CHICAGO - The Regional Transportation Authority of Illinois in coming weeks will convert $133 million of high interest-rate variable-rate securities to a new, more affordable mode and enter the market to raise $260 million for cash flow as the agency grapples with dwindling sales taxes and state payment delays.
While the General Assembly's passage of a $29 billion capital program gave the authority cause for celebration this spring, it was short-lived as the fiscal strains driving the cash-flow borrowing prompted downgrades from two rating agencies.
Moody's Investors Service this week downgraded the authority's general obligation credit to Aa3 from Aa2 with a stable outlook while Fitch Ratings last week downgraded the credit to AA-minus from AA and warned of further action by assigning a negative outlook. The system has $2.3 billion of outstanding GO debt that is secured by a gross pledge of sales taxes and other state aid.
Standard & Poor's rates the authority's GOs AA, but has not yet issued its new review.
Fitch and Standard & Poor's assigned top short-term marks to the taxable working cash-flow notes. Moody's was not asked to rate that issue which carries a final maturity in May, 2011. Fitch assigned its F-1-plus and Moody's its P-1 to the 2005 variable rate securities being remarketed.
First on the authority's agenda is the cash-flow note issuance that is expected to sell next week, said chief financial officer Joseph Costello. The RTA is working with underwriters Wachovia Securities/Wells Fargo & Co., RBC Capital Markets, Grigsby & Associates Inc. and Rice Financial Products Co.
The borrowing marks the agency's largest issue for cash-flow purposes and the first done through the capital markets. In 2007, the RTA borrowed $70 million. It has ongoing authority to borrow up to $100 million annually but due to a strain on liquidity stemming from state payment delays and rising service costs, the authority sought a one-time authorization from the state to increase the cap to $400 million this year."The big new wrinkle for the RTA is that the state has been spotty on providing our matching funds," Costello said. The state matches the RTA's sales tax funds by 30% - a figure that totaled $332 million, or 17% of the RTA's operating revenues in fiscal 2008.
In the past, the authority turned to its commercial banking relationships for a more traditional loan.
"Credit is a little harder to come by these days and with the increased amount of our issue, it looked like we were going to have to put together a consortium of banks," Costello said. "We stepped back and said let's just go to the capital markets."
With its credit still strong in the double-A category, Costello said the authority expects to achieve a slightly better rate than if it had gone the route of the bank loan. The notes are taxable because the RTA's ability to tap a portion of its federal capital dollars for some operating purposes precludes it from selling tax-exempt cash-flow notes.
The authority then plans to remarket by July 1 its 2005 variable-rate issue that carries liquidity from downgraded Depfa Bank PLC. The bonds had suffered failed remarketing after the downgrades and rates rose to 9%. In recent remarketing cycles, the bonds have captured investors but at rates in the 5% range.
The RTA will convert the debt to extendible reset securities with Morgan Stanley & Co. serving as remarketing agent. The monthly mandatory tenders are payable only from remarketing proceeds and in the case of a failed remarketing, investors must hold the securities until an extended mandatory purchase date nine to 12 months later. The RTA could restructure or issue refunding bonds at the end of the extended period if buyers cannot be found.
"We shopped around for new liquidity and the final cost when you added in fees was going to be no better than the bank bond rate," Costello said of the agency's decision to shift to the extendible reset mode that does not require liquidity. The authority expects a rate in the 1% range.
Costello said he was disappointed in the downgrades, but noted: "We are still a strong credit".
"Generally speaking, we were considering factors that were out of the RTA's controls. The state has been late in a lot of its payments and sales tax collections are below expectation even though they got the tax increase last year and those factors are pressuring the RTA's liquidity," said Moody's analyst John Ceffalio.
Fitch's negative outlook reflects the agency's "expectation of protracted sales tax weakness due to reduced retail spending in the area and substantial operating pressure given escalating needs of the authority's service boards; and the likelihood of continued payment delays at the state level," analyst Melanie Shaker wrote.
The state fell behind on its matching payments last summer, but caught up in January. The state again fell behind, although caught up on back payments last month. The state - currently $54 million in the arrears to the RTA - issued $1 billion of its cash-flow certificates in May to help get caught up on a backlog of bills.
Lawmakers ended their session last month passing a bare-bones budget with funding for just six months of operations. Gov. Pat Quinn - who is seeking an income tax increase - has been meeting with legislative leaders to reach agreement on a plan that would fund operations for a full year and address a $12 billion deficit.
The state has been on time in transferring the RTA's share of sales tax revenues, which totaled $921 million in fiscal 2008. Those funds are collected by the state treasurer and transferred directly to the RTA.
As the economy has worsened, sale tax collections have struggled, falling 4.9 % below projections for 2008. The RTA projected 5.4% growth in 2009 to $1.4 billion due in part to a 0.25% increase that took effect from legislation approved by the General Assembly last year but collections are expected to miss their mark.
The credit's strengths include debt service coverage ratios that will fall to a low of 2.5 times in 2012 before rising to 4.4 times in 2014 and strong bondholder protections that include a trustee intercept on pledged revenues. The RTA also provides essential services to a diverse and wealthy service area of eight million residents in the Chicago region through its three service boards - the Chicago Transit Authority, Metra commuter rail and Pace suburban bus service. Ridership is up, growing by 5.1% in fiscal 2008 to 654.5 million passenger trips.
With the state's operating budget still being negotiated, the $29 billion capital budget approved by lawmakers is in limbo as Quinn has tied its signing to passage of the operating plan. Under the capital plan, the RTA would receive $2.7 billion in funding towards its $5.4 billion five-year capital improvement program.
The $5.4 billion program provides $2.97 billion for rolling stock, $1.3 billion for track and structure improvements, and $1.2 billion for stations and passenger facilities with funding coming from state and federal funds including $414 million in the stimulus package. The RTA has little bonding authority remaining from past authorizations and under the capital budget would receive the $2.7 billion directly from the state, which would issue $8.9 billion of debt.