http://www.bloomberg.com/news/2013-09-11/california-toll-road-risks-biggest-default-since-detroit.html
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 Warning
The 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 Down
As 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 Window
The 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 Drive
By 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 Link
The 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.