SAN FRANCISCO - Facing rising interest costs triggered by downgrades to Ambac Assurance Corp., the Orange County Transportation Authority is moving forward with plans to refinance toll revenue bonds it issued in 2003 to acquire toll lanes on the State Route 91 freeway from private owners.
The original bond issue included $95.3 million of fixed-rate bonds and $100 million of variable-rate demand bonds, all insured by Ambac.
The VRDBs suffered a "significant loss of trading value" after Fitch Ratings downgraded Ambac to AA from AAA in January, according to a staff report prepared for the OCTA board. Subsequently, Ambac was downgraded by both Standard & Poor's and Moody's Investors Service, to AA and Aa3 respectively.
The authority's VRDBs have been resetting at about 3.5% since March in weekly mode and prior to that had been at about the Securities Industry Financial Markets Association rate, according to OCTA treasurer Kirk Avila. He added that the bonds have not reset since last week's downgrade of Ambac.
The OCTA board voted Monday to move forward with plans to refund the bonds, by selecting investment bankers and authorizing a request for proposals to seek liquidity and credit support providers.
"The RFP will be on the street in the next couple of weeks, so we anticipate by the end of July that we'll go back to the [finance] committee to discuss some of our alternatives," Avila said.
Though driven by the poor market for Ambac-backed variable-rate debt, the agency may be forced to refinance its fixed-rate bonds as well to remove the Ambac insurance in order to get credit support for new variable-rate bonds, the staff report said.
"We'd prefer not to," Avila said. "That's why we wanted to get the RFP on the street."
The staff report said that letter of credit banks are currently "in the position to dictate aggressive terms and prices. Although there have been exceptions, letter of credit banks have generally said that they would prefer not to provide credit to VRDBs that also have outstanding Ambac-insured parity fixed-rate bonds."
At current market values, the present-value cost to refund the $79.285 million of fixed-rate bonds is $500,000, the report said.
Lehman Brothers was selected to serve as senior manager for a team that includes five other investment banks. Sperry Capital is the authority's financial adviser.
In addition to Ambac's troubles, OCTA's hand is being forced toward restructuring by the pending expiration in November of its standby bond purchase agreements on the VRDBs with JPMorgan and Dexia Credit Local.
Under current market conditions, refunding the variable-rate debt with fixed-rate bonds is not viable, according to Avila.
"There's a high cost related to that, because we have a swap in place," he said. "It would cost too much money at this time." Such a refinancing would trigger $11 million in swap termination payments, the staff report found.
The authority has initiated discussions with federal officials over the possibility of obtaining a loan under the federal Transportation Infrastructure Finance and Innovation Act, or TIFIA, to refinance the fixed-rate bonds, according to the staff report, though it is not yet clear if such a financing would be eligible.
OCTA could benefit from a bill that is working its way through the California Legislature. That measure, designed to allow neighboring Riverside County to add its own toll lanes on its segment of the Route 91 freeway, would also extend OCTA's authority to collect tolls on its 91 Express Lanes to 2065 from 2030.
The toll agency is focused on the ongoing refinancing of its 91 express lanes bonds, butit doesn't plan to do anything that would diminish its ability to take advantage of that bill if it passes, Avila said.
"We're just focusing on this right now, but we do have our eye on that ball," he said.
