The North Carolina Turnpike Authority will price $275 million of debt Thursday, including $250 million of Build America Bonds, for the Monroe Connector System in a transaction that illustrates how some issuers are jockeying for pricing position ahead of the BAB program’s scheduled expiration.
No retail pricing period was proposed for the transaction.
The state appropriation revenue bonds are part of a larger financing package for the Monroe highway, a 19.7-mile toll road that is scheduled to open in 2015 and link the Charlotte beltway with southeastern suburbs in Union County.
The highway project is estimated to cost between $750 million and $825 million. The NCTA expects to issue a second round of debt — about $500 million of toll revenue-supported bonds, possibly including BABs — for the project in December.
Though BABs could still be extended after the mid-term elections, political uncertainty in Congress has put the program in jeopardy, even though its survival, at a reduced subsidy rate, was all but assured just a few months ago.
The Build America Bond program is set to expire at the end of the year.
NCTA officials decided this summer to split up bond financing for the Monroe highway into two transactions to avoid the rush to market on BABs.
Pricing for the state appropriation bonds, which have already been approved by the General Assembly, was moved up to October from December.
“When we squeeze through the door in December, there will be less crowding” following this deal, according to NCTA chief financial officer Grady Rankin.
It is a tactical shift from the authority’s pricing last July when state appropriation and toll revenue bonds were sold simultaneously for the 18.8 million Triangle Expressway, the state’s first new toll road in a century. In that transaction, the NCTA sold $622.8 million of bonds, $352.7 million of which were BABs.
The bonds are being priced by a 10-member underwriting syndicate. Bank of America Merrill Lynch is the lead underwriter. Citi, JPMorgan, Wells Fargo Securities, BB&T Capital Markets, RBC Capital Markets, Southwest Securities Inc., Loop Capital Markets LLC, Siebert Brandford Shank & Co., and Piper Jaffray & Co. are co-managers.
Hunton & Williams LLP is bond counsel and Bode, Call & Stroupe LLP is underwriter’s counsel.
Public Financial Management Inc. is the financial adviser.
The bonds being priced Thursday are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s. Their maturities are to be at pricing.
The bonds are secured by two sources of funds: the state’s highway trust fund and the 35% federal interest subsidy on the BABs.
Issuers have been hesitant to secure BABs with subsidy payments in case a check from the Internal Revenue Service arrives late or is offset because of an outstanding debt to the federal government. However, less than 1% of BAB subsidy payments have been offset from the beginning of the program in early 2009 through August of this year, according to the IRS.
The NCTA has set up a reserve fund that will equal the annual amount of federal subsidy payments to limit the risk of a check arriving late.
The trustee bank can call on the reserve fund if the federal payment is not received two days before a scheduled debt-service payment, according to the rating agencies.
With the reserve fund, Standard & Poor’s said the subsidy payment is “as reliable as any other revenue stream not subject to annual appropriations” from the federal government.
The bonds also are secured by a $24 million appropriation from North Carolina’s highway trust fund, which is outside the state’s general fund. The fund’s primary sources of revenue have been hit hard by the recession, but do not pose a significant credit threat, analysts said.
In fiscal 2009, the trust fund’s revenues fell 14.9% to $912 million amid lower car and gasoline sales, the two-largest tax sources for the fund. Estimates for fiscal 2010 revenues are flat.
Highway revenues are “economically sensitive” and their decline is comparable to the dips seen in other states, said Kimberly Lyons, the lead analyst for Moody’s on the NCTA.
Financing for the Monroe Connector also will include $77 million from the North Carolina Department of Transportation and could include a loan of up to $38 million from the agency, according to bond documents.
Because only the Monroe Highway and Triangle Expressway are drawing money from the highway fund, there is less concern about its declining revenues, according to Moody’s.
If necessary, the state can scale back future projects to control spending, Lyons said.
Standard & Poor’s estimated the highway trust fund’s debt-service coverage, including its current and future obligations, will be 7.5 times for fiscal 2010 and 5.1 times for fiscal 2011.
The Monroe Connector and the Triangle Expressway are the first of four projects in the works for the NCTA.
At least two other toll road projects have been identified by the state General Assembly and have been appropriated funds.
One is a seven-mile bridge in Currituck County connecting the mainland to the Outer Banks. This project, initially estimated to cost $659 million, could be developed as a public-private partnership in lieu of bond financing, Rankin said. The other is the Gaston Parkway, a $910.7 million, 21.9-mile toll road through Gaston County that will be financed beginning next year.
The legislation that created funding for the projects will automatically appropriate money for them each year.
This differs from state debt appropriated from the general fund, which must be approved by the legislature in each year’s budget.