LOS ANGELES — The Bay Area Toll Authority will come to market next week with its first new money deal in three years.
"We were actually planning to be in the market much earlier this year, but with the various things that go on in the world, the decision was made to delay it," said Brian Mayhew, BATA's chief financial officer. "But now seemed like a good time."
The authority is planning to sell $750 million of San Francisco Bay Area subordinate toll bridge revenue bonds on Wednesday, to be priced by Bank of America Merrill Lynch for a group of 14 underwriters.
Orrick, Herrington & Sutcliffe LLP is bond counsel and Public Finance Management Inc. is the financial advisor.
Proceeds will fund the completion of current construction programs, including a new eastern span of the San Francisco-Oakland Bay Bridge designed to be more resistant to earthquake damage.
Around $500 million of the proceeds will go toward the Bay Bridge, and the remaining funds will go toward other projects the authority is working on, Mayhew said.
The last time the authority sold new money bonds was in October 2010, an $885 million deal consisting of subordinate revenue bonds and Build America Bonds.
Since then, the authority has been taking advantage of the low interest rate environment, refinancing debt and switching to floating rate notes, but it hasn't issued any new money.
Mayhew said the authority sold $3 billion of BABs in 2009 and 2010 and didn't burn through that money until now.
Next week's 2013 Series S-4 bonds are fixed rate with maturities heavily weighted on the long-end. Maturities range from 2027 through 2033, with term bonds maturing in 2038, 2043, 2048, and 2053.
The majority of the deal will mature in 35 or 40 years, with $230 million of the bonds due in 2048, and $353 million in 2053.
"It's kind of a different animal when you put bonds out that far," said Craig Brothers, a managing director and portfolio manager at Bel Air Investment Advisors in Los Angeles. "A 35-year bond is a long municipal bond and a 40-year bond is not typical. I think that could be a potential Achilles' heel — a deal that has maturities this long in an environment where people have been kind of running for cover."
Brothers views the BATA as a good credit — he recently bought some of its 11-year senior bonds in the secondary market — but he looks at the intermediate part of the curve and wouldn't buy the long maturities in the new deal.
"A deal that's heavily weighted on the longest end like this is really being sold to the big mutual funds," Brothers said. "That part of the market has been very weak lately. It's improved a little bit in the last week or so, but mutual funds got a huge number of redemptions in June and they did a lot of selling on the long end."
BATA's subordinate bond deal in October 2010, rated at A1 by Moody's Investors Service and A-plus by Standard & Poor's, had maturities ranging from 9 to 40 years. Yields ranged from 2.99% with a 3.25% coupon in 2019 to 4.95% with a 5% coupon in 2050.
Next week's bonds will be subordinate to the authority's senior lien bonds, which are secured by a prior claim on net toll revenues BATA collects on its seven Bay Area bridges. In addition to the Bay Bridge, they are the San Mateo-Hayward Bridge, Dumbarton Bridge, Antioch Bridge, Benicia-Martinez Bridge, Carquinez Bridge, and Richmond-San Rafael Bridge.
Moody's, which affirmed its A1 rating and stable outlook ahead of the deal, said toll revenues provide good coverage of outstanding debt service obligations. In addition, the BATA has the flexibility to increase rates to support all debt service associated with the completion of its seismic retrofit program, but does not have any increases planned until 2027.
The authority currently has $5.4 billion in outstanding senior bonds and $2.9 billion in outstanding subordinate bonds.
"By using the subordinate lien, we didn't find that much of an interest penalty and got more flexibility on the coverage test," Mayhew said.
According to bond documents, the gross senior debt service coverage is over 2.0 times for the next five years. Gross aggregate debt service coverage, which includes subordinate bonds, is around 1.6 to 1.7 times for the next five years. The unrestricted general fund balance is forecasted to stay above $1 billion through the term of the bonds.
Moody's said its rating is based on weaker forecasted debt service coverage ratios than for the Aa3-rated senior bonds, as well as a lower standing in the flow of funds and a weaker rate covenant, additional bonds test, and debt service reserve provisions.
"The subordinate lien nevertheless benefits from BATA's fundamental credit strengths, including very strong market position, cash flow and liquidity," Moody's analyst Maria Matesanz said in a report.
Matesanz also noted the authority's near monopoly over bridge crossings in the San Francisco Bay area, as well as the strong service area demand for its seven bridges.
Moody's rates the senior bonds at Aa3 with a stable outlook.
Standard & Poor's assigns its A-plus rating and stable outlook, also noting the demand for and essentiality of the authority's bridge system, as well as management's ability to set and raise tolls to finance its capital program.
"The rating on the subordinate-lien bonds is based on our view of the subordinate nature of the bonds, a more permissive additional bonds test as compared with that for the senior-lien bonds, our projections of significantly lower debt service coverage, and management's plans for additional subordinate-lien debt," credit analyst Mary Ellen Wriedt wrote in a report.
The agency rates the senior bonds at AA, also with a stable outlook.
Following next week's deal, the authority is planning to issue $450 million in parity bonds later this year or early next year, which will help fund the completion of the seismic retrofit program.
Since 1998, drivers on all Bay Area state-owned bridges have paid a $1 seismic surcharge, which has since gone up to $3, to help finance the $9 billion program.
All of the program's projects have been completed except for the replacement of the eastern span of the Bay Bridge, which partially collapsed during the 1989 Loma Prieta earthquake. The new eastern span consists of a self-anchored suspension bridge span, a skyway, and an approach and touchdown on the Oakland side. Work is expected to be completed on the $6.3 billion project at the end of the year.
As of August 31, 2012, approximately $5.3 billion of the estimated cost of the east span had been expended. The remaining costs will be paid by the authority from bridge tolls, investment earnings, and the proceeds from toll bridge revenue bonds.
The new eastern span was originally set to open on Labor Day, but the Toll Bridge Program Oversight Committee recently announced it would be delayed until December after the release of an analysis on how to fix some broken rods in the bridge structure.
The remediation cost for the defective bolts is estimated to cost around $23 million. The contractor now forecasts that the steel saddle retrofit of the failed bolts will be completed by December 10, according to the official statement for the upcoming issue.
In a recent report, Moody's said the delayed opening is not expected to have any operational or financial impact for the BATA, as the existing bridge will remain open and collecting tolls until the new span opens.
There are, however, some risks associated with the construction of the program for the BATA bridges, although this is mitigated by remaining project contingency reserves of $329 million, Moody's said. Analysts believe the seismic retrofit program projects will continue on schedule and within the current budget.
Moody's said stronger than currently forecasted growth in traffic and revenues, higher debt service coverage ratios, and continued maintenance of strong liquidity levels would have a positive impact on the rating.
It could be downgraded if there are construction delays, increases in construction costs, or the need for additional debt financing without additional supporting revenues.
