The Pennsylvania Turnpike Commission is watching for an opportunity to refinance nearly $600 million of floating-rate debt, including variable-rate bonds now owned by banks.
The commission is hoping to use a combination of fixed-rate and floating-rate bonds tied to the Securities Industry and Financial Markets Association’s Municipal Swap Index.
The PTC has until early March to refinance the bonds or replace expired standby bond purchase agreements for the debt with letters of credit to avoid accelerated payments. It also will use proceeds from the new bonds to pay termination costs associated with interest rate swaps.
Earlier plans to deal with the bank bonds involved using LOCs, but the cost of such liquidity has become expensive. Meanwhile, yields have decreased enough over the past few months to provide for refunding opportunities, so the PTC is now looking to refinance the bonds with new debt and terminate a portion of the swaps attached to the variable-rate debt, according to Nick Grieshaber, the turnpike’s director of treasury management.
“Over a period of months, yields have come down so much that there was an opportunity also to cash fund-swap termination payments and take care of both issues at the same time,” Grieshaber said. “Unfortunately, more recently what’s happened is that rates have started to back up over the past few weeks and so we’re looking at the market now.”
Morgan Stanley is book-runner on both the fixed-rate and SIFMA turnpike senior-lien revenue bonds. Cozen & O’Conner and Denise Joy Smyler are co-bond counsel. Phoenix Capital Partners LLP and NW Financial Group, LLC are co-financial advisers.
The refinancing includes Series 2009B fixed-rate bonds for $374.9 million and Series C SIFMA bonds for $208.6 million.
“There’s a possibility of doing the Series 2009C bonds first, the SIFMA index notes, to be followed by the fixed-rate bonds, or the Series Bs,” Grieshaber said. “The timing [of the pricing] is a little uncertain at the moment. The SIFMA index notes are a newer product so the senior underwriter is working towards getting interest in that product.”
The SIFMA bonds will not have external liquidity, are not puttable and will be refunded with other bonds to be issued in the future. The interest rate is reset weekly and cannot exceed the lesser of 12% or the maximum permitted by law, according to Moody’s Investors Service.
“This is an excellent product for issuers as it is cheaper than a bank letter of credit, is committed funding and does not carry any of the put risks of a bank variable-rate demand bond,” J.R. McDermott, managing director and head of short-term underwriting at Morgan Stanley, said via e-mail. “This SIFMA indexed product along with other products, such as the extendable reset securities financing that we remarket for the Illinois Regional Transportation Authority — another non-bank backed product that is a short-term remarketed product that is money market eligible — provide excellent alternatives for issuers to access the low rates on the short end of the municipal curve without paying the relatively high costs of bank letter-of-credit charges.”
The Series B bonds will refinance outstanding variable-rate debt into fixed-rate mode, with serial maturities from 2010 through 2030, according to the preliminary official statement. The Series C SIFMA bonds will refinance variable-rate debt with new bonds maturing in 2012, 2013, and 2014.
The transactions will refinance Series 1998Q, Series 2001U, Series 2002A, and Series 2002B bonds. The 1998 and 2002 bonds are now owned by banks that provided liquidity facilities for the debt.
The fixed-rate Series B transaction will end swaps attached to the refinanced bonds while the Series C floating-rate deal will continue to use existing swaps to offer the turnpike a synthetic fixed rate. Terminating derivatives attached to the debt will cost the turnpike roughly $50 million, depending on market conditions, according to Grieshaber.
He is confident that the turnpike will be able to issue the debt before accelerated payments kick in on the bank bonds in early March.
“There’s a little flexibility here, obviously we’ve been working on this refunding concept for a few months now,” Grieshaber said. “It’s not something that has to be done immediately. We still have a little flexibility here in terms of timing and that’s where we are at this point.”
The PTC is in the middle of two investigations, one by the Pennsylvania attorney general and another by the Federal Bureau of Investigation. Local reports indicate that the AG probe relates to alleged corruption and potential pay-to-play issues at the turnpike. The POS mentions the grand jury investigation.
“The commission has received from the Pennsylvania Office of the Attorney General a grand jury document subpoena requesting a broad range of information,” according to the POS. “The commission is cooperating with the Attorney General in connection with such request for information. The commission also understands that several former employees have appeared before the grand jury. The nature of the inquiry is unknown at this point. It is not possible for the commission to predict what effect this inquiry and its eventual outcome may have.”
In addition, the FBI earlier this month visited the turnpike, at its request, to help it look into possible illegal activity related to a road-widening project.
The probes might require the turnpike to pay a bit more for borrowing, if investors see the investigations as a serious risk to the credit, according to one market source.
Tom Spalding, senior investment officer at Nuveen Investments, said such investigations “requires some additional amount of yield,” but the turnpike will continue to have adequate debt service coverage. He said its borrowing program — which has increased due to payments the PTC now makes to the Pennsylvania Department of Transportation — is an important aspect of the credit.
The turnpike has a contract with the state where it pays annual payments to PennDOT and also increases tolls on the turnpike to help finance the payments.
The commission at the end of October submitted additional applications to the Federal Highway Administration to implement tolling on Interstate 80 to provide additional revenue.
“I think the key element of this is the additional construction program that they have both on the existing toll road and any potential for I-80,” Spalding said. “And that’s more of a long-term credit concern for us than in the near term.”
Last year, the FHWA denied the turnpike’s request to begin tolling I-80. The commission will pay PennDOT $900 million in fiscal 2010. That payment will drop to $450 million in fiscal 2011, which begins June 1, if the turnpike cannot toll I-80. If the FHWA approves tolling on I-80, the state would transfer management of the roadway to the commission.
The PTC has $4.75 billion of total outstanding senior and subordinate debt. Fitch Ratings and Standard & Poor’s rate the senior transaction A-plus with a stable outlook. Moody’s rates the Series 2009B and Series 2009C bonds Aa3 with a stable outlook.
The commission’s expanded role to help support road and bridge projects outside of the turnpike system is incorporated into Fitch’s rating of the credit.
“While the rating reflects the expectation that under any reasonable scenario senior-lien debt service coverage would be robust, PTC’s mission change from a self-supporting entity to one subsidizing state-wide functions and the associated lower levels of financial flexibility are heightened risks,” according to Fitch.
“Given the significant increase in financial obligations and overall leverage, the PTC is now dependent upon regular toll increases for obligations outside of the preservation of the turnpike system.”