California Toll Bonds Hampered by Freeways: Muni Credit
http://www.bloomberg.com/news/2013-01-02/california-toll-bonds-hampered-by-freeways-muni-credit.html
By James Nash -
Jan 1, 2013
Even in traffic-clogged Southern
California, too few drivers want to spend as much as $6.25 to
travel 12 miles on toll roads. Their reluctance is leading one
highway agency to extend $2.4 billion in debt payments by as
much as 12 years as investors demand more to hold its
securities.
Orange County’s 51 miles (82 kilometers) of toll highways,
the most extensive system in the world’s ninth-biggest economy,
have fallen short of revenue projections since opening in the
1990s as the two managing agencies raise fares and refinance
$4.5 billion in outstanding debt issued to build them. State
Treasurer Bill Lockyer is looking into whether the authorities
even will be able to raise money for escalating bond payments.
The woes are a caution for investors, said Howard Cure,
director of municipal research for Evercore Wealth Management
LLC in
New York. Long-distance highways with few free rivals --
such as the Ohio and Pennsylvania turnpikes -- have fared
better, he said.
“The issue with Orange County is that it’s a stand-alone
toll road and there’s competition from free options,” Cure said
by telephone. “Additionally, you have a group of people --
Southern
California drivers -- who are not used to paying
tolls.”
Rosy Forecasts
Cure, whose company oversees $3.8 billion, said most recent
toll-road projects have been premised on unrealistic traffic
volume, making it difficult to meet debt payments that typically
escalate. Operating agencies have responded by raising fares, a
dubious strategy in a sluggish economy, Cure said. Operators
raised them in 2009, 2011 and 2012, each time by 25 or 50 cents
depending on the highway and distance traveled.
The toll roads in Orange County, a jurisdiction that filed
for bankruptcy in 1994, are run by two agencies, the
Foothill/Eastern Transportation Corridor Agency, which has $2.4
billion in outstanding debt on three highways linking inland
areas to the Pacific Coast; and the San Joaquin Hills
Transportation Corridor Agency, which owes $2.1 billion in for a
12-mile highway parallel to the shoreline. With interest over
the life of both agencies’ bonds, the debt totals $10.5 billion,
according to the bodies.
Narrower Penalty
Even with traffic trailing forecasts, San Joaquin Hills
Transportation debt’s yield penalty narrowed in 2012. A bond due
in 2030 and rated B1 by Moody’s Investors Service, four levels
below investment grade, traded Dec. 28 with an average yield of
5.3 percent, about 3 percentage points above an index of top-
rated munis with similar maturity, data compiled by Bloomberg
show. That difference declined from 3.3 percentage points on
Jan. 3.
Foothill-Eastern Transportation bonds have seen their
penalty widen. A security due in 2040 and rated Baa3, Moody’s
lowest investment-grade rank, traded Dec. 19 with an average
yield of 5.6 percent, about 2.9 percentage points above
an index of benchmark munis with similar maturity, according
to Bloomberg data. That yield difference widened from
Jan. 5, when the bonds traded with a spread of about 2.5
percentage points above the index.
With municipal
interest rates at their lowest since the
1960s, Foothill plans to refinance its bonds and extend
maturities beyond 2040,
according to a Dec. 13 staff report.
Debt service is due to increase to $298 million in 2040 from
$105 million next year, the report said. Tolls yielded $107
million in the year ended June 30, short of the $143 million
that the agency projected, according to
data on the
Transportation Corridor Agencies website.
Ratio Cut
The San Joaquin agency already agreed with bondholders in
May 2011 to reduce the required ratio of pledged revenues
against principal and interest payments for the next 13 years,
according to a press release. Tolls from the highway brought in
$93 million in the 12 months ended June 30, compared with
projections of $167 million a year, according to Transportation
Corridor Agencies.
Highway 73, the San Joaquin Hills Toll Road, parallels both
the Pacific Coast Highway and Interstates 5 and 405, all free.
The Foothill/Eastern toll roads slice through the foothills of
the Santa Ana Mountains, cutting about four miles from the 31-
mile commute of a driver in suburban Corona to the business
parks of
Irvine, compared with the free Highways 91 and 55 and
Interstate 5.
Commuter Pain
Even with the U.S. recovering since June 2009 from the
longest recession since the Great Depression of the 1930s, the
economic downturn disproportionately affected commuters from
inland Southern California who take toll roads to jobs in Orange
County, said Michael McDermott, a managing director at
Fitch
Ratings in New York.
Riverside County, immediately east of Orange County, had a
12 percent unemployment rate in October,
according to the state
Employment Development Department. Orange County had an
unemployment rate of 7.2 percent in October, below the 9.8
percent statewide rate,
according to the state Employment
Development Department. Nationally, the rate was 7.9 percent,
the Bureau of Labor Statistics reported.
In May, Fitch revised its outlook for the Foothill/Eastern
Transportation Corridor Agency to negative from stable, with a
BBB- rating, its 10th highest. The ratings company affirmed its
BB rating, 12th-highest and below investment grade, on the San
Joaquin Hills Transportation Corridor Agency. The authority’s
credit outlook is stable, like 92 percent of the toll-road
authorities Fitch rates. Four percent of rated roads have
positive outlooks and a like number has been termed negative,
meaning a downgrade is possible.
Ohio Proposal
McDermott said toll roads and bridges are becoming
increasingly popular as cash-strapped local governments look for
ways to accommodate motorists without raising taxes. On Dec. 13,
Ohio Governor
John Kasich suggested that the state’s turnpike
commission issue as much as $1.5 billion in debt to fund
transportation projects.
While drivers
pay as much as $10.26 in peak periods for a
round trip on the floating bridge connecting
Seattle to suburbs
across Lake Washington, average daily traffic exceeded
projections by 18 percent in 2012,
according to a Washington
State Transportation Department press release.
The Route 520 span is the world’s longest floating bridge
at 7,580 feet and tolls are intended to cover the cost of
replacing it in 2014 or 2015,
according to the transportation
department.
Solvency Questioned
Orange County’s toll roads came under scrutiny from
California officials in September after a request from former
state Assemblywoman Marilyn Brewer, a Republican from
Newport
Beach, to Lockyer. Brewer wrote that higher fares and less-than-
forecast ridership raise the possibility of the toll roads
becoming insolvent. Lockyer, a Democrat, responded that the
state Debt and Investment Advisory Commission, which he
chairs,
would look into the matter.
“The straw that broke the camel’s back for me is that
they’re making local developers pay development fees on the
expectation that their customers will use the toll roads,”
Brewer said in a telephone interview. “That’s a stretch. My
concern is the fiduciary responsibility of going out for new
bonds when they’re having trouble servicing their existing
bonds.”
Orange County’s transportation corridor agencies plan to
issue about $200 million in new bonds to pay for a five-mile
extension of Highway 241, one of the eastern toll roads, said
Lori Olin, an authority spokeswoman.
Taxpayers’ Burden
Brewer, who represented areas along the San Joaquin Hills
toll road in the state legislature from 1994 to 2000, said she’s
concerned that California or Orange County would inherit
responsibility for toll-road bonds if the authorities default.
Lockyer spokesman
Tom Dresslar said he could not foresee
any circumstance in which California would be liable for toll-
road debt. Still, Dresslar said Lockyer agreed to the
“unusual” inquiry that Brewer suggested because he shares her
concern about the toll authorities’ ability to repay their debt.
Olin said the Orange County toll agencies are “nowhere
near” insolvency, which would be a prerequisite to bankruptcy,
nor would California taxpayers become responsible for their debt
in the event of a default.
Highway Bankruptcy
In 2010, the private operator of a 10-mile segment of State
Route 125 in San Diego County filed for Chapter 11 bankruptcy,
citing traffic that was about half of projections on a road that
runs parallel to free alternatives. After the San Diego County
Association of Governments bought the highway in 2011 for about
one-third of the cost of building it in 2006, the new operator
lowered tolls by about 40 percent, it
said in a press release.
Drivers now pay no more than $3.50 for a one-way trip.
The Orange County agencies have $523 million in reserves to
pay debt and haven’t missed a payment, Olin said in an e-mailed
response to questions. They’ve restructured their debt to take
advantage of low interest rates and to ensure that they’ll be
able to meet their debt obligations, she said.
“We do these things because we are responsible issuers
intent on paying off our debt,” Olin said. “Our bonds are non-
recourse revenue bonds, so taxpayers and TCA member agencies
cannot be held responsible for repaying the debt should we be
unable to ourselves.”
