Demand looks solid as West Virginia’s massive road plan is approved

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BRADENTON, Fla. – West Virginia expects to move quickly to issue the largest amount of bonds in its history, and analysts believe the market will be receptive to the plan.

Voters statewide overwhelmingly approved $1.6 billion of general obligation bonds as part of Gov. Jim Justice’s “Roads to Prosperity Program.”

Justice said he will call a special session of the Legislature for next week to pass legislation to speed up implementation of his $3 billion transportation capital plan and related financing, which includes the GOs that were approved on 73% of the 120,510 ballots cast in Saturday's referendum.
“I am grateful to the people of West Virginia for sharing my vision to jump-start our economic engine,” Justice said in a statement. “While this will start the process of fixing our state road system, the most important mission I have is to help find and create jobs for the working men and women of our state.”

The GOs are part of the state’s largest-ever transportation financing plan, which could place up to $2.5 billion of new debt on its balance sheet. The GOs will be issued over several years, backed by various sales tax and fee hikes.

The finance plan also includes $440 million of grant anticipation revenue vehicle bonds and up to $500 million of toll revenue bonds.

West Virginia has encountered fiscal difficulties in recent years due to its lagging economy and dependency on coal mining. Its GO rating has been downgraded one notch by all three rating agencies in the last year, though it remains in the double-A category.

Alan Schankel, a managing director at Janney Capital Markets in Philadelphia, said the impact of the state’s upcoming issuances on market supply may be limited because of its multiyear issuance strategy, but investors should be interested.

“I see reception as being strong,” Schankel said Tuesday. “Although the state has taken a revenue hit related to falling energy prices and semi-dependence on coal, state finances are generally approached from a conservative view, with a rainy day fund bringing reserves to 10% of revenue.”

Only 11% of West Virginia’s 1.2 million registered voters turned out for the single-topic referendum, according to the West Virginia Secretary of State’s office.

The GO bond issue passed in all but one of 55 counties, and the governor vowed to determine why a majority of voters in Ritchie County struck it down.

State Transportation Secretary Tom Smith said officials will move quickly to bring bonds to market.

“At the end of the month we’ll have the biggest Garvee bond sale” in state history, he said Monday. “That’s about $260 million worth of bonds already going out the door.”

After the Garvees are issued the state will turn its attention to bringing the GO bonds to market, he said.

Justice, who took office in January, pushed the transportation financing package to create jobs and boost the economy. The Mountain State has struggled with slow revenue growth, forcing steep state budget cuts, and high unemployment underscored by diminished demand for coal products as cheaper forms of energy such as natural gas became available.

The state’s multiyear budget imbalance led to GO bond rating downgrades in the last year by Fitch Ratings to AA from AA-plus, by Moody's Investors Service to Aa2 from Aa1, and by S&P Global Ratings to AA-minus from AA.

About $322.8 million of state GO bonds are outstanding.

NewOak Fundamental Credit Managing Director Triet Nguyen said the new debt load West Virginia has chosen to take on may not damage its credit.

“To the extent that infrastructure spending is meant to bolster future economic development, the market and the rating agencies may give the state the benefit of the doubt for the time being,” Nguyen said, adding that the “relative scarcity of West Virginia debt may help keep any potential spread penalty to a minimum.”

NewOak currently ranks West Virginia 33rd out of the 50 states in its MuniScore credit risk monitoring system, he said.

“Ironically, since West Virginia ranks low on socio-economic factors and well below average on fiscal factors, the only bright spot in the state’s overall score has been its relatively light debt and pension burden,” Nguyen said. “Obviously, that will change significantly once the newly approved debt is issued.”

On Tuesday, Moody’s assigned an A2 rating to the upcoming Garvee debt to be issued as surface transportation improvement special obligation notes due in 2029.

S&P assigned its AA rating to the notes, which will be issued by the West Virginia Commissioner of Highways. S&P also confirmed its AA rating on $53.4 million of Garvee bonds sold in 2016.

Both agencies assign stable outlooks.

Garvee proceeds will finance 18 bridge replacement and 13 interstate pavement rehabilitation projects. The debt will be secured by a first lien on Federal Highway Administration payments for debt service under Title 23 of the United States Code.

Analysts said their ratings reflected the strong pro forma coverage of maximum annual debt service from the pledge of eligible federal highway aid received by the West Virginia Department of Transportation. MADS coverage was 12.6 times based on 2017 federal receipts.

Moody’s said its rating also reflects the recent stable pledged revenue trend and a strong additional bonds test of 3 times.

“These strengths are balanced by the federal reauthorization risk of the pledged revenue stream,” said Moody’s analyst Pisei Chea. “This risk is mitigated by the state's willingness to use other funds in the event of federal revenue disruption.”

A debt cap approved by the West Virginia Legislature limits additional Garvee issuances, and restricts the total amount of bonds outstanding to no more than $500 million, up from the previous $200 million cap. State officials have said the current available bond capacity totals $440 million.

The West Virginia Commissioner of Highways eventually plans to leverage the full amount of the cap and under that scenario pro forma MADS coverage would be 6.9 times based on 2017 receipts, which S&P said it would consider “very strong.”

S&P’s AA rating reflects its view of the “strong” MADS coverage and the state's history of effectively managing the federal reimbursement process, according to analyst Kevin Archer.

“The stable outlook reflects our expectation that the longstanding federal aid highway program will continue to receive what we consider significant funding and that West Virginia will continue to receive its historical share of annual Title 23 distributions,” he said.

West Virginia’s “Road to Prosperity Program” also includes the possible issuance of up to $500 million of toll revenue bonds by the West Virginia Parkways Authority. A traffic and revenue study is underway to determine the exact amount of bonding capacity. The parkways authority manages state’s 88-mile turnpike. A new law passed this year allows the authority to spend bond proceeds on the turnpike and on road projects in counties adjacent to the turnpike.

The governor said he would call a special session for Oct. 16 to deal with issues related to the transportation finance plan and hiring.

“We’re going to bond here like crazy,” Justice said.

While he said Monday that all details for the upcoming special session weren’t refined, issues that he will ask lawmakers to tackle include shortening the six-to-nine month process it currently takes to hire state employees, ensuring that West Virginians are considered for employment first, and hiring veterans.

The state DOT needs a “whole range of folks” to work on road projects, according to Smith. The DOT has been “chronically understaffed for years,” he said, adding that even though some road work has already started as many as 500 new employees will be needed as bonds are issued.

Justice also said that he would appoint a task force to ensure that contractors hired by the state are paying taxes and as many state residents as possible get jobs.

“We have eliminated auditors because we didn’t have money to pay” as West Virginia lawmakers cut the budget in recent years, Justice said, pledging to hire more examiners to catch potential tax dodgers.

The state’s financial advisor is Public Resources Advisory Group.

More details about the state’s bond issuance schedule are expected in the weeks ahead.

Based on the schedule approved in the constitutional amendment passed by voters, state officials can issue the 25-year GOs in four series: up to $800 million within a year; $400 million in 2018; $200 million in 2019; and $200 million in 2020.

Schankel said that despite the state’s fiscal problems he still expects strong demand for West Virginia’s bonds.

“I imagine there is plenty of room in most diversified portfolios to add West Virginia exposure,” he said.

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General obligation bonds Revenue bonds Bond elections Transportation industry Infrastructure Primary bond market State of West Virginia West Virginia