BRADENTON, Fla. — The Kentucky Turnpike Authority expects to price $186.85 million of new road revenue bonds Thursday.
Bond proceeds will be used to finance various highway projects in the Transportation Cabinet's six-year highway plan.
The deal is expected to include serial maturities from 2015 to 2033, according to according to Ryan Barrow, executive director of Kentucky's Office of Financial Management. No term bonds are envisioned.
"Certain maturities will be bifurcated and even trifurcated in an effort to attract retail participation," he said. "The deal is structured conservatively with level debt service to continue the authority's practice of managing capital planning and debt service requirements over the long-term."
The bonds are appropriation-backed lease obligations between the Turnpike Authority and the Kentucky Transportation Cabinet, and debt service will be paid primarily from transportation-related fees and taxes.
Goldman, Sachs & Co. is heading up a 10-member syndicate, which will complete pricing Thursday with institutional sales after a retail order period on Wednesday.
The bonds are rated A-plus by Fitch Ratings, Aa2 by Moody's Investors Service, and AA-plus by Standard & Poor's. All three agencies said the outlook is stable. Fitch also affirmed its A-plus rating on approximately $6.4 billion in outstanding appropriation-backed debt issued by various state agencies.
The double-A ratings from Moody's and S&P are "good, solid ratings" that investors will consider, said a trader.
"I think that trying to get retail interested is a good idea, and there should be some good interest from retail through 10 years," the trader said.
"Institutions have been backing away from appropriation bonds, but having said that if you price the bonds cheap enough I think you will get interest in the deal," the trader said. Structuring the deal with two or three coupons per maturity may attract institutional orders as well.
In a week where there are few transportation-related revenue bond sales, the trader said the Kentucky deal should see "decent" response from the market.
"It is all about price — good credits and ratings — and a steady market environment," said the trader, who also noted that there has been some stability this week but the situation is "precarious" due to bond outflows, sequestration and budget impasses in Congress, and headline risk from Puerto Rico, Detroit, and Syria.
Barrow said the state is closely monitoring the market, which continues to demonstrate volatility.
"We still expect this transaction to receive strong investor reception given the strength of the credit, the size of the transaction, and the [fact that the] Turnpike Authority has not issued since February 2012 and is not anticipated to be back in the marketplace until fiscal year 2015," he said.
Rating agency analysts noted that the road fund revenues, primary sources for debt service on the bonds, are constitutionally dedicated for transportation projects. Biennial appropriation by the Legislature is required for bond payments as well as the renewal of leases.
"In the event that the lease is not renewed, the Transportation Cabinet is still obligated to pay debt service from motor fuel taxes, which represent about 40% of gross revenues, further reducing appropriation risk," according to Moody's analyst Lisa Heller.
S&P noted that the bonds have strong coverage of debt service from road fund revenues as well as a strong additional bond test of two times. Net revenues covered annual debt service by 5.1 times in fiscal 2012 and unaudited results show coverage was 4.1 times in fiscal 2013.
Maximum annual debt service was 3.5 times in 2012, and unaudited results show coverage was 3.6 times in fiscal 2013.
For fiscal 2014, Kentucky's consensus forecasting group projects total road fund revenues will increase 5.1% year-over-year to $1.57 billion, said S&P analyst John Sugden.
"We believe the turnpike's capital needs are limited," he said. "The commonwealth will have approximately $200 million of authorized but unissued road fund projects after this issuance."
In her rating review for the Turnpike Authority bonds, Heller noted that the road fund is poised to take on contingent liabilities to support the Ohio River Bridges Project, which the Transportation Cabinet oversees.
"While debt issued for this project will be supported primarily by toll revenues, the Transportation Cabinet has pledged additional support for the project, including a backstop of certain operating and maintenance reserve funds for Kentucky's share of the operations, maintenance, and repair of the Downtown Crossing from the road fund," said Heller.
The Cabinet will also fund additional costs of the project that exceed the expected fixed price for the construction budget in the event that the current construction contractor must be replaced.
"It is expected that any such costs would first be paid through capitalized interest or a surety bond," Heller said. "However, if necessary, the Cabinet may also provide support through the issuance of additional Garvee bonds or through appropriation of other additional funding sources, including federal highway funds and amounts in the road fund."
Kentucky sold $207 million of Garvees, or grant anticipation revenue vehicle notes, for the Ohio River Bridge Project in July. The first tranche of $100 million of Garvees was issued in 2010.
Heller said additional funding for project that is paid from the road fund will be treated as a subordinated loan to be repaid with interest.
The state's next bond issuance is expected to be sold by the Kentucky Public Transportation Infrastructure Authority to finance most of the remaining costs of the $1.3 billion Ohio River Bridges Project.
The issuance is expected to sell in October or November, and will include $313 million of toll revenue bonds and a $461 million bond anticipation note that will be taken out in 2017 with proceeds from a federal loan obtained through the Transportation Infrastructure Finance and Innovation Act.
Kentucky is renovating the existing Interstate 65 "Kennedy" Bridge though downtown Louisville, adding a new, adjacent Interstate 65 bridge, and reconstructing the interchange where several Interstates converge in downtown Louisville.
Along with Goldman selling the Turnpike Authority bonds this week are Citi, Edward D. Jones & Co. LP, Fifth Third Securities, First Kentucky Securities Corp., J.J.B. Hilliard, W.L. Lyons LLC, Morgan Stanley, PNC Capital Markets LLC, Raymond James & Associates Inc., and Sterne, Agee & Leach Inc.
Peck, Shaffer & Williams LLP is bond counsel. Stites & Harbison PLLC is counsel to the underwriters.