BRADENTON, Fla. - Alabama plans to sell the final tranche of its $1 billion statewide transportation program next week.
The deal comes to market as other states gear up for legislative sessions aimed at creatively funding billions in backlogged road and bridge projects.
While some states are just starting on their plans, Alabama will put the finishing touches on its largest transportation funding program with the Jan. 21 pricing of $508.5 million in special obligation revenue bonds.
The debt will be issued by the Alabama Federal Aid Highway Finance Authority as a newly structured credit that boosted ratings by several notches for the program, which first began in 2012 with bonds backed solely by federal highway trust funds.
"It's not your father's Garvee bond," is what one banker said potential investors are being told.
The bonds are secured by priority liens, first on state gas taxes, and then federal highway funds. They have been rated Aa1 by Moody's Investors Service and AAA by Standard & Poor's.
"What we have is a separate pledge of three gas taxes then a backup pledge of federal funds," said Alabama's financial advisor Rushton Rice, president at Rice Advisory LLC. "This is a much stronger pledge that eliminates reservations the market would have on federal funding."
Revenue from fuel taxes is less than needed to support federal Highway Trust Fund projects, and Congress has been unable to reach consensus on a long-term transportation package.
Alabama's preliminary offering structure calls for maturities between 2016 and 2034, with most of the bond payments in the final eight years. The schedule is designed to wrap around outstanding bond issues, and provide level debt service for the overall program, Rice said.
While the state expects the deal to receive interest savings due to the new security structure and high ratings, a trader said investors still may demand some yield.
"I think the Alabama deal would be well received due to the recent lack of supply with the holidays," the trader said. "I think because it is Alabama, and with the history of the bond, it will trade cheaper than other state deals with the same rating."
The holiday-shortened week could help with pricing, another banker said. The new credit structure could also broaden the pool of investors since some institutions shy away from stand-alone grant anticipation revenue vehicle bonds, he added.
Gov. Robert Bentley initiated the $1 billion Alabama Transportation Rehabilitation and Improvement Program in 2012. The state first issued $328 million in stand-alone Garvees in December 2012. They were rated Aa3 by Moody's and AA by S&P.
Last June, Moody's downgraded its ratings on the ATRIP bonds to A1 as it lowered the ratings of other Garvee bond programs, citing the growing structural imbalance in the federal highway trust fund, uncertain U.S. general fund support, and an increased risk of payment interruption or reduction.
As Alabama's finance team prepared for the second ATRIP deal amid doubts about federal funding, officials looked at alternatives to strengthen the bonds.
The Legislature agreed to pledge the state's gas tax as the primary security in "a change that will save our taxpayers many millions of dollars by reducing interest rates and borrowing cost," Rice said.
Next week's issuance will fund road and bridge projects in all 67 Alabama counties.
Morgan Stanley is the book-runner and Joe Jolly & Co. is senior manager. Co-managers are Harbor Financial Services LLC, Securities Capital Corp., and Thornton Farish Inc.
Balch & Bingham LLP is bond counsel. Hand Arendall LLC is disclosure counsel. Underwriters' counsel is Baker, Donelson, Bearman, Caldwell & Berkowitz PC.
Some other Southeast states are now considering ways to increase revenues to deal with billions in pent-up road and bridge funding needs as 2015 legislative sessions get under way.
Few, if any, of the states are considering leveraging federal highway funds.
"If we become less dependent on federal revenue for our transportation projects in Georgia, we will avoid the regulations and extra costs associated with federal involvement; we will get more for our money in new roads; and it will be one of the best signals that the state of Georgia is willing to spend our money to solve our problems," Gov. Nathan Deal said Wednesday as he urged legislators to address transportation funding in his State of the State address.
Georgia must determine how to fund "hundreds of millions of dollars in new revenue each year" needed for transportation, he said, while noting that the state's excise tax on fuel has remained the same since 1971.
"With only current funding levels, new capital projects will have to wait as we tend to our existing transportation network," Deal said. "If we do nothing, we would continue to have to depend on the federal government, whose transportation funds are also dwindling.
"We can debate how much it will cost to do something, but let us not forget how much it will cost to do nothing," he added.
In other Southeast states, ideas include increasing state gas taxes as oil prices drop and vehicles become more fuel efficient, boosting sales taxes, and implementing bills that allow public-private partnerships.
Kentucky will once again consider a P3 law backed by Gov. Steve Beshear. The state already uses P3s on certain projects and services, but they cannot be used for highway and bridge projects without authorizing legislation.
"Kentucky has large gaps in our road and bridge system, and federal resources aren't enough to fill those gaps," Beshear said in his final State of the State address Jan. 7, a day after the legislative session began. "Using current procurement and financing mechanisms, we are simply not equipped to tackle these 'super-projects' in a timely manner without squeezing out local projects."
Lawmakers passed a P3 bill last year but Beshear vetoed it because the legislation prohibited tolls on the new Brent Spence Bridge planned between Kentucky and Cincinnati.
In North Carolina, Gov. Pat McCrory revealed his proposal for a $1 billion transportation bond program.
McCrory's plan calls for the use of alternative programs such as P3s and managed lanes to reduce the state's dependency on federal dollars.
McCrory said his 25-Year Vision proposal builds on the foundation established in the state's Strategic Transportation Investments law passed in 2014.
In Tennessee, a gas tax increase is on the table to chip away at $8 billion in needs. The legislative session started Tuesday.
A 1-cent sales tax increase is one idea under consideration in South Carolina to deal with a $1 billion lag in funding that state's road budget.
In Louisiana, a legislative Transportation Funding Task Force on Monday began preparing a preliminary report for lawmakers designed to address $12 billion in unfunded needs.
The report, due to lawmakers Thursday, details many programs that the state can consider, including P3s, a sales tax on fuels, increasing the gas tax, and replacing a fuel excise tax with a sales tax.
The task force plans additional meetings to address final recommendations for the Legislature, which beings its annual session April 13.
"Most people recognize we have a problem," said task force member Robert Adley, R-Benton, who also chairs the Senate Transportation Committee. "It's the possible funding sources people are truly interested in."
In addition to new bonding for transportation in Louisiana, Adley suggested that the task force address in its final report the need to equalize the tax on compressed natural gas as it relates to the state's gas taxes.
Vehicles using CNG "are using roads like anyone else," he said.
