CHICAGO -- Ohio is offering $1.1 billion of bonds backed by a new junior-lien credit pledge from the Ohio Turnpike in one of the largest deals of the coming week.
The state has worked on the borrowing for two years. It’s key to Gov. John Kasich’s plan to plug a shortfall in road funding and generate an additional $1.5 billion of federal funding.
Kasich had originally considered privatizing the turnpike to raise cash for the state, but later proposed that the turnpike commission craft a new credit pledge that would allow it to tap deeper into the asset. The new debt is subordinate to $540 million of existing turnpike debt.
The junior lien trust agreement allows the commission to issue bonds against future toll revenue projections. Currently it is restricted to issuing debt with coverage levels tied to historic revenues.
Earlier this year, the Legislature passed a measure that allows the commission to use bond proceeds for infrastructure projects that share a loosely defined nexus with the turnpike. Proceeds on senior-lien bonds are restricted to projects on the 241-mile turnpike itself.
The sale is tentatively set for Tuesday. Officials from the newly named Ohio Turnpike and Infrastructure Commission and the Ohio Department of Transportation touted the deal to investors in a three-city road show last week.
Ahead of the deal, the commission approved a series of toll rate increases that will raise rates by 2.7% every year for the next 10 years. The commission also okayed a pair of new policies aimed at boosting investor confidence, one that pledges debt service coverage levels of at least two times on the senior-lien debt and another that pledges to maintain 365 days cash-on-hand.
Officials during the road show touted the scheduled toll rates hikes and a plan to fund a $3 billion, 35-year capital improvement plan entirely with cash, said the commission’s chief financial officer Marty Seekely.
“We got a very good response” from investors, Seekely said. “The turnpike is well run and not highly leveraged, and our ability to fund our cap ex with cash is rare in the toll road industry,” he said. “It shows we have great flexibility to handle any shortfalls or unexpected events.”
The sale features $1.107 billion of turnpike revenue bonds. Of that, $74 million are senior-lien bonds, issued on par with the commission’s existing $540 million of senior-lien debt. The new senior lien debt has a tentative maturity date of 2048 or 2050.
The rest of the deal is made up of $1.03 billion of junior-lien bonds, divided into three series: $675 million of current-interest bonds, $179.5 million of capital appreciation bonds, and $180 million of convertible capital appreciation bonds.
The current-interest bonds tentatively mature from 2019 through 2038. The CABs mature from 2040 to 2048, and the convertible CABs mature from 2034 to 2039.
The back-loaded schedule allows the commission to match debt service payments with increasing revenue from rising toll rates, Seekely said.
“As revenues go up we’ll have more capacity for debt service,” he said.
Interest payments on the bulk of the debt will be delayed for several years to allow the revenues to ramp up, he said.
The turnpike’s annual net revenue available for debt service is expected to total around $175 million next year, rising to $242 million in 2023, according to preliminary bond documents. Debt service this year totals $68.6 million and is projected to rise to $121 million by 2023.
This week’s deal will be the commission’s only issuance for the next five years. It expects to return to market in 2018 with another $500 million of new-money bonds, including $50 million of senior-lien debt and $450 million of junior-lien bonds.
Citi is the book-running senior manager on the deal. JPMorgan and Morgan Stanley are co-seniors. Co-managers are: Bank of America Merrill Lynch; Fidelity Capital Markets; Huntington Investment Co.; Jefferies & Co.; KeyBanc Capital Markets Inc.; Loop Capital Markets Inc.; PNC Capital Markets LLC; RBC Capital Markets; Rice Financial Products LLC; Stifel, Nicolaus & Company Inc.; and Wells Fargo Securities LLC.
Squire, Sanders is bond counsel and Public Financial Management Inc. is financial advisor.
Moody’s Investors Service has assigned an initial A1 rating to the junior-lien bonds and Aa3 rating to the senior lien bonds. Standard & Poor’s and Fitch Ratings assigned A-plus ratings to the junior-lien debt. S&P rates the senior-lien bonds AA-minus and Fitch rates it AA.
