, particularly if [states] take the view that these projects are worthwhile and particularly if the projects can generate revenues and support themselves," Forsgren agreed. "There's a void in the market for that type of enhancement, and if states are willing and able, there can be a role for them to provide that type of enhancement. But I think ultimately it's got to be prioritized with the other obligations of the state, which as you know are quite large."
