ATLANTA - A hunger for high-yield paper should attract buyers to an upcoming $193 million toll-backed bond deal in South Carolina, in spite of some concerns investors have about the project's chance for success.
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Lehman Brothers within the next week expects to price tax-exempt revenue debt for the Connector 2000 Association Inc., a private group that will use proceeds to build a toll road near Greenville.
This deal has several unique features, including a mix of unrated and low-rated bonds. The 16-mile road also will be the first privately built and publicly owned highway in the state.
The public corporation selling the debt was created specifically to build the road, which is meant to stimulate development in rural Greenville County rather than relieve traffic congestion.
Even before coming to market, the project received lots of attention - from press reports that criticized its developers, and from local activists who spent nearly two years trying to scuttle it.
But Connector 2000 and developers at Interwest Carolina Transportation Group seem to have overcome those obstacles, as well as a Supreme Court case in which property owners challenged the state's ability to authorize the road without voter approval.
ICTG will build the road, which South Carolina state government will own and maintain. Connector 2000 will operate it and collect the tolls after the road opens in November 2001. Also, the state Department of Transportation will build a $17.5 million connector road that will feed traffic into the tollway.
Due to road supporters' perseverance, high-yield buyers will have the rare opportunity to invest in $50 million of unrated, subordinate lien debt. All bonds, including the subordinate series, are available only to institutional investors that can afford an initial $100,000 chunk.
Lehman and co-manager Mesirow Financial Inc. have targeted high-yield mutual funds that can extensively research a first-time issuer and its project before deciding to buy.
Some investors and analysts expressed concern this week about whether the road would attract enough traffic to meet debt service coverage.
Recent start-up toll roads have had trouble meeting their projected traffic estimates, analysts cautioned. "It's fair to say the transportation industry has recently seen feasibility studies that were significantly off of their assessment," said Julie McKinney, a senior transportation analyst at John Nuveen & Co.
But analysts and fund managers agreed that bonds still would find a home, because of the current market demand for any deals that offer substantial yield.
"Because of the lack of high yield, you get more people looking at this than otherwise. But at the end, they still have to do the credit analysis," said James T. Taylor, senior vice president at Lehman Brothers.
To allay debt coverage fears, underwriters structured the issue so there was as much senior lien, investment-grade paper as possible, Taylor said.
Annual coverage ratios range from 1.74 times to 2.43 times on the $59 million of rated, senior current interest bonds and $84 million of senior capital appreciation bonds. Debt service payments are structured to rise in later years to match projected increases in toll revenues.
On the other hand, those increased tolls may not materialize unless the road accomplishes its goal of creating economic development, said Bradley Mincke, senior fixed income analyst at Van Kampen American Capital.
He noted the association estimates drivers at first will save only five minutes to seven minutes by taking the toll road as an alternative to existing routes. A one-way toll will cost 75 cents initially, or $1.50 if a commuter has to pass through toll booths at both ends of the road.
"Right now, to pay $1.50 to ride the length of the toll road to save seven minutes doesn't seem worthwhile," Mincke said.
But development around the road could eventually come at a rate that piles more congestion onto alternate roads, making toll road more appealing as a time saver, he said.
Standard & Poor's last week rated $143 million of Series 1998 A and B bonds BBB-minus. Underwriters structured this piece specifically with higher coverage in mind to attract buyers who lack enough research resources to analyze the unrated portion.
Taylor said he welcomes the extra attention from the buy side, and hopes potential investors scrutinize the Connector deal closely because there will be many similar ones will come from across the country. He mentioned Virginia and Arizona as looking into public-private toll road partnerships.
Underwriters and investors say these types of deals will come to market more frequently in coming years, as states look to leverage shrinking transportation dollars to get needed projects done.
In this case, proponents have been trying to get the Connector built since 1968. The state Department of Transportation finally selected a private partnership to build the road in February 1996.
