WASHINGTON - After more than three months of watching the municipal bond market seize up and then continue to stumble, the Maryland Transportation Authority is on the calendar to come back to market with $425 million of grant anticipation revenue vehicle bonds in a negotiated deal led by Merrill Lynch & Co. Wednesday and Thursday.
The deal marks the second and final tranche of Garvees raising money to finance the ongoing construction of the state's Intercounty Connector, a $2.4 billion, 18.8-mile toll road project.
The bonds originally were to sell competitively in early September, but after the U.S. Department of Transportation warned that the highway trust fund would be depleted, MdTA officials postponed the deal. The Garvees are backed in part by money from the trust fund and officials feared then that the trust fund's woes likely would create an unfriendly market for the bonds.
Congress and the Bush administration transferred $8 billion to the beleaguered trust fund days later.
But then the collapse of Lehman Brothers Holdings Inc. and the frozen credit markets that followed kept the deal on the shelf until now.
Merrill Lynch is senior manager on the issue, which is scheduled for a retail order period on Wednesday and institutional pricing Thursday. Co-managers are Citi, Banc of America Securities LLC, Loop Capital Markets LLC, Goldman, Sachs & Co., and M&T Securities Inc. McKennon Shelton & Henn LLP is bond counsel. Underwriters' counsel is McGuireWoods LLP.
Public Financial Management Inc. and Davenport & Co. are financial advisers on the deal.
Standard & Poor's gave the issue a AAA with a stable outlook in September. Fitch Ratings rated it AA and Moody's Investors Service assigned a Aa2.
Garvees typically are issued by state governments to finance the construction of transportation projects and are repaid with future federal transportation grants.
MdTA first sold Garvees in May 2007 when it issued $325 million in a negotiated transaction that financed the initial construction costs of the ICC. Earlier in September, the authority had planned to sell the bonds competitively because officials considered it to be a strong enough credit to do so. But with current market conditions, they decided to return to the negotiated route. The 2008 bonds are expected to mature from 2011 to 2021.
The issue's credit strengths also include an additional security pledge. The Garvees are secured first by a senior lien on pledged federal highway funds, but are ultimately secured and rated based on an irrevocable pledge of state tax revenues from Maryland's transportation trust fund. The trust fund's revenues include a portion of the state's corporate income tax, the fuel tax, the motor vehicle titling tax, and the sales and use taxes on rental vehicles.
Standard & Poor's AAA rating ahead of the sale was based, in part, on that irrevocable pledge of revenues from the state's trust fund in addition to the federal highway trust funds. If the federal funds do not come through, the state would be obligated to repay the debt from its fund.
"In addition to the standard federal aid pledge that you have in all Garvees, the Maryland issue has additional security, so that's a strength," MdTA finance director Alison Williams said in September.
Questions persist about the stability of the federal highway trust fund because the current law authorizing federal highway spending - dubbed the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users - expires Sept. 30, 2009.
MdTA's preliminary official statement notes that the funding the highway trust fund is in the hands of lawmakers.
Fitch in early October projected that outlays from the trust fund will become restrained beginning in 2010 when the trust fund again reaches a zero balance. Cash to state departments of transportation will subsequently drop by more than 20%, Fitch said in a report.
But some market participants said the MdTA bonds are more secure because of the state pledge.
Standard & Poor's cited agency's "strong and diverse statewide taxes that ultimately support the bonds" in its decision to rate the bonds AAA.
"A diverse and broad-based economy that has outperformed the national economy in the past five years and should continue to grow in the near term, albeit at a reduced rate," also affects the rating, Standard & Poor's analyst Richard Marino said in the September report.
The report called the MdTA's Garvee program well structured, with high debt service coverage levels from obligated federal funds, and a short bond amortization of 10 years and a funded debt service reserve fund.
The ICC project will provide an east-west traffic link between Interstate 270 in Montgomery County and Interstate 95 in Prince George's County. The MdTA will own, operate, and maintain the project, and will have responsibility for setting the tolls.
Williams said the project is on track and that it is still expected to be completed by 2012. MdTA officials said that because they had other funding sources, no construction was delayed by the delay in selling the Garvees.
The project is also being financed by $264 million from Maryland, $180 million from the Maryland Department of Transportation, and $1.2 billion of expected MdTA-issued toll revenue bonds.
Williams had said the authority will likely begin issuing those bonds around June 30, the end of the state's fiscal year.
The MdTA was established in 1971 to construct, manage, operate, and improve the state's seven toll facilities, as well as to finance new revenue-producing projects. The net revenues generated by the transportation facilities repay all of MdTA's debt.
The facilities consist of a system of toll roads serving established high-volume travel markets, including I- 95 between Baltimore and the Maryland-Delaware state line; three bridges that cross the Chesapeake Bay near Annapolis, the Potomac River connecting Southern Maryland with Virginia, and the Baltimore harbor; and tunnels on I-95 and Interstate 895, which both cross Baltimore harbor. The ICC is the eighth project under the authority's control.
The MdTA last sold $573 million of Series 2008 transportation facilities project revenue bonds to Merrill Lynch at a true interest cost of 4.929% on March 12. A portion of those proceeds also went to the ICC project.
