DALLAS — The Oklahoma Turnpike Authority will reduce its exposure to the vagaries of variable-rate debt and cut its debt service costs with next week’s negotiated sale of $521.7 million of revenue refunding bonds.

Proceeds from the offering will current refund $321 million of the $348 million of outstanding fixed-rate revenue bonds issued in 2002. The remaining $27 million balance from the 2002 issues matures Jan. 1, 2012.

The authority will also use the proceeds to defease and refund $212.3 million from $538 million of variable-rate debt issued by OTA in 2006. The two refunded series will be converted to fixed rates.

The debt is rated AA-minus by Fitch Ratings and Standard & Poor’s, and Aa3 by Moody’s Investors Service. The authority currently has $1.02 billion of outstanding debt.

The turnpike debt is supported by toll revenues on the 10-segment, 605-mile system. OTA can use its share of state motor-fuel tax revenue for debt service, but has not done so since 1992.

The sale schedule includes a two-day retail order period on Oct. 3 and 4, with institutional pricing Oct. 5.

RBC Capital Markets leads the underwriting team on the OTA issue. Other underwriters include BOSC Inc., Bank of America Merrill Lynch, Morgan Stanley, Fidelity Capital Markets and Edward Jones. Hawkins Delafield & Wood LLP is bond counsel for the authority. First Southwest Co. is financial advisor.

Wendy Smith, director of finance and revenue for OTA, said the refunding should result in net present-value savings of around $19 million. “That’s 3.6% of the refunded principal, and it could be even more if the market cooperates,” she said. “We had a target of 3%.”

The three-day sales period will accommodate the expected strong interest from smaller buyers, according to Jon Moellenberg, managing director with RBC.

“There’s a sizeable retail market in Oklahoma, and across the country, for Oklahoma Turnpike Authority debt,” he said. “It’s a solid retail investment, especially within the state with the exemption from state as well as federal income taxes. We are giving a priority to retail customers with this issue, and that’s why we have two days set aside for retail sales.”

Moellenberg said OTA bonds will do well in the market because the authority is a strong credit with double-A ratings from all three agencies, and that’s what buyers are looking for.

“They have 60 years of successful operation, and a strong management team that has been in place for years,” he said. “The Oklahoma Turnpike Authority pays for everything with revenue from its ratepayers, and doesn’t rely on the state or federal governments for funding. That’s an attractive credit in today’s market.”

Turnpike Authority director Gary Ridley, who also serves as director of the Oklahoma Department of Transportation, said the refunding will reduce the authority’s exposure to variable-rate demand debt to 30% of total debt from the current 55%.

Termination payments for the two 2006 tranches is expected to total $51 million. The swaps currently have a negative mark-to-market of $127.5 million, including accrued interest.

“We’ve had a business plan for the last two years to reduce our variable-rate exposure,” Ridley said. He added that the decision in 2006 to issue the five tranches of variable-rate demand bonds, each in the amount of $106.2 million, seemed to be the best option at the time.

“With the synthetic fixed rate, we were getting an effective rate that was better than what the fixed rate issues were getting at the time,” he said. “It was a risk worth taking. It was a good plan, at least until the market meltdown in 2008.”

The authority pays a fixed rate of 3.589% to three providers on the five tranches. In return, OTA received a variable rated based at first on the SIFMA index but which converted to 68% of the one-month London Interbank Offered Rate on Jan. 1, 2009. The 2006 bonds will mature in 2028. The maturation date will not be extended by the refunding.

Next week’s sale will terminate the swaps on two series held by Goldman, Sachs & Co. Goldman will continue to hold one series.

Swap agreements will remain in place on Series 2006E, held by JPMorgan Chase Bank NA, and 2006F, held by UBS AG. The authority has no plans at this point to defease the remaining three variable-rate tranches, but will if the numbers are right, according to Tim Stewart, deputy director and operating officer.

“We continue to monitor the bond market,” he said. “We will look at all our options.”

Despite the chaotic market in 2008, Smith said, none of OTA’s variable-rate bonds failed at auction then or since, and there is no fiscal pressure to terminate the remaining three swap agreements

“We have been getting very positive feedback from our liquidity providers,” she said. “With these two gone, we feel good about the rest.”

OTA’s revenue bonds are supported by tolls on the 10-segment, 605-mile system that connects to non-tolled Interstate highway system in the state. Toll revenues are expected to total $229 million in 2011 and grow to $271.6 million by 2020.

Officials intend to issue $150 million of fixed-rate revenue bonds in spring 2012 to finance the widening of 15 miles of turnpike in Tulsa and Oklahoma City. Ridley said the capacity-expansion projects have been contemplated for years.

“Those segments are handling far in excess of their capacities,” he said. “They were designed for expansion, and we think we’ll be ahead of the curve with these added lanes.”

The Oklahoma Turnpike System is the second-longest in the nation, behind only New York. Ridley said no major extensions are anticipated.

“Our focus is on maintaining the infrastructure we have, and improving whatever we need to do to improve our traffic level,” he said.

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