Monday, October 13, 2008

NTTA loan "could prove costly in the current market, where interest rates have spiked."

Toll road agency votes to borrow $100 million from Bank of America


The Dallas Morning News
Copyright 2008

The North Texas Tollway Authority's board of directors voted unanimously this morning to borrow $100 million as the agency scrambles to retire the last $225 million in short-term debt used to finance its 2007 purchase of the State Highway 121 toll road contract.

The loan from Bank of America -- one of the few financial giants to have so far emerged unscathed from the Wall Street crisis -- is designed to help NTTA whittle away at a debt it must retire by Nov. 19, when a 12-month deadline expires on "bond anticipation notes" the agency took out to pay for the State Highway 121 toll road contract.

NTTA will use $75 million of the new loan to reduce its remaining $225 million in short-term notes related to State Highway 121. About $25 million will be spent on capitalized interest and other overhead.

Unlike the nearly $6 billion in other NTTA debt, the Bank of America loan will carry a variable rate that will reset weekly over the next three years.

That could prove costly in the current market, where interest rates have spiked.

Retiring NTTA's short-term debt related to the State Highway 121 project had been seen as a routine obligation until the recent collapse of worldwide credit markets upended the world of public financing.

NTTA officials said they expect to beat the Nov. 19 deadline, but the board also approved a back-up plan that would permit NTTA to take out new BANs to cover those set to expire Nov. 19, should it be unable to convert the remaining $150 million in BANs.

After it won the State Highway 121 contract, the agency faced a hard deadline imposed by the state of Texas to make good on its eye-opening promise to outbid Cintra, the private firm who had offered about $2.8 billion to build the road. NTTA offered $3.3 billion, though it ultimately paid about $3.2 billion.

To pay that bill, NTTA borrowed more than $3.5 billion – and did so by taking out short-term notes, rather than traditional municipal bonds. The move allowed it to meet its deadline to pay the state what it owed, and gave it a year to find the best long-term financing available.

At the time, some critics, including top state transportation officials who had pushed for the contract to go to Cintra, complained that NTTA paid too much for State Highway 121, and that the debt it incurred could limits its ability to build other roads. NTTA chairman Paul Wageman and others have strenuously denied this, arguing that over time the profits on the 26-mile toll road in Collin and Denton counties will greatly enhance NTTA’s finances.

A year ago, few anticipated that NTTA -- a cash-rich and credit-worthy agency -- would have any problems quickly converting short-term notes into traditional municipal bonds.

But that was before the global credit market blew up this fall, sending borrowers of all shapes and sizes – from big cities to public agencies to entire states – scrambling to float bonds that had until recently been routine transactions.

NTTA has been steadily converting the notes into bonds over the past year, and has just $225 million left to go. But while it’s a fraction of the total debt incurred for the toll road contract, $225 million is still a lot of money when the credit markets are all but closed.

Spokeswoman Sherita Coffelt said this morning’s transaction was good news for the authority, and sets the stage for it to retire the final $125 million in debt next week.

“The NTTA has been presented with an opportunity to sell $100 million of notes to Bank of America with the proceeds used to retire existing BANs,” she said. “The NTTA plans to enter the market the week of the Oct. 20 to retire the BANs remaining after the Bank of America transaction. However, we still will have the option to issue new BANs to refund the existing BANs if by chance we could not enter the bond market.”

She said the agency fully expects to be able to meet the deadline, despite “unprecedented” changes in the financial markets.

“You asked what would happen if the NTTA was not able to take out the BANs by Nov. 19: Let me preface this by saying that this won’t happen. … However, theoretically if a borrower were unable to meet their obligation on this type of instrument they would be unable to pay the holders on time. The (creditors) would have to wait until the issuer were able to enter the market to get the money to pay them. This is an unprecedented market, so any explanation beyond that would be speculative, perhaps inaccurate and not prudent.”

She said the board's decision to allow further short-term financing if needed "is in no way tied to concerns about the NTTA, its credit rating or its financial stability, but is being undertaken as a prudent response to the direct effect of the unprecedented market turbulence that has affected everyone in both the public and private sectors. We are simply giving ourselves options and seizing an opportunity,” she said.

© 2008 The Dallas Morning News:

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