SAN FRANCISCO — The Oakland-based Bay Area Toll Authority plans to sell $1.3 billion in its first taxable Build America Bond deal next week.
The new-money toll revenue bonds will finance the seismic retrofitting program that includes the $6.3 billion rebuilding of the San Francisco-Oakland Bay Bridge. The bonds will be structured as long-term, fixed-rate debt with serials going out 36 to 40 years.
The bonds will carry make-whole calls, and like other issuers, BATA will collect the 35% interest rate subsidy directly from the U.S. Treasury. The pricing is scheduled for Wednesday.
“We’re going to go all taxable on this one,” said BATA chief financial officer Brian Mayhew. “If you look at the net rate on it, these are just an amazing opportunity.”
With 30 year Treasuries trading at 4.20% and an estimated 180 to 200 basis point spread between BABs and Treasuries, the authority expects to end up paying about 6% to 6.2% on the long-term bonds. That’s just 3.9% to 4.03% after the 35% interest rate subsidy.
“You’re very nearly sub-4%,” Mayhew said. “We’ve done fixed-rate debt sub-4 once. You’re almost talking swap market levels.”
The possibility of garnering such low rates convinced Mayhew to forego the traditional municipal 10-year call provisions that some issuers have used with their BABs.
“Like most finance officers, I don’t like non-callable bonds out there,” Mayhew said. But he estimates that it would cost him 50 basis points in higher interest rates to get a muni-style call on the bonds.
“I’ve agonized over this, and the simple mathematics are, when was the last time you could really refinance 4% debt with any sort of cost-effectiveness?” Mayhew said. “The reality is that you can’t. The Golden Gate Bridge was built at over 3.5%” during the Great Depression.
He said he will consider doing another big BAB issue next year after he sees how his debt portfolio looks with the new bonds.
The authority’s about 60% of the way through the 2.2-mile, $6.3 billion Bay Bridge project, which includes the replacement of the eastern span of the bridge between Yerba Buena Island and Oakland. The old eastern span, built in 1936, was badly damaged in the Loma Prieta Earthquake 20 years ago.
BATA is about 68% done with the overall $8.7 billion seismic retrofit program on its seven-bridge system. The authority owns all of the major San Francisco-area toll bridges except the Golden Gate Bridge.
The deal is rated AA by Standard & Poor’s, AA-minus by Fitch Ratings and Aa3 by Moody’s Investors Service. Fitch has a negative outlook on the debt, citing the difficulty of implementing politically unpopular toll hikes and the possibility of continuing cost overruns on the big projects.
“The critical nature of this seven bridge system and long-term economic strength and viability of the San Francisco Bay Area continue to provide a basis for very strong investment-grade credit quality,” despite the ratings pressures, Fitch said in a release.
Citi and Merrill Lynch & Co are the senior managers in a six-firm syndicate. Orrick, Herrington & Sutcliffe LLP is bond counsel, and Public Financial Management Inc. is financial adviser.
