Moody’s Investors Service dropped the Orlando-Orange County Expressway Authority one notch to A2 on Tuesday, citing a lighter traffic outlook, reduced revenue support from the state, and deep exposure to variable-rate debt and swaps.
The credit was also assigned a negative outlook owing to its heavy debt load and increased operating costs.
Lighter traffic should mean less revenue and reduce the authority’s debt-service coverage ratio, Moody’s said. That debt ratio finished fiscal 2010 at 1.66 and the authority forecasts it will slide to 1.48 this year. The authority has tried to combat lighter traffic with higher tolls. It has already hiked rates by 25 cents, or roughly 30%, and the board has approved another increase — linked to the consumer price index, or 3%, depending on which is greater — beginning in 2012 and updated every five years.
Political opposition to the approved hike is another reason for the downgrade.
Orange County Mayor Teresa Jacobs reacted to the downgrade Tuesday by criticizing the authority for using “risky financing schemes” reminiscent of exotic products that “brought down Wall Street and created the biggest government bailout in the history of this country.”
Jacobs, who sits on the expressway’s board, said the planned toll increases are due to “bad debt” rather than a need to raise money for the Wekiva Parkway, a 25-mile, limited-access toll road near Walt Disney World.
But the new rating is on par with Fitch Ratings and Standard & Poor’s, so it was hardly stunning, according to Nita Crowder, the authority’s chief financial officer.
Crowder added the problems with variable-rate debt and swaps aren’t new information and can’t be blamed for the downgrade.
What is new: The Florida Department of Transportation refused to pay its monthly bill under a lease-purchase agreement for facilities built with toll-backed debt. FDOT owed $464,097 for July, but said it lacked the authority to pay any invoices for lease-purchase agreements because Gov. Rick Scott removed the funding from the 2012 budget, using line-item veto powers.
“There are things that have changed since Moody’s last rated us in May,” Crowder said. “The traffic and revenue numbers are off projection — we lowered them in June — the governor vetoed the operation reimbursement that had been in place the last 40 years, and there’s been political opposition to the toll policy.”
The Expressway Authority, which has $2.7 billion of rated debt outstanding, plans to remarket $408 million of variable-rate notes, in four series, in late November. It is waiting for a rating on the notes from Standard & Poor’s; upon receiving that it will call the existing notes in, which requires a 30-day notice.
The notes are currently supported by a standby purchase agreement issued by troubled Belgian-French bank Dexia Group.
Spreads have jumped on those notes in recent weeks, but not significantly so, Crowder said.
The remarketing will take Dexia out of the equation and substitute it with letters of credit — an irrevocable liquidity support — from three banks.
JPMorgan is expected to provide LOCs on two tranches: the $158.3 million series and an $83.3 million series. Two other $83.3 million series are to be supported by TD Bank and Bank of America, according to Crowder.
In addition the LOCs, the notes continue to carry bond insurance from Assured Guaranty. The wrap enhances their rating to Aa3 and AA-plus from Moody’s and Standard & Poor’s.
Upon completion of that deal, the authority will still have $92 million of exposure to Dexia. Crowder said the authority intends to replace that support with Barclays Capital, about eight weeks after the $408 million substitution takes place.