CHICAGO — The Illinois State Toll Highway Authority next week is set to sell up to $760 million of advance refunding bonds, and is planning a new-money issue of at least $500 million later this year as it continues on track with a $6 billion expansion and reconstruction program.

Next week’s transaction will advance refund a significant chunk of the ISTHA’s $1 billion new-money issue in 2006, refinancing the deal’s longer maturities. The deal is broken into two series, each for the same size, with Goldman, Sachs & Co. serving as the senior manager.

Another 11 firms will be co-managers. Mesirow Financial Inc. and Scott Balice Strategies LLC are financial advisers and Perkins Coie LLP and Burke Burns & Pinelli Ltd. are co-bond counsel.

The refunding bonds are being issued using a variable-rate structure that is being swapped to a synthetic fixed rate under recently bid forward-starting swap contracts entered into between the authority and counterparties Depfa Bank, Deutsche Bank, Merrill Lynch Capital Services, and the Bank of New York.

The ISTHA will pay a fixed rate of 3.77%, or around 4%, when all costs of issuance are added, including liquidity and insurance, and receive in return the rate set under the Securities Industry and Financial Markets Association’s municipal swap index. The transaction will achieve a present-value savings of about 4%, according to the authority’s finance chief, Michael Colsch.

The authority has long waited for interest rates to improve since they rose last summer as the market began to digest the worsening news associated with the subprime mortgage market.

“We received the authorization for the transaction in April 2007 when the board authorized our last new-money transaction and the deal was right on the margin then, but we missed our window of opportunity,” Colsch said. With recent movement in interest rates and spreads, the deal again achieves a significant enough level of savings to proceed.

The authority found the best value by turning to a synthetic fixed rate over a traditional fixed-rate, but could unwind the swaps or convert to a fixed rate if the market becomes less favorable.

Financial Security Assurance, whose triple-A was recently affirmed by Fitch Ratings, will insure the deal and Dexia Credit Local is providing liquidity. While some issuers have chosen to forgo insurance as the companies’ ratings have come under scrutiny due to their exposure in the subprime market, Colsch said the insurance, bid prior to Fitch’s affirmation of FSA’s credit, helped with the liquidity pricing.

The ISTHA is also working on a new-money issue that is expected to top $500 million and sell about “mid-year,” according to Colsch. The authority has not yet named a financial team for the transaction or any structural details.

The agency last fall sold $700 million of new-money debt, then naming Goldman to the refunding deal. Colsch said the ISTHA sought to reward firms that had generated good ideas, had done a good job of providing market updates, and had not recently served in the lead spot.

The agency is issuing new money on an as-needed basis through 2010 to finance a $6.3 billion capital program that includes an overhaul of the 274-mile system. The program relies on $3.5 billion of issuance, leaving another $1 billion still to be borrowed. Toll revenues secure the authority’s outstanding $3.1 billion of debt, which includes $600 million of bonds that were issued before the new program began and carry a final maturity in 2017.

Tolls generated more than $600 million last year and only the system’s annual operating costs of $225 million come before debt service. The authority expects to maintain a coverage ratio of debt service of 2.4 times.

Under the capital program, roads are being rebuilt and extended, toll plazas are being altered to accommodate electronic tolling and relieve congestion, and a new interstate highway is being built. The plan relies on increased revenues collected from the doubling of tolls paid by motorists who don’t use the authority’s electronic tolling device, known as the I-PASS, and from truckers.

The authority’s bonds are rated Aa3 by Moody’s Investors Service, while Fitch Ratings and Standard & Poor’s rate them AA-minus.

The ISTHA’s credit benefits from a steady annual increase in toll revenues of 9.9% between fiscal 2001 and 2006, and it maintains healthy unrestricted cash and investment levels — $562 million in fiscal 2006. The agency’s most significant challenge is managing such an extensive capital program, according to Moody’s.


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