CHICAGO - The Missouri Highways and Transportation Commission hits the market next week with a $900 million refunding, feeding a muni primary market that has withered due to lower refunding numbers.
The commission plans to refund $582 million of first lien state road bonds and $312 million of second lien state road bonds. It will take retail orders on Monday and price the revenue bonds for institutional investors Tuesday.
"Our primary motive is the significant savings on interest we expect," said the commission's chief financial officer, Roberta Broeker. "We are also doing a little restructuring by accelerating some debt service in the first lien to give us additional future borrowing capacity."
About 9% of present value savings is expected on the first lien tranche and 6 % on the second lien.
Bank of America Merrill Lynch is senior manager with Jefferies and Wells Fargo Securities serving as co-senior managers. Another nine firms round out the syndicate as co-managers.
Public Financial Management Inc. is advising the commission. Gilmore & Bell PC and Martinez Madrigal & Machicao LLC are bond counsel.
The first lien refunding bonds carry a final maturity in 2026 and the second lien 2025. They are secured by pledged state road funds that come primarily from state motor fuel taxes and sales taxes on motor vehicles and motor license fees.
Ahead of the sale, all three rating agencies affirmed triple-A ratings for the first lien bonds and Standard & Poor's affirmed the AAA rating it also applies to the second lien bonds. Fitch Ratings affirmed its AA-plus rating on the second lien bonds and Moody's Investors Service affirmed its Aa1 rating.
The commission is waiting to see if the state legislature sends a sales tax hike to ease its funding crunch to voters this fall.
Broeker said the commission has no new money borrowing plans as it's tapped much of its capacity based on its conservative debt management policies. That could change, as state lawmakers debate the sales tax hike.
The Missouri Senate recently approved a measure to send a three-fourth cent sales tax hike to voters in November. The proposal is smaller than a one-cent sales tax question approved by the House.
The Senate version is now pending in the House which must approve it before the Legislature adjourns Friday.
The Senate version asks voters to approve a constitutional amendment to levy a three-fourths cent sales tax for 10 years. It is projected to raise $534 million. It could be extended after the 10 years if voters approve again.
Under the legislation, the revenue would go to fund roads, bridges and could also be directed to fund railroads, ports, airport and other transportation related projects.
"We have no plans to use the additional borrowing capacity from the refunding now, but it could be useful" if the commission gets new revenue, Broeker said.
The commission could use the capacity for a much-needed rebuilding of Interstate 70 that's long been considered.
Legislative opposition last year was too great to place a similar measure on the ballot, but the proposal has gained traction amid warnings from transportation officials over the state's dire funding needs.
Funding challenges in recent years have driven a shift in the commission's strategy to one that's focused on maintenance instead of expansion and enhancements.
"We have to look at the future and make sure we don't have trouble matching federal funds," Broeker said. The commission also wants to maintain strong ratings, which come from strong coverage ratios.
The commission earlier this year adopted a 20-year construction program to meet a federal planning mandate but warned it can't really afford the plan amid dwindling funding. The commission, which oversees the Missouri Department of Transportation, warned that its construction budget will soon fall below the $485 million needed to keep state roads and bridges in at least their current condition.
The agency said from 2005 through 2010 its annual construction budget totaled $1.3 billion. That's dropped this year to $685 million and by 2017 it is expected to further fall to about $325 million - the lowest since 1992. To address its funding challenges, the commission has trimmed costs and cut staffing by 19%.
The agency blames a myriad of reasons for its lack of funding including dwindling gas tax revenue, as vehicles become more fuel efficient and people drive less. At the same time, construction costs are rising. The state's gas tax has long been held steady at 17 cents per gallon and there is little political will to raise it or to use tolls to fund construction.
After a long absence from the market, the commission returned to the ranks of frequent borrowers in 2000 to finance a five-year capital program for which the General Assembly approved $2 billion of new debt to support. Voters in 2004 then bolstered the commission's borrowing capacity by ending the diversion of some road-related taxes to the general fund.
The commission exhausted much of that bonding capacity to fund a $2.2 billion, five-year capital program in 2009. The commission has leveraged its federal grants but has tapped out that capacity under its high internal-coverage limits.
Standard & Poor's said the bonds' high-grade ratings are due to the broad-based and diverse nature of the pledged revenues, state support of the transportation capital program and the commission's tight oversight process for approving new projects.
The credit also benefits from "very strong bond provisions; and continued very strong collections and coverage of debt service consistent with ratings," Standard & Poor's said.
The senior lien is closed and the first, second and third lien are subordinate and coverage must meet a certain threshold before additional bonds are issued.
The commission has a total of $2.8 billion of outstanding debt including all of its state road bonds under various liens and its bonds that leverage federal grants. Debt service tops out at $300 million between 2017 and 2020, according to a roadshow presentation attached to the deal's offering statement.
Lawmakers in 2013 changed a use tax on out of state vehicle purchases to a sales tax and that cut about $14.8 million in annual MoDot revenues.
Moody's said the credits' strengths include a strong additional bonds tests for all liens, constitutional pledge of various highway-related tax and fee revenues, broad public support for the commission's program of highway improvements, and additional state-source security for federal reimbursement bonds.
Challenges include the possibility for a drop in pledged revenues due to growth in MoDOT benefit costs and the ability to change up to 5% of total pledged revenue to "unspecified revenues" to comply with the additional bonds test.
On federal reimbursement bonds, reauthorization risk is "inherent in the federal program, combined with uncertainty regarding the future strength of the Federal Highway Trust Fund," Moody's said.
A separate piece of pending state legislation also could have a negative impact on the commission's revenue streams. It would eliminate a sales tax on older cars resulting in a $27 million annual hit to the commission resources, according to the roadshow.
