DALLAS — The North Texas Tollway Authority plans to test the market’s appetite for a $400 million issue of its lowest-rated debt this week.
Amid an unprecedented expansion of its role as major highway developer for the Dallas-Fort Worth Metroplex, the NTTA expects to price the toll revenue bonds Thursday in some combination of tax-exempt and taxable Build America Bonds.
The authority and its financial advisers RBC Capital Markets and TKG & Associates will decide the mix of BABs and tax-exempts as the deal comes closer to pricing, according to spokeswoman Sherita Coffelt.
JPMorgan serves as senior manager on the deal, with Bank of America Merrill Lynch, Goldman, Sachs & Co. and Siebert Brandford Shank & Co. are co-managers. McCall Parkhurst & Horton and Mahomes Bolden & Warren are bond counsel.
This week’s deal represents a new, fourth lien on revenues and will be the first in years from the authority to carry only one rating — a Baa3 from Moody’s Investors Service, the lowest rung of investment grade. Even at that, Moody’s maintains its negative outlook on the NTTA’s debt.
“The negative outlook reflects the highly leveraged nature of the system as it has issued debt to keep up with growth, and the anticipated pressures that it faces given the expansion of its service area and addition of new projects,” analysts Laura Barrientos and Maria Matesanz explained in last week’s report.
As subordinate-lien revenue bonds, “the deep subordination exposes the bonds to a variety of risks not present in the prior-lien bonds that could compromise the cash available to pay the subordinate-lien bonds,” analysts wrote.
The NTTA consulted with Standard & Poor’s on a rating but the authority did not say whether the rating would have fallen below investment grade.
“Those discussions did not include final and full information about the Series 2010 bonds for the purpose of obtaining an indicative rating,” according to the preliminary official statement. “The authority terminated its discussions with such rating agency and made the determination to proceed with obtaining a single rating.”
Under current revenue scenarios, coverage ratios for first- and second-tier bonds falls to a low of 1.26 in 2013 before climbing over the next 44 years.
Deposits available in the reserve maintenance fund that includes federal loans reach a 1.12 ratio in 2015 and 2018. To fall to a break-even threshold, revenue would have to fall 10%, according to Moody’s.
“Though we do not anticipate such an occurrence given the overall good historical revenue growth and the continued economic and population expansion in the North Texas region, the debt-service coverage ratio for all system debt is low compared to similarly Moody’s-rated issuers and reflective of the highly leveraged position of the system,” the analysts wrote.
The scenario includes plans to issue an additional $420 million of first-tier bonds in 2011 and 2012.
The $400 million from this issue will go toward an equity payment for the right to complete State Highway 161 that was begun by the Texas Department of Transportation and later awarded to the NTTA through two years of negotiations. The proceeds could also be used for equity payments on two toll projects in Fort Worth if the authority decides to take on those projects.
The subordinate-lien bonds are scheduled to mature in 20 years, with an optional mandatory redemption at 10 years.
This deal closes out the authorization for the lowest-lien bonds, according to Moody’s.
While these bonds are backed by system revenues, the NTTA is planning to finance SH 161 and the Fort Worth toll roads known as Southwest Parkway and Chisholm Trail with off-balance sheet debt that will not be secured by system revenues.
NTTA officials expect to issue about $870 million of revenue bonds for the projects that will be secured by gross revenues of the specific toll road, without recourse to the agency’s system revenues. The construction debt will be supported by a toll equity loan from TxDOT.
The department will cover operations and debt service, in the event that the road is unable to generate sufficient revenues to cover its obligations. However, SH 161, a north-south highway through a heavily traveled route on the western edge of Dallas, is expected to be one of the NTTA’s most lucrative projects.
The agency’s ratings have eroded as it has supplanted TxDOT as the major highway provider in the region under the state’s SB 792, passed in 2007. The rapid growth has also come during one of the worst economic downturns since the Great Depression.
The NTTA dropped Fitch Ratings in February 2008 when it issued a BBB-plus rating on the authority’s first-tier revenue bonds.
The NTTA’s finance plan for the $3.5 billion State Highway 121 project it was beginning at the time was based on an A-category rating, which it retained from Moody’s and Standard & Poor’s.
SH 121, now known as the Sam Rayburn Tollway, contributes revenue to the NTTA system that includes the flagship Dallas North Tollway, the President George Bush Turnpike, the President George Bush Turnpike Eastern, the Addison Airport Toll Tunnel, the Mountain Creek Lake Toll Bridge, and the Lewisville Lake Toll Bridge.
In an April 16 update from Wilbur Smith Associates, the consulting firm upheld its projections for revenue in a 2009 report that provided underlying assumptions for upcoming bond issues.
“Economic conditions appear to be improving after a noticeable stabilization in the latter part of 2009,” the April update stated. “Texas continues to experience a smaller impact from the recession and is on a faster track for recovery than many other parts of the country. Economists have referred to this as the 'last in-first out’ effect.”
To support its system revenue bonds, the NTTA has established an automatic schedule of toll increases and can adjust them as needed to maintain debt-service coverage as required by its bond covenants.
Toll hikes last September were designed to stabilize revenues and equalize toll rates at 14.5 cents per mile in 2010, and adjusts them at a 2.75% annual compounded rate that resets every two years. Tolls on the President George Bush Turnpike Eastern Extension will be adjusted at 3% annually.
Traffic and revenue studies forecast growth of 8.3% per year on average between 2010 and 2020, and about 4.8% per year between 2020 and 2030, according to Moody’s. Between 2010 and 2055, revenues on the total system are expected to increase at an average of about 5.1% per year.
Traffic on all NTTA system roads was up 10.5% from 2008 to 2009, and is up 5.1% from March 2009 to March 2010, according to the study. The 2010 traffic numbers are 2.4% above the traffic engineer’s forecast.
“The change in traffic does reflect some decrease in traffic for the Dallas North Tollway due to the economic recession and the President George Bush Turnpike due additionally to some traffic diversion onto the Sam Rayburn Tollway,” Moody’s said.
In less than three years, the NTTA’s debt has more than tripled to $7.2 billion, not counting the upcoming issues. Just two years ago, agency was insuring its bonds through MBIA Insurance Corp., whose triple-A ratings were beginning to slip.
“The municipal bond insurance segment of the municipal market has been radically transformed over the last couple of years,” noted John Hallacy, municipal market strategist at Bank of America Merrill Lynch.
“Although there are several firms that exist, the only active participant in the market of any consequence is the Assured Guaranty family of companies that are primarily represented by Assured Guaranty Corp. and Assured Guaranty Municipal.”