DALLAS — The Kansas Department of Transportation will bring the Sunflower State's largest deal of the year to market this week, offering $250 million of new money revenue bonds for two major construction projects.
The pricing is expected Tuesday through negotiation with a syndicate led by Morgan Stanley. Bill Mack, executive director at Morgan Stanley, is lead banker.
Jon Burmeister, managing director at Public Financial Management Inc. in Des Moines, Iowa, is KDOT's financial advisor.
Attorneys Kim Wells and Lisa Russell at the law firm Gilmore & Bell in Kansas City are bond counsel.
Kyle Malcom, debt and investment manager for KDOT, said the bonds, maturing serially through 2030, will go primarily to institutional investors. No retail order period is planned, he said.
With ratings of AAA from Standard & Poor's, AA-plus from Fitch Ratings, and Aa2 from Moody's Investors Service, the bonds should be well received, Malcom said.
"I think the market response is going to be positive," he said. "The department is not a frequent issuer."
With this issue, Kansas will have about $1.63 billion of highway revenue bonds outstanding. In August, KDOT plans to issue about $213 million of refunding bonds that will take out Series 2002B and C, Malcom said. The refunding bonds will be adjustable rate with a Libor-based rate structure.
KDOT expects to issue about $735 million of additional highway revenue bonds through the fall of 2018, including the current offering, according to Moody's. That represents a decrease of about $400 million compared with prior plans. The department expects to provide additional cash funding instead of bond proceeds.
Analysts consider debt-service coverage strong. Pledged revenues include motor fuels tax collections, license, permit fees and federal funds.
"Weak motor-fuel tax revenue trends are mitigated by somewhat stronger fee revenue trends and increased sales tax allocations," wrote Moody's analyst Lisa Heller.
Ben Cleeves, chief operating officer of the budget for KDOT, said that projected debt-service coverage assumes motor fuels tax growth of less than 1%.
"While gasoline consumption has decreased 7% between 2004 and 2013, revenues from the motor fuels tax have held steady," Cleeves said. "Revenues from vehicle registration fees have increased 26% during the same period."
In recent years, the state legislature has transferred revenues from the State Highway Fund to other agencies to balance the budget.
The state shifted $158 million in fiscal year 2014 and $161 million in 2015. That came after draws of more than $350 million total in fiscal 2011 and 2012 to support the state general fund.
"These authorizations extended a long practice of using the SHF as a general operating reserve," Heller said. "Additional transfers are possible as the state continues to face budget pressure, though KDOT has flexibility to reduce construction project expenditures in line with reduced resources."
With the state highway fund "insufficiently insulated" from use in the general fund, the KDOT rating cannot go any higher than the state's issuer credit rating, Heller said. Moody's downgraded Kansas in April.
Standard & Poor's still has a stable outlook on its triple-A rating, citing strong debt service coverage over the next two years.
"Given the strength of the revenue sources and additional bonds test, we expect coverage to remain strong regardless of whether KDOT receives full federal funding for its current capital program and decides to increase new money bonding beyond currently anticipated levels," S&P analyst David Hitchcock wrote in a July 8 ratings report.
Proceeds from the upcoming issue are included in the $7.7 billion T-Works (Transportation Works for Kansas) program, approved by the 2010 Legislature.
"This is our largest (contract) letting year since T-Works began, and we have two major projects that will be funded by this issue," Malcom said. "The Gateway Project involving two interchanges in Kansas City is a design-build project valued at $288 million. The second one is the South Lawrence Trafficway, which will be a freeway around southern Lawrence that is expected to cost $130 million."
Under the T-Works program, the legislature authorized one design-build project, Malcom said. KDOT chose the Gateway project involving Interstates 35 and 435 and Kansas Highway 10 because engineers believed completion could be accelerated.
"It can be started right now without the entire project designed," Malcom said. "We think it will reduce construction time by several months."
Kansas Gov. Sam Brownback broke ground on the project April 22, along with officials from Lenexa, Olathe and Johnson County.
The construction firm managing the project is Gateway Interchange Constructors, a joint venture led by Kansas City, Mo.-based Clarkson Construction Co. and Kiewit Infrastructure Co. Local design firms HDR Engineering, Inc. and George Butler Associates, Inc. are also working on the project.
The South Lawrence Trafficway represents what planners consider a missing piece in the connection between Kansas 10 and the Kansas Turnpike in the Lawrence area. Both are high-speed, four-lane freeways carrying much of the region's traffic. Drivers must use Lawrence city streets to travel between K-10 and the Kansas Turnpike.
Total debt issued under the 10-year T-Works plan will amount to $1.3 billion, including already-completed financings, officials said.
As KDOT gets the latest T-Works projects underway, officials are watching developments in Congress regarding the Federal Highway Trust Fund. Without congressional action, the fund could go broke in August, officials said.
In a commentary on July 11, Randy Gerardes, vice president of municipal securities research at Wells Fargo Securities, noted that deals such as KDOT's are not threatened by the trust fund crisis.
"We caution investors not to mistake bad policy for negative credit news," Gerardes wrote. "Lost in some of the headlines is that federal spending represents only 21% of surface transportation funding, so this political drama has little effect on the creditworthiness of investment vehicles backed by nonfederal sources."
Rep. Lynn Jenkins, R-Topeka, represents most of eastern Kansas in Congress, including the areas where the T-Works projects are underway. As a member of the House Ways and Means Committee, she is considered influential on issues such as the Highway Trust Fund.
"Congresswoman Jenkins will continue to work with Ways and Means Committee Chairman Dave Camp to find a bipartisan solution that will ensure the highway trust fund gets the necessary funds to keep our transportation projects on track," Jenkins spokesman Thomas Brandt said via email. "While finding consensus on these measures is always difficult, she views the construction and maintenance of our nation's infrastructure as a key function of the federal government and is certain there will be a solution in the weeks ahead."
KDOT spokesman Steve Swartz said KDOT receives about $360 million per year in federal funds, which makes up about 25% of the agency's budget.
Despite the threat to the Highway Trust Fund, KDOT does not expect to suffer any immediate consequences, Swartz said.
"We could go three to six months without any impact if our federal funds are reduced," Swartz said. "It could be that we delay projects, but right now we're in pretty good shape."