LOS ANGELES — Washington will bring its second ever Garvee bond deal to market next week to finance the replacement of a floating highway bridge to help ease traffic in the Seattle region.
The state is expected to sell $295 million of federal highway grant anticipation revenue bonds on Wednesday. A retail order period is not currently planned, but it will depend in market conditions, according to Ellen Evans, the state's deputy treasurer.
Bank of America Merrill Lynch is the lead underwriter on the deal. Foster Pepper PLLC is bond counsel and Montague DeRose and Associates and Piper Jaffray & Co. are financial advisors.
Proceeds from the sale will finance a portion of the Washington State Department of Transportation's multi-billion dollar State Route 520 floating bridge and landings project, which is under construction.
The project includes constructing a new bridge and other structural improvements along the SR 520 Corridor between Seattle and Redmond.
The new bridge, expected to open to the public in late 2015 or early 2016, will replace the Evergreen Point floating bridge over Lake Washington, the longest floating bridge in the world at 1.42 miles long. Its replacement will be widened to six lanes from four, including space for pedestrians and capacity for light rail.
"It's really putting together the great state of Washington with the U.S. Department of Transportation," Evans said of the financing. "It is an important source of funding for our SR 520 project and we look forward to a good response from the market."
Last year, the state sold $500 million in its first Garvee bond deal, which also went toward financing the SR 520 Bridge and related projects.
That deal priced with yields ranging from 0.7% with a 3% coupon in 2015 to 2.75% with a 5% coupon in 2024.
Wednesday's deal with also be structured with serial bonds maturing from 2015 through 2024, but it will have one slightly lower credit rating.
Moody's Investors Service in November downgraded Washington's Garvee bond rating to Aa3 from Aa2 and assigned a negative outlook based on the uncertainty surrounding future federal reauthorizations and funding levels.
The ratings agency simultaneously downgraded 26 other Garvee bond ratings for the same reason.
Moody's affirmed the rating and outlook on the new Garvee bonds, but noted the solid debt service coverage. Analysts said that even in the event of severely reduced federal highway funding, debt service on the Garvees would still likely be covered while funding for new projects would be significantly curtailed.
"Washington has regularly submitted construction projects for funding reimbursement," analysts said. "The state is a donor in terms of its allocations, receiving less in total federal gas tax revenues than the amounts it contributes."
Standard & Poor's affirmed its AA rating on the bonds, with a stable outlook, citing good future debt service coverage based on historical grant receipts, and a sound bond structure.
The bonds are secured by a first lien on the state's federal highway aid reimbursements credited to Washington's DOT. Federal highway funds are derived from the 18 cents per gallon federal gas tax and other allocations.
Like Moody's, Standard & Poor's also cited concerns about a possible decline in federal funds or delays to reauthorization.
"Program rule changes, constrained funding sources, and federal budget pressures could lead to lower authorization and appropriation levels and diminish coverage, which we currently view as very strong for most Garvee issues we rate," credit analyst Mary Ellen Wriedt wrote in a report. "Weaker or varying levels of appropriations could reduce the overall level of support and predictability associated with the grant programs, which, in turn, could affect our ratings."
However, Standard & Poor's expects continued strong coverage levels and does not expect the AA rating to change during its two-year outlook period.
Congress has yet to pass a full new six-year transportation funding bill after the most recent six-year bill - the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, or SAFETEA-LU -expired in 2009.
Since then, Congress has extended the program 12 times. Moving Ahead for Progress in the 21st Century, or MAP-21, was signed into law July 7, 2012 and authorizes federal transportation funding through Sept. 30, 2014.
Although MAP-21 provides funding certainty for the next year, it does not address longer-term issues regarding the sustainability of the federal program or solvency of the Highway Trust Fund, says Michael Pietronico, chief executive officer at Miller Tabak Asset Management.
"In the event of a decline in federal resources following the expiration of MAP-21, state capital improvement programs overall could be materially affected as a larger portion of funding needs would fall to the responsibility of the states, and would require increased state gas taxes or mean deferral of large capital projects," he said.
His firm assigns Washington's Garvee bonds an internal rating of A1, below the double-A ratings from Moody's and Standard & Poor's.
Pietronico said the credit quality of the bonds reflects, in addition to reauthorization uncertainty, WSDOT's pledge to first obligate and use federal transportation funds for debt service payments on the bonds, the solid trend of federal highway aid received annually by WSDOT, which is projected to provide sound debt service coverage, and an additional bonds test of 3.5 times maximum annual debt service.
When Washington issued its first Garvee bonds, Evans said the state had incorporated several strategies to strengthen the bond security, including a more restrictive additional bonds test and a 12-year limit to the amortization of the bonds to reduce reauthorization risk.
"This second issuance of Garvees has the same credit structure as the first issuance of Garvees, and we think that it's very strong," Evans said. "We're very pleased with the payment process, the reimbursement process, and with the interaction with the U.S. Department of Transportation in terms of processing the direct Garvee reimbursement."
In its report, Standard & Poor's said the state's track record of maximizing federal grants and effectively managing the grant reimbursement is a credit strength.
The entire SR 520 Corridor Program has been budgeted to cost the state $4.65 billion, according to bond documents. The State Legislature has so far authorized $2.7 billion in funding, which will come from a variety of sources.
Around $1.8 billion is estimated to come from bond proceeds, $547 million from motor vehicle fuel taxes, and $74 million from toll revenue. Other funding will come from sales tax deferral, federal funds, and local contributions.
SR 520 tolling for the project began in December 2011. Drivers on the old bridge are charged tolls through transponders attached to their car. If drivers do not have the electronic pass, a camera will record their license plate and they will be mailed a bill. Tolls for drivers with the electronic pass range from $1.70 to $3.70. For others, tolls range from $3.25 to $5.25.
Evans said the state legislature has not authorized Garvee issuance for any other transportation projects in the state and they don't expect issuing additional Garvees for the SR 520 project.
The state is planning additional financing for a portion of the project, which will likely come in the form of toll-backed bonds. Evans said those will likely be issued in 2015.
