By James Nash, September 10, 2013
California’s largest toll-road agency, whose revenue has trailed projections for six years, is nearing the biggest default in the $3.7 trillion municipal market since Detroit’s record bankruptcy.
Bonds for three highways linking inland suburbs to coastal business parks are rated one step above junk and traded last month at their lowest price this year. The agency asked late in in 2012 to extend maturities and tolls by 13 years, a proposal the state Transportation Department has yet to accept. With benchmark municipal yields setting a two-year high this month, the window to complete the refinancing may be closing.
“The projections that were originally put into place when they issued debt didn’t come to fruition,” said Howard Cure, director of muni research for Evercore Wealth Management LLC in New York. “Built into this kind of project is the expectation that they can improve the amount of traffic and the collection of tolls. When you fall behind early on, it just makes the problem that much worse.”
Evercore’s $4.7 billion in assets don’t include Orange County toll-road bonds.
Consultant WarningThe consultant to Lockyer’s debt panel warned that Foothill-Eastern would risk defaulting unless it reduces repayments by extending maturities.
Default “could have a negative effect on the outlook of investors on the creditworthiness of California in general,” the consultant, Westlake Village, California-based Montague DeRose & Associates LLC, said in the report.
Lisa Telles, a Transportation Corridor Agencies spokeswoman, dismissed the possibility of a default, noting that Foothill-Eastern has reserves to cover expenses and that the economic picture is brightening. Tom Dresslar, a spokesman for Lockyer, said the agency “eventually” could become unable to meet its obligations without a refinancing.
Defaults DownAs of Sept. 4, 34 municipal issuers had filed notices of default this year, down from 54 in the same period last year, according to data from Municipal Market Advisors. The par value reached a record high, largely on defaults in Detroit and Jefferson County, Alabama, said Matt Fabian, managing director at the Concord, Massachusetts-based company.
Most municipal defaults have been among issuers that rely on restricted revenue sources such as tolls and taxes on rising property values, rather than general obligations, Fabian said.
Of issues rated by Moody’s Investors Service, 70 percent of defaults since 1970 have been in health care and housing projects, according to a May research note.
The cumulative rate of defaults within a 10-year period for rated municipal issuers was 0.12 percent from 1970 to 2012, according to Moody’s. The comparable rate for corporate debt was 11.8 percent, Moody’s said.
Tax-exempt Foothill-Eastern bonds maturing in January 2040 traded at an average of 95.03 cents on the dollar Aug. 22, the lowest this year, data compiled by Bloomberg show. The bonds traded yesterday at an average of 97.45 cents, to yield 5.94 percent, or about 1.34 percentage points above benchmark debt.
Missed WindowThe agency missed the opportunity to refinance at near-record-low interest rates. Bets that a growing economy will lead the Federal Reserve to reduce its bond buying have pushed yields on benchmark 10-year local bonds to the highest since 2011, data compiled by Bloomberg show. In December, the interest rate was the lowest since at least January 2009.
In October, the agency’s financial adviser, Robert Rich of Philadelphia-based PFM Group’s Public Financial Management unit, urged the agency to act, stressing that closing the deal quickly was “critical,” according to a letter obtained through a public records request.
Rich declined to comment on the deal. Fabian said last year’s “excellent window” for municipal issuers has closed, meaning a refinancing would have less favorable terms.
“Refinancings have been taken off the table,” Fabian said by telephone. “This transaction, when refinanced, will have the legacy of the roads’ troubles.”
Negotiation DriveBy repaying over a longer period, the agency would limit increases in debt service to 3.5 percent per year, rather than 4.4 percent, according to Lockyer’s consultant report.
Instead, Transportation Corridor Agencies, which manages Foothill-Eastern and the San Joaquin Hills Transportation Corridor Agency’s 12-mile tollway, embarked on fruitless negotiations with Caltrans, as the state transportation department is known. Caltrans must approve changes to the 1988 agreement authorizing the agencies to collect tolls.
The state already has extended tolling to 2040 from 2033, documents show. Drivers pay as much as $3.50 one-way for a 25-mile drive on Highway 241, according to an agency rate card. A toll increase took effect July 1.
Higher tolls helped the agency’s revenue reach a record $111.8 million in the year ended June 30, even as the number of vehicles using the roads fell to a 12-year low, according to agency data. Annual revenue has been about 75 percent of projections for the past three years, the data show.
Coastal LinkThe highways linking lower-cost suburban housing to jobs in coastal Orange County are sensitive to fluctuations in Southern California’s economy, said John Husing, principal of Economics & Politics Inc. The county is home to companies including Ingram Micro Inc. (IM), Broadcom Corp. (BRCM), which makes chips that connect mobile devices to the Internet, and Allergan Inc. (AGN), the maker of wrinkle-smoothing Botox.
“The share of inland workers commuting to coastal counties has been flat as a proportion of the workforce since 2000,” Husing said by telephone from Redlands, California. “Population growth has slowed down dramatically in the inland region.”
The collapse of Southern California’s housing market hurt the toll roads on both ends: Inland homes lost value, while jobs in Orange County were hard-hit, particularly in companies offering and servicing mortgages, said Telles, the Transportation Corridor Agencies spokeswoman.
‘Reasonable’ Offer“If people are nervous about losing their jobs, they are more careful about their expenses and are willing to sit in traffic rather than pay a toll,” she said by telephone.
Neither Telles nor David Richardson, a California Transportation Department spokesman in Orange County, would discuss negotiations to extend the life of the bonds and the tolls.
Caltrans made a “reasonable” offer to allow the bonds to be refinanced that the toll-road agency didn’t accept, Richardson said Sept. 6. He wouldn’t disclose details. Telles said negotiations were “fluid,” without providing specifics.
After the sides reach agreement, the toll agency still might delay a sale until market conditions improve, she said.
Attributing the toll-road revenue challenge to the housing crash is ironic, said Marilyn Brewer, a former state assemblywoman from Orange County who asked Lockyer to review the finances of the Transportation Corridor Agencies.
‘Bad Decisions’“The TCAs are like a homebuyer whose house is underwater and they want to extend the loan in order to save it,” Brewer, a Republican, said from Newport Beach. “It’s the result of bad decisions they’ve made in the past. This is like the third time they’ve gone to the well. In three to five years, they’re going to be asking for another extension.”
Localities nationwide plan to sell $6.5 billion in long-term debt this week as benchmark 10-year munis yield about 3.13 percent, close to the highest since April 2011. The interest rate compares with 2.96 percent for similar-maturity Treasuries.
The ratio of the yields, a gauge of relative value, is about 105 percent, compared with an average of 93 percent since 2001. The higher the figure, the cheaper munis are compared with federal securities.
Following is a pending sale:
West Virginia Hospital Finance Authority is selling about $211 million of revenue bonds to help institutions belonging to West Virginia United Health System Inc., a nonprofit group, refinance debt, expand and improve facilities. The securities mature over 31 years. A unit of Wells Fargo & Co. is leading the sale.