CHICAGO – The Illinois State Toll Highway Authority plans to enter the market next week with a roughly $425 million fixed-rate refunding of toll-backed revenue bonds in a deal scaled down due to rising interest rates.
The agency originally planned a refunding in the $500 million to $600 million range but trimmed it as rates have risen. The authority anticipates at least 5% in present value savings on the pieces of existing debt it still intends to refund. The final sizing and timing depend on market conditions next week.
“We are targeting next week if market conditions are favorable,” the agency said in an email. “We do have the option to wait, but we believe we’ll be able to price some bonds next week with a favorable return for the agency.”
Goldman, Sachs & Co. and Jefferies are the senior managers. Bank of America Merrill Lynch and Siebert Brandford Shank & Co. are co-seniors. Another five firms round out the syndicate as co-managers. Chapman and Cutler LLP is bond counsel. Public Financial Management Inc. and Columbia Capital Management LLC are advisors.
The agency sold $500 million of new-money this spring and has another $500 million on tap for the fourth quarter or early next year under a $1 billion authorization approved by the board last December. The new-money issuance marks the agency’s first borrowing to support a new $12.1 billion 15-year capital program.
An additional $2.2 billion is tentatively expected to be sold between 2014 and 2016 and then $1.8 billion between 2020 and 2022, all to support the $12 billion MOVE Illinois program, according to the offering statement for the refunding. The agency’s board also has approved the restructuring of $570 million of variable-rate bonds to a fixed rate that includes plans to eliminate swaps.
The new program was approved by the tollway board in 2011 to follow up its previous $6 billion program.
The agency carries ratings in the low-double-A category from all three rating agencies. The agency’s more than $4 billion of senior lien bonds are secured by a pledge and lien on the net revenues of the tollway system after operating expenses are paid.
“The ratings reflect our view of the system’s essentiality and strong financial risk profile,” said Standard & Poor’s analyst Adam Torres.
The agency’s chief of finance, Michael Colsch, and executive director, Kristi LaFleur, ahead of their new money sale in the spring stressed to investors toll rate changes in place that support repayment of the bonds and bondholder protections that isolate bond repayment from the state’s fiscal woes. Even those Illinois-based issuers with little state exposure, however, still typically pay interest rate penalties simply for their location in Illinois.
To support the MOVE Illinois construction program, the board adopted a steep one-time 87% increase in passenger tolls that took effect last year and a 60% increase in commercial vehicle tolls that will be phased in and then adjusted annually based on inflation in 2018.
After the toll hikes, debt service coverage rose to 2.84 times in 2012 from 1.81 a year earlier and it is scheduled to remain above 2 times over the course of construction. Debt service coverage has historically been at least 1.8 times.
The 286-mile system provides a critical transportation link in the Chicago and northern Illinois region, and revenues provided strong liquidity of 917 days cash on hand in fiscal 2012 in addition to strong coverage ratios, according to Fitch Ratings.
The credit’s most significant challenges stem from the difficulties of managing a massive construction program, the burden of adding substantial debt, and risks that commercial traffic could drop due to economic conditions.
Floating rate exposure of more than 30% in its debt portfolio also poses some risk although the percentage will fall as more fixed-rate bonds are issued. Floating-rate securities are expected to account for 27% of the debt portfolio after this year’s issuance and should drop to 21% by 2015.
The agency saw a less severe drop than expected in passenger levels after the 2012 toll hike. Passenger traffic dropped 4.2%, though it had been projected to fall by 5.2%. Toll revenue grew by 41% in fiscal 2012 to $923 million. Operating expenses increased by 3% to $253 million. Forecasted growth is higher than historic growth over the past 10 years.