Lockyer: Orange County, Calif. Tollway Could Default Without Refinancing

LOS ANGELES — California State Treasurer Bill Lockyer on Wednesday released a report on the Foothill/Eastern Transportation Corridor Agency that found the toll agency could eventually default on its bond payment obligations without a proposed $2.21 billion restructuring of the agency’s debt.

The general tone of the report comes as no surprise to F/ETCA officials, who said in mid-June that the only thing holding up plans to restructure the debt was getting the California Department of Transportation to sign an agreement extending a contract between the state agency and F/ETCA.

“We are really pleased with the report,” said Lisa Telles, an F/ETCA spokeswoman. “It says we need to do the refinancing that we have planned.”

F/ETCA had hoped to refinance $2.4 billion in debt on July 8, but its plans were slowed by the failure of Caltrans to sign documents that would extend the agreement of the toll agency’s management of its 36 miles of highway, and extending its authority to toll them, by 13 years to 2053. The toll agency needs an extension of the agreement in order to refund the bonds, because it wants to extend the maturity dates on them from 2040 to 2053. 

Much of the required additional revenue, under the restructuring plan, would come from extending by 13 years the time drivers are charged tolls, according to Lockyer’s report. Currently set to expire at the end of 2039, the tolls would be extended from 2040-2053, according to the report.

The California Debt and Investment Advisory Commission chaired by Lockyer contracted with Montague DeRose and Associates, a financial advisory firm, to conduct a financial evaluation that would determine whether the proposed refinancing is in the public’s interest.

The CDIAC review came about after Lockyer was asked to review the toll agency’s debt by former state assemblywoman Marilyn Brewer, who sent a letter to the treasurer’s office in August 2012 expressing concerns about the agency’s debt load.

Caltrans spokesman David Richardson told The Bond Buyer in late June that the transportation agency “is working cooperatively with the F/ETCA in the process of performing its due diligence responsibility.”

The transportation agency would not provide a time frame as to when it might make a decision.

Absent the debt restructuring, the treasurer’s report said, “the agency is not likely to meet its bond covenants going forward and without significant revenue increases, toll revenues would soon fall below the level needed to meet debt service obligations.” 

Failing to meet “debt service obligations” could include anything from not having the required amount of revenues over and above the amount needed to make bond payments to actually defaulting on payments, according to the report.

Nevertheless, measures can be taken that would reduce the duration of tolling and would ensure that savings from the refinancing are used prudently, according to the report.

The report advised that the planned refinancing could be structured in such a way that the extension of the agreement with Caltrans could be shortened by seven years.

F/ETCA should set aside a portion of the cash flow savings produced by the debt restructuring to pay off the bonds early, the report states, which would allow F/ETCA to shorten the tolling extension. 

If 100 percent of the cash flow savings, estimated at $104 million through 2039, was used to retire bonds early, the tolling extension could be avoided entirely, the report said.  If 50 percent of the savings was devoted to early repayment of bonds, F/ETCA could end the extended tolling period in 2046. That would extend the agreement by a shortened six years, rather than the tolling agency’s proposed 13-year extension to 2053.

The tollway’s board of directors has consistently looked for ways of restructuring the debt that would lessen the amount of time it would take to pay it off, Telles said.

A draft tolling extension agreement between F/ETCA and Caltrans calls for F/ETCA to make annual payments to Caltrans that rise from $14.1 million in 2041 to $18.9 million in 2053. 

The report from the treasurer’s office recommends the agreement include a provision that prohibits F/ETCA from spending any additional money on the controversial Foothill South extension until Caltrans reviews and approves a financial and feasibility plan for the project. That would help ensure F/ETCA retains sufficient revenues to make the annual payments to Caltrans, the report said.

Caltrans has yet to respond to the tollway agency as to when it might sign the agreement.

Telles said they are continuing to negotiate with Caltrans, but since the report came out over the holiday, they did not expect to hear back from Caltrans regarding the recommendations in the treasurer’s report this week.

The treasurer’s report said that the need for the restructuring resulted because expected revenues anticipated in a 1990 report failed to materialize at the expected level. The bonds were issued in 1990. The tollways agency has spent the past several years working to restructure debt. This year’s planned refinancing was the final piece in those efforts.

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