CHICAGO — Michigan is coming to market Wednesday with $266.5 million of refunding state trunk line highway bonds.
The bonds are secured by a first lien on tax revenues that are deposited in the state trunk line fund. The deal will refund bonds originally issued in 2004, 2005 and 2006, and the state expects to see a present value savings of about $21.5 million, or 7.69%.
Pledged revenues are motor fuel taxes - which have been falling slightly since 2009 - and motor vehicle registration taxes. The funds are constitutionally restricted to be used only for transportation purposes and deposited in the trunk line fund. The funds are first dedicated to debt service payments, with leftover money used for operations and maintenance of the state's highway system.
The bonds will mature from 2015 through 2021.
Standard & Poor's rates the bonds AA-plus. Moody's Investors Service rates the bonds Aa2.
S&P said its rating reflects the large and diverse economic base that generates the pledged transportation taxes. Both ratings firms praised strong maximum annual debt coverage.
Debt coverage on all the fund's outstanding bonds totals 4.5 times in 2014, roughly the same over the last five years, according to preliminary bond documents.
"The rating is based on expected strong coverage of maximum annual debt service from constitutionally dedicated highway revenues, a statutory limit on issuance of additional debt backed by the revenues, and relative stability of the revenues despite a recent history of declines," Moody's said in its report.
Moody's notes that the history of declining or flat motor fuel tax in recent years is a possible challenge for the department. S&P warns that there are risks associated with the "inherent potential volatility of the motor-vehicle-related tax revenue securing this issue," and that the state has the ability to change the statutory distribution of pledged revenues deposited into the trunk line account.
"The stable outlook reflects our anticipation that the fund will maintain strong debt service coverage and that possible changes in state fuel taxes, including a potential movement to tax fuel on a wholesale basis, would not result in material diminishment of revenue deposited to the pledged state trunk line fund. Limited debt plans also add stability to the rating," S&P analysts said in the report.
Citi is the senior manager and Morgan Stanley the co-senior. Bank of America Merrill Lynch, Loop Capital Markets and JPMorgan are co-seniors. Dickinson Wright PLLC and Miller, Canfield, Paddock and Stone PLC are co-bond counsel. Public Financial Management Inc. is financial advisor.
