Louisiana prices the largest Garvee bond deal of this year
Louisiana issued its first – and the market’s largest - Garvee bond deal this year.
The $185 million of standalone grant anticipation revenue vehicle bonds priced Thursday with Wells Fargo Securities as the book-runner and JPMorgan as co-manager. Closing is expected April 23.
More than two dozen states have used Garvees as an additional tool to finance transportation projects. Louisiana has been authorized to issue the debt since 2002, but surplus revenues and federal stimulus dollars have since dried up leading state officials to propose using Garvees last year to fund several targeted projects, some of which have been on the books for nearly 30 years.
The fixed rate, tax exempt bonds were structured with level debt service. All maturities sold with a 5% coupon, and priced to yield 1.58% in 2020, to 1.97% in 2026, and to 2.4% in 2031.
As the first tranche of a $650 million program, proceeds of the inaugural issuance will be used by the Department of Transportation and Development to fund all or portions of four projects: two interchange projects on Interstate 110; an interchange at I-220 and I-20; and a bridge and tunnel project in Plaquemines Parish.
State Bond Director Lela Folse told the State Bond Commission March 28 that the $185 million in principal debt sold will generate about $214 million in proceeds to be used for all four projects.
“DOTD estimates that this will provide about two to two-and-a-half years of cash flow for those projects, and we’ll return in about two years for the second series of bonds,” she said.
The debt is secured solely by federal transportation funds paid or reimbursed by revenues from the U.S. Department of Transportation.
S&P Global Ratings gave a AA rating to the bonds, and pointed out that there is no backup of other state funds or a debt service reserve fund associated with the deal.
S&P said its ratings on Garvee bonds range from A-minus to AA when only federal funding is pledged. Ratings go as high as AAA when there is federal funding and an additional pledge of state funding.
Louisiana’s AA rating is due to favorable bonds provisions, Shad said. Those provisions include an additional bonds test requiring historical federal aid receipts to be at least 3 times maximum annual debt service on all existing and proposed bonds, and Louisiana's enabling Garvee legislation which states that debt service cannot exceed 10% of annual obligation authority in any year.
So far this year, only two Garvee bond deals have been sold for a combined total of $63.5 million, according to data from Infinitiv.
During the last seven years, annual issuance has hovered around $1 billion to $2 billion, though when issuance skyrocketed to $5.14 billion in 2016.
That spurt may have been related to Congress’ passage of the most recent highway transportation legislation called Fixing America's Surface Transportation (FAST) Act, which took effect Dec. 4, 2015, and authorized federal funding through fiscal 2020.
“We believe the FAST Act generally supports the sector's credit quality given a longer period of funding certainty and increased funding,” S&P analyst Scott Shad said in rating a report on Louisiana’s deal. “The multiyear legislation will provide approximately $230 billion for highways, $60 billion for public transportation, $10 billion for passenger rail, and $5 billion for highway safety programs.”
The funding is an approximately 11% increase over five years, he said, adding that the FAST Act provided a 5.1% increase in highway fund distributions to states in fiscal 2016, and growth rates of 2.1% to 2.4% in later years.
“Previously, funding growth rates were lower and S&P Global Ratings had cited federal budget deficits as a concern affecting highway funding,” Shad said.
Lamont Financial Services is the state’s financial advisor.
Foley & Judell LLP and Jones Walker LLP are co-bond counsel on the Garvee bond deal. Underwriter’s counsel is Butler Snow LLP.