LOS ANGELES - Idaho is bringing grant and revenue anticipation refunding bonds to market amid increasing uncertainty over the federal funding that supports them.
State officials did their best to reassure investors at a net road show ahead of the state's plans to price $157.5 million of Garvees.
The Garvees are repaid through funds from the Federal Highway Administration, a funding source that has become increasingly uncertain amid gridlock in Congress.
Federal dithering should have no impact on the Idaho Garvees' credit quality given the multiple levels of support for the credit on the state and federal level, Dave Tolman, finance director for Idaho's Transportation Department said in a road show posted on munios.com.
"The current market climate and topic of the next federal authorization of surface transportation legislation will have, if any, a negligible actual impact on overall Garvee program credit quality even with the probability of another interim extension," Tolman said. "Even during past partial federal government shutdowns, FHWA reimbursements flowed weekly to Idaho without interruption due to the strong base of national dedicated taxes flowing directly into the Highway Trust Fund."
Idaho Housing and Finance Association, the issuer, plans to price the bonds for retail investors on June 15.
Institutional pricing is scheduled June 16.
Gurtin Fixed Income stays away from Garvees because "there has not been a long-term solution to funding them, and it doesn't look like there will be one soon," said Michael Johnson, managing partner, co-chief investment officer and head of research.
"That cycle in which the Highway Trust Fund goes broke, and then there is a short term fix; the risk reward doesn't make sense to us," Johnson said. "There are many more bonds that are much more stable, of the same, or higher credit quality."
Gurtin does buy transportation bonds but won't buy Garvees, across the board, in any state, he said.
"They all have similar issues," Johnson said. "Unless there is specific backing with state transportation funds; then we would think about those. Without that, it doesn't matter which state they are in."
Johnson said the market as a whole is used to the cycle of the Highway Trust Fund veering toward going broke and federal legislators passing last-minute legislation to provide funding each year.
"The situation has to be really bad - like Detroit, or Puerto Rico bad - for the market to think about there being a default," Johnson said. "I wouldn't expect the market to shun an issue like this."
Ahead of the deal, Fitch Ratings affirmed its A-plus rating on Idaho's $633.2 million of Garvees; Moody's Investors Service confirmed its A2 rating. Both outlooks are stable.
"The stable outlook reflects our expectation that Congress will provide stop-gap funding this summer to prevent a shortfall in the HTF and maintain spending at or near current levels in the near term," Moody's analysts wrote June 5.
Moody's downgraded Idaho Garvees to A2 in June 2014.
The bonds will refund Series 2006 bonds and partially refund the Series 2008A bonds for a net present value savings of $13.3 million, or 7.9% of the refunded bonds, according to Fitch.
Citi is the lead underwriter.
Ballard Spahr LLP and Sinner Fawcett LLP is co-bond counsel and Orrick, Herrington & Sutcliffe LLP is underwriters' counsel.
The bonds, an advance refunding, are neither front-loaded nor back-loaded, but will retain a level repayment schedule with a July 15, 2026 maturity, John Sager, IHFA's executive vice president and chief financial officer, said in the net road show.
The serial bonds will mature from 2017 through 2026.
The state's legislature authorized the initial issuance of Garvees in 2005.
A memorandum of agreement between the FHWA and the Idaho Transportation Department established a payment stream equal to 90% of debt service requirements in each period.
The remaining 10% comes from federal surface transportation fund receipts.
The series 2014A issuance last year completed the legislature's authorization for the highway construction program.
The transportation department's ability to pay debt service "depends on the strength, stability, and reliability of the federal program that authorizes outlays from the highway trust fund," according to a June 5 Fitch report.
Under the master financing agreement, each subsequent issuance of debt must be authorized by the legislature, creating flexibility to expand or contract, the size of the program.
Fitch added that the future of the federal program remains uncertain.
"The federal program, which was once funded on a multi-year basis, has now morphed into a program where future policy is less certain and funding levels are less predictable," Fitch analysts wrote.
The Highway Trust Fund continues to be on an unstable trajectory with expenditures exceeding revenues, according to Fitch.
The program is more "dependent on authorization and on continued transfers from the general fund that will likely need to be continued indefinitely barring an increase in the federal gas-tax or a significant reduction in spending," Fitch said.
The most recent legislative authorization, Moving Ahead for Progress in the 21st Century, MAP-21, relied on $10.8 billion of transfers from the general fund and did not address the long-term structural imbalance in HTF.
"Future funding levels will be hard to predict, but it is Fitch's view that significant changes are needed on the expenditure side or the on the revenue side to put the program on a sustainable trajectory," its analysts wrote.
The structure of the Idaho bonds still earned the debt an A-plus rating, while similar bonds in other states achieved BBB ratings from Fitch, according to analysts.
"We have not been following the Idaho deal closely, but we have certainly been cautious on Garvees given the uncertainty in federal funding," said Peyton Studebaker, a managing director with Richmond, Va.-based Caprin Asset Management.
"Given the rapidly aging infrastructure of the country, it seems that a truly comprehensive plan and subsequent bill will be needed to fix the long term issue within our transportation system, and to fund the highway trust at adequate levels going forward," Studebaker said. "It seems unlikely to us that lawmakers would be about to agree to such a plan anytime soon. As such, the headline risk and funding uncertainty must be carefully considered."
Though the Idaho Transportation Department derives 56% of its revenues from federal resources, it retains substantial liquidity on hand to cover potential delays in federal receipts.
The department maintains no debt other than that associated with its Garvee program.
Final maturity in 2032 exposes bondholders to a certain degree of reauthorization risk, but the transportation department retains sufficient flexibility at the A-plus level even under a scenario in which outlays from the HTF are cut to match projected gas tax receipts, according to Fitch.
Idaho may be more susceptible than other states to changes in federal funding policy because it receives $1.66 in federal surface transportation funds for every dollar it contributes in motor fuel tax revenues.
Since the passage of MAP-21 in July 2012, 20 Garvee issuances have closed, totaling over $4.4 billion in par, according to Fitch.
Idaho received apportionments totaling $276 million in fiscal year 2015, Tolman said.
Almost all funds generated through the Federal Highway Trust fund sources are exempt from sequestration; all of the dedicated motor fuel taxes and user fees that flow to the HFHT are exempt from sequestration. However, the U.S. General Fund transfers that are sustaining funding levels are subject to sequestration.
