NTTA refunding deal will help mitigate toll revenue losses

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After a steep revenue drop, the North Texas Tollway Authority plans to lower its debt service costs with a $758.3 million refunding deal Thursday.

Since restructuring its debt in 2014, NTTA has reported more than $1 billion in interest savings through refunding in a low-interest-rate environment.

“We are seeking to achieve long-term interest savings and short-term principal relief as we navigate the effects of the pandemic and reduced traffic,” chief financial officer Horatio Porter said of the upcoming deal. “Overall, we expect approximately $125 million in savings.”

Despite a 25% drop in revenues, NTTA has maintained debt-service coverage ratios above the levels required by bond covenants. The authority has also reduced spending and delayed some projects.

“Like other entities, the pandemic and resulting stay-at-home orders have adversely impacted our traffic and revenue results,” Porter said. “With the steps taken in the past, specifically the prior refinancings, as well as the actions implemented by the board in April/May to conserve cash, we believe we are positioned to weather this economic and health crisis while also preparing to continue improving mobility in the region.”

S&P Global Ratings has a negative outlook on NTTA’s A-plus first-tier bond rating and A second-tier rating.

The ratings agency is expecting “a material and sustained decline in toll revenues and traffic declines due to the COVID-19 outbreak and associated impacts for the remainder of 2020 in comparison to 2019, which could result in a downward rating action if we believe the NTTA's traffic levels and financial capacity will decline further or stagnate at lower levels longer than expected,” S&P analysts Kevin Archer and Todd Spence wrote.

“The negative outlook reflects our opinion that the NTTA's financial metrics could be pressured as a result of severely or materially depressed or unpredictable vehicle traffic demand for 2020 and beyond that are beyond management's control.”

Moody’s Investors Service has a stable outlook on its A1 rating of first-tier debt and A2 on the second tier. Moody’s analyst Earl Heffintrayer noted that the refunding will help NTTA finesse a possible cash crunch next year as toll roads across the U.S. brace for another tough year.

“The rapid and widening spread of the coronavirus outbreak is creating a severe and extensive credit shock across many sectors, regions and markets,” Heffintrayer wrote. “The combined credit effects of these developments are unprecedented. The toll road sector has been significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand.”

The new bonds are coming in three series as first and second-tier debt.

The $186.5 million Series A will be tax-exempt first-tier bonds.

Series B will be $518 million of taxable first-tier debt.

Series C will be $53.8 million of tax-exempt second-tier bonds.

Jefferies is book-runner on Series A and C. BofA Securities is senior manager on the Series B.

Richard Ramirez, managing director at Hilltop Securities, is NTTA’s financial advisor.

Bond proceeds will refund all or a portion of the authority's first-tier revenue bonds, series 2011B, 2012A, 2012B, 2012D, 2014A, and 2019A, along with its second-tier revenue bonds, series 2010A.

“We view debt restructuring to realize short-term, up-front savings resulting in higher long-term debt service requirements as a credit risk in benign economic and operating environments,” S&P said. “However, given our expectations regarding traffic and revenue recovery in the toll sector and NTTA's historically strong growth rates, we believe the restructuring is a prudent low-risk response by management to partially mitigate the near-term financial impacts of the COVID-19 pandemic on the system and can be accommodated at the current rating level.”

After this deal, NTTA will have about $9.76 billion in principal and accreted interest outstanding.

Adjusted debt to operating revenue has decreased to 9.8x based on fiscal 2019 results and will fall below 8x by fiscal 2023 if revenue returns to its normal trend.

“The authority maintains the ability to fund its five-year growth needs without additional debt and minimal reduction in liquidity,” Heffintrayer said. “However, the authority has reduced its capital spending plan substantially by delaying several construction and IT related projects, creating a sizable cash infusion to bolster liquidity in the event that it must be relied upon as a mitigant to the ramifications of the pandemic.”

Before the pandemic hit in March, NTTA was enjoying strong revenue growth as an economic boom continued across the Dallas-Fort Worth region.

Traffic fell about 57% in April versus the same month in 2019, and improved modestly to an estimated 41% down for the month of May year over year and have remained at about 25% down in June through August compared to the same three months in 2019, according to NTTA reports.

The baseline forecast included in a consultant's traffic and revenue report for the upcoming bond issuance assumes an annual transaction growth of 4.8% for toll transactions during 2020-2030, with a recovery to 2019 traffic and revenue levels by 2023 and 2022, respectively.

“We consider NTTA's forecast reasonable, which assumes over the forecast period no changes in NTTA's existing toll rate policy and does not include any assumptions regarding the availability of an effective COVID-19 vaccine, with toll revenues reaching $972 million by 2023, $1.14 billion by 2026, and $1.4 billion by 2029,” S&P wrote.

“The independent report also analyzed the effect of impacts such as remote working on traffic trends associated with COVID-19,” analysts added. “While it is acknowledged that this may grow in the future and possibly reduce road travel demand, its effect will be constrained by the number of occupations for which this practice works effectively.”

NTTA’s member counties represented on the board of directors are Dallas, Denton, Collin and Tarrant. The authority also serves Ellis and Johnson counties.

NTTA owns and operates the Dallas North Tollway, President George Bush Turnpike, Sam Rayburn Tollway, Addison Airport Toll Tunnel, Lewisville Lake Toll Bridge, Mountain Creek Lake Bridge, Chisholm Trail Parkway, and 360 Tollway.

NTTA toll projects are not a part of the state highway system and receive no direct tax funding. Tolls are collected to repay debt and to operate and maintain the roadways.

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Toll revenue bonds North Texas Tollway Authority Coronavirus