New Texas issuer to sell $1.8 billion of bonds for toll road P3 termination

Bloomberg News

A Texas issuer makes its debut in the municipal bond market this week with a $1.8 billion revenue bond deal that will provide long-term financing for last year's termination of a public-private partnership that built managed toll lanes in the Houston area.

The non-profit Texas Transportation Finance Corporation, which was created by the Texas Transportation Commission in 2024, is scheduled to sell the State Highway 288 System subordinate tier toll revenue and refunding bonds Tuesday in what will be the week's biggest debt offering. 

The finance corporation was specifically authorized by the commission to take over the P3 project and was assigned the rights to revenue from its four toll lanes on a 10.3 mile stretch of SH 288 in Harris County.

The commission took action in March 2024 to end a 52-year comprehensive development agreement reached in 2016 with BlueRidge Transportation Group, LCC to build and operate the project, which was partially financed with private-activity bonds. 

Interim financing to terminate the P3 came from $1.7 billion of Series 2024 subordinate tier notes the corporation privately placed last year with the Texas Department of Transportation. The notes will be refunded and prepaid with proceeds from the bonds.

After the P3 was officially terminated last October,  TxDOT announced in July that toll rates for the managed lanes will be reduced by nearly 50% this fall with the exception of some short peak-usage times.  The agency also said a portion of toll revenue it collects on SH 288 will be used to pay for the construction of two non-tolled general-purpose lanes.

Gov. Greg Abbott said cutting toll rates was part of his "top priority" to reduce taxes for Texans. 

"By lowering toll rates and adding free lanes along SH 288, we will achieve that goal while also easing roadway congestion," he said in a statement. 

Total net revenue generated by the system is estimated to climb from $108.7 million in fiscal 2026 to $485.4 million in 2056, according to the deal's preliminary official statement.

The bonds, which are supported by the corporation's toll equity loan agreement (TELA) with TxDOT for up to $4.433 billion that can be tapped from the State Highway Fund if toll revenue is insufficient to pay for debt service or major maintenance expenses, were rated Aa1 by Moody's Ratings and AA-plus by S&P Global Ratings, both with stable outlooks. 

Moody's said its rating reflects "strong debt service coverage provided by Texas's State Highway Fund, the high essentiality of transportation infrastructure in the state, and the very tight governance and management linkages between the issuers of the TELA-supported bonds and the state."

Moody's also affirmed the Aa1 ratings on $2.8 billion of TELA-supported bonds issued through the Grand Parkway Transportation Corporation.

S&P said its rating is a notch lower than Texas' triple-A general obligation rating "based on our view of potential for non-appropriation associated given constitutional and statutory provisions that require the state to appropriate amounts to the (State Highway Fund) for TxDOT and certain other agencies of the state.

"In our opinion, there is no unusual political, timing, or administrative risk related to debt service payments on the bonds supported by the TELA," the rating agency added.

The P3's termination last October was hailed as "an extraordinary outcome for Texans" by TxDOT Executive Director Marc Williams.

"Not only will this bring future toll relief and additional free general purpose lanes for drivers, but the state is acquiring a $4 billion asset for $1.7 billion," he said in a statement. "This type of buyout is unprecedented in the United States and is a very big win for SH 288 drivers and our taxpayers."

Texas transportation officials have said the P3s' termination was allowed under provisions in the 2016 agreement and occurred for convenience not cause, adding that the $1.7 billion cost to end the agreement was substantially below the value of future toll revenue even with a toll rate reduction. 

The termination triggered an extraordinary mandatory redemption in October 2024 of $272.63 million of tax-exempt senior lien revenue bonds sold for the project in 2016 by the Texas Private Activity Surface Transportation Corporation. The redemption price was 100% plus any accrued interest.

Texas' termination was the only negative news for highway P3s in 2024, according to a May report by the Reason Foundation. Robert Poole, its transportation policy director, said P3 toll projects are booming in the U.S.

"It's ironic that two of the states that pioneered toll-financed highway P3s—California and Texas—have turned against them, both for ideological reasons: California for anti-car/anti-highway policies and Texas for anti-toll, anti-P3 reasons," he said in an email. 

In fiscal 2024, the Lone Star State had four other toll projects operating under comprehensive development agreements with private entities that carry end dates in 2061 or 2062, according to a February TxDOT report. No P3s have been terminated or added since last year, according to a TxDOT spokesperson.

P3s got a boost in Texas under Gov. Rick Perry, who held office between 2000 and 2015, but fell out of favor with Abbott, whose first term began Jan. 20, 2015, and who strongly supported TxDOT's P3 termination.

Texas voters approved constitutional amendments in 2014 and 2015 that specifically excluded toll roads from new sources of funding for public roadways.

The tax-exempt portion of the deal scheduled to price on Tuesday consists of $1.68 billion of current interest rate bonds structured with serial maturities from 2034 through 2045 and term bonds due in 2050 and 2054, according to the POS. There are also $40 million of capital appreciation bonds maturing in 2054 and 2055.

The deal's $79.38 million of taxable current interest bonds carry maturities from 2027 through 2034 and are not subject to an early redemption.

BofA Securities leads the underwriting team consisting of co-senior manager Morgan Stanley and co-managers RBC Capital Markets Academy Securities, BOK Financial Securities, Cabrera Capital Markets, D.A. Davidson & Co, Janney Montgomery Scott, JP Morgan, Piper Sandler & Co, Raymond James, SAMCO Capital, Siebert Williams Shank, Stifel, Texas Capital Securities, and Truist Securities. 

McCall, Parkhurst & Horton is bond counsel, Bracewell is disclosure counsel, and Estrada Hinojosa is the financial advisor.