Tuesday, August 28, 2007

Putting red ink on a pig and calling it 'Tranche'

TxDOT Takes Another $1B To Market

First Tranche of $6B Authorization


by Richard Williamson
The Bond Buyer
Copyright 2007

DALLAS — The Texas Transportation Commission is laying the groundwork for a $1 billion revenue bond offering next month, its first under an expanded $6 billion authorization from the Texas Legislature.

The commission, which supervises the Texas Department of Transportation, is seeking approval from the Texas Bond Review Board to issue its full annual allotment of $1.5 billion, though it only plans to issue $1 billion next month.

“Our plan is to issue the first $1 billion and then monitor those projects under the proceeds,” said James Bass, chief financial officer of TxDOT. “If cash-flow needs dictate, we can tap into the additional $500 million.”

The Bond Review Board will rule in today’s meeting on whether TTC needs separate approvals for each issue, said Robert C. Kline, the board’s executive director.

The debt, known as Proposition 14 bonds, is expected to hit the market in mid-September, depending on market conditions, Bass said. The agency will confer with its financial advisers and underwriters this week on prospects for a receptive market.

RBC Capital Markets works as financial adviser on the negotiated deal.

Senior managers will be JPMorgan and First Southwest Co. Co-managers are Bank of America, A.G. Edwards & Sons, Estrada Hinojosa & Co., First Albany, Morgan Stanley, Piper Jaffray & Co., SBK Brooks, and Southwest Securities.

Analysts will keep an eye on a volatile market and several key indicators this week, including consumer confidence, jobless claims, and adjusted second-quarter gross domestic product as well as the troubled mortgage market.

Demand for large blocks of TxDOT’s triple-A rated revenue bonds has remained consistently strong among institutional buyers, said Noe Hinojosa, president and chief executive officer of Estrada Hinojosa.

“One thing we’ve experienced is that the Texas name is a good name with good credit quality,” he said. “About 95% or more of the market is institutional.”

“As far as the market goes, there’s been a certain degree of volatility, and munis have been somewhat flat,” Hinojosa said.

Next month’s sale will be the second $1 billion deal of the calendar year for the Texas Transportation Commission. A June offering of $1.1 billion of general obligation mobility fund bonds ranked as the largest in the Southwest region for the first half of 2007. The upcoming bonds are known by the ballot measure that authorized them, Proposition 14. The proposition to amend the state constitution to allow the debt won voter approval in 2003. The state won voter approval to issue debt for transportation projects under a measure known as Proposition 15 in 2001.

In May, Texas lawmakers doubled the debt limit under Proposition 14 to $6 billion. Previously, the TTC could not issue more than $1 billion of Proposition 14 bonds per year. Under the new law, the limit is $1.5 billion per year.

The bonds are backed by the state highway fund, made up of state gas tax revenues, vehicle registration fees, and federal reimbursements for road construction.

Although new ratings have not been released, the previous ratings were AAA from Standard & Poor’s and Aa1 from Moody’s Investors Service. The bonds do not carry a rating from Fitch Ratings.

In November, voters will get a chance to provide even more debt for the TTC. A proposed constitutional amendment approved by the Legislature would allow the agency to issue up to $5 billion of GOs.

Because the original Texas constitution prohibited GOs, new authorizations require constitutional amendments. The constitution mandates that state-supported debt cannot exceed 5% of uncommitted general revenue, and the state is currently below 2%, with roughly $21 billion available for GOs.

If the new GO measure passes, the TTC will not be able to issue any bonds under that heading until 2009. The bond issue would need enabling legislation from the Legislature, which does not meet until then.

Despite the new debt authorizations, TxDOT sees an ongoing crisis over funding transportation projects in the rapidly growing state. The so-called funding gap between needed infrastructure and available money is estimated at $77 billion, according to reports from the Legislature.

TTC chairman Ric Williamson recently sounded the alarm over the need for additional funding in a letter to Lieut. Gov. David Dewhurst, who asked about TxDOT’s ability to maintain bridges and other infrastructure in the wake of the Interstate 35W bridge collapse in Minnesota.

Referring to the Proposition 14 bonds as “payday loans,” Williamson wrote, “In each of the recent legislative sessions, TxDOT and its regional partners have been asked to do more with less.”

“Despite our growing population, increasing traffic, and deteriorating road maintenance conditions, the net result of legislative action was to scale back resources,” he wrote.

For Texas and other states, revenue from state and federal fuel taxes is not keeping up with growing transportation needs and rising construction costs. Although state fuel tax revenue was up 2% in Texas for fiscal 2007, that did not come close to providing the money needed for construction, Williamson said.

“During the next 25 years, our state’s population will increase 64% and our road use will grow 214%,” he wrote. “Absent new resources, state road capacity will increase 6%.”

Over the past quarter century, Texas grew at the rate of 57% and road use increased 95%, but road capacity grew only 6%, he noted.

Maintenance costs are also eating into money for new projects, Williamson said. Over the next five years, TxDOT expects to shift $6 billion from new construction to maintenance. The state appropriations bill passed this year also transfers $1.5 billion out of the state highway fund to non-transportation uses, a 15% increase over the previous biennium.

Lawmakers have not raised the state fuel tax since 1991, when it went to 20 cents per gallon from 15 cents. In the last legislative session, a bill to index the gas tax to construction costs was peremptorily killed.

The Legislature also halted an alternative source of funding that TxDOT had built plans around — private investment. Amid an uproar over private ownership of roadways for 50 years or more under pending deals, lawmakers placed a two-year moratorium on public-private toll roads, exempting several projects in urban areas.

“At a time when other states are working to attract private-sector resources to meet their infrastructure needs, recent legislative action in Texas has severely damaged the prospects of Texas recognizing the potential of public-private partnerships to meet our state’s growing mobility needs,” Williamson wrote to Dewhurst.

Williamson’s wrote his letter as TxDOT prepared to sign a deal with the public North Texas Tollway Authority to build the $5 billion State Highway 121 toll project north of Dallas. The NTTA won the project in an unorthodox bidding process three months after SH 121 was awarded to the private development team of Cintra/JPMorgan.

Although the TTC had hailed the original Cintra deal as a step toward solving the state’s funding problems, the agency accepted the recommendations of the Regional Transportation Authority in North Texas that stripped Cintra of the project in favor of NTTA.

Cintra’s bid to build the $5 billion SH 121 was one that had been exempted from the legislative moratorium.

© 2007 The Bond Buyer: www.bondbuyer.com

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