It wasn't the disaster the Bay Area Toll Authority had prepared for.
But its fiscal readiness puts the agency in a solid position as it comes to market amid a pandemic that has taken a major bite out of traffic on its seven San Francisco-area toll bridges.
BATA has $1.3 billion in reserves providing it with an 18-month operations cushion, according to its comprehensive annual financial report for the year ended June 30, 2020.
“We set it up that way to protect us in case of a major event like an earthquake,” said Brian Mayhew, BATA’s chief financial officer. “We didn’t expect this. While there was no damage to the bridges, it has been equivalent to a seismic event. We wanted to be able to operate for 18 months in any type of emergency.”
The authority comes to market Tuesday with a $726.7 million refunding at a time when the three largest rating agencies have negative outlooks on the transportation sector.
The pandemic took traffic off the nation's roads immediately during the widespread lockdowns of the spring, creating obvious problems for toll roads that depend on traffic.
The transportation sector, overall, has been one of the hardest hit by the COVID-19 pandemic, but the revenue impact has been less severe for toll roads, because they were able to capture an uptick in commercial traffic, from truck traffic, said Kurt Forsgren, a managing director for S&P Global Ratings and the transportation sector lead for U.S. Public Finance.
“It depends on the market, the toll operator was serving,” Forsgren said. “Some statewide turnpike toll systems have done pretty well. Operations are down for the year, but mostly because everyone took a huge hit in March, April and June.”
BATA brings to the table strong ratings for the sector, which were affirmed ahead of the deal: its senior bonds are rated Aa3 by Moody’s Investors Service and AA by both Fitch Ratings and S&P Global Ratings.
Moody's assigns a stable outlook; Fitch has a stable outlook on BATA's senior bonds and a negative outlook for the AA-minus-rated subordinate bonds, assigned in April after the pandemic hit; and S&P maintains the negative outlook it assigned to transportation issuers across the board on March 26.
Despite the challenges, toll roads have some characteristics that position them better than the overall sector to deal with the steep declines in traffic experienced last year.
They include strong cash reserves, debt service protections, the mix of commercial and commuter traffic, and the ability to raise rates, Forsgren said. Toll bridges like BATA's also have the advantage of having a monopoly, because there aren’t alternatives for crossing the water, he said.
Publicly-owned toll roads carried over 900 days cash on hand or the equivalent of nearly 2.5 years of operating expenses, according to the most recent median statistics prepared by Moody’s Investors Service for operating year 2018.
Those characteristics prompted Sheila May, director of municipal bond research for GW&K Investment Management, to
The case she made last year has held up, May said in an interview Wednesday.
“We are comfortable with our toll road holdings, but they are primarily the major networks serving large metropolitan areas that are essential transportation corridors with a mix of commercial and passenger traffic,” she said. She declined to comment on whether GW&K owns BATA or is considering next week’s deal. GW&K has $34.6 billion in municipal bond holdings.
The investment firm figured that commercial traffic would be more resilient, which has proven to be true, May said, particularly given the spike in online sales from consumers stuck at home.
“The point there to remember is that commercial vehicles pay much higher tolls,” May said.
While commercial traffic is only 10% of traffic, it represents 40% of toll revenue, according to a Moody’s report May cited.
“It’s a low-overhead enterprise and they throw off a lot of cash and keep a lot of cash on hand,” May said. “Toll road operators had plenty of cash going into this downturn, and they also have debt service reserves equal to a year of debt service, which is an ultimate backstop.”
With traffic down sharply after the March 2020 shutdown, BATA decided to prepay its $160 million debt service in the spring, because with traffic levels bouncing up and down it wasn’t sure it would have coverage, Mayhew said.
“We thought, 'Why risk having a coverage ratio issue when we had plenty of money in the bank?'” Mayhew said.
BATA’s deal is split into four tranches: $124 million Series A term rate, $156.8 million Series B index rate, $91.5 million Series F-1 fixed rate and $352.3 million Series F-2 federally taxable fixed rate.
The three tax-exempt series will refund BATA’s series 2014E, 2014H and 2017D bonds, all of which have a mandatory tender date of April 1. The taxables will refund BATA’s series 2012F-1 and 2017F-1 bonds outstanding. The amortization schedule will likely remain similar to that of the outstanding debt with no extension of final maturities.
BofA Securities and Citi are lead managers with Goldman Sachs and J.P. Morgan as co-managers. PFM is financial advisor. Orrick Herrington & Sutcliffe is bond counsel.
BATA had estimated it could achieve $40 million to $50 million in present value savings, but that depends on the market, Mayhew said. Rates
Both the senior and subordinate bonds are secured by toll revenue from BATA’s bridge system. As of June 30, 2020, BATA had $9.3 billion in debt. The bonds are additionally secured by a $522 million debt service reserve fund.
Toll road agencies across the country have experienced significant declines in traffic and toll collections due to “stay at home” orders and school closings.
Vehicle traffic on BATA's seven bridges was down by more than half in April compared to the previous year, according to the preliminary official statement; from June through September, the first six months of fiscal 2021, vehicle traffic was down 23.5% year-over-year, according to the online investor presentation for the deal.
Vehicle miles traveled on federal highways fell 40% in April 2020 compared to a year earlier, but had crept back to being down 11% in June and to 10% in October, May said, citing data from the Federal Highway Administration. Those numbers include more than toll roads, but are a good national indicator, she said.
Moody’s gave a stable outlook citing the toll operator’s strong liquidity and satisfactory financial metrics, while S&P analyst Paul Dyson gave BATA a negative outlook citing “significant traffic declines” and “uncertainty as to the timing and extent of the recovery.”
Fitch has a stable outlook on the senior bonds and a negative outlook on the subordinate bonds citing its weaker financial metrics and concern that the pandemic could push subordinate metrics to a level inconsistent with the AA-minus rating for the subordinate bonds.
The toll operator’s strong liquidity and satisfactory financial metrics despite the drop in traffic were cited by Moody’s for its stable outlook.
“BATA’s bridge system is in good and seismically-sound condition with its sizeable capital program nearing completion and manageable capital needs over the foreseeable future,” Fitch analysts wrote.
BATA has completed $18 billion in projects over a dozen years on its seven bridges to protect them from earthquakes, Mayhew said.
It
In June 2018, voters approved a new $4.5 billion capital improvement program under Regional Measure 3, to be funded with a $3 of toll rate hike phased over several years, Fitch wrote. The measure has been challenged in court, so Fitch said, it remains to be seen whether BATA will ultimately have the ability to levy the toll hikes.
It has been a hard 12 months for BATA, including hiccups after Gov. Gavin Newsom ordered the toll operator to switch to an all-electronic system toll collection last spring as a pandemic safety measure. The switchover had originally been planned on a 2025 timetable.
“A year ago, a guy would hand me six bucks, it would be paid and he would leave,” Mayhew said. “I didn’t have to do anything but count and bank it. We had to develop an invoicing system on the fly. One day we had toll collectors and the next day they were gone.” Before the pandemic, more than 70% of BATA toll revenue was collected through FasTrak toll transponders.
BATA began discussing the deal in November 2019, and had planned to price the debt in spring 2020 with the goal of restructuring the portfolio to shorten it and reduce costs.
After the pandemic struck, Mayhew said the authority intentionally stayed out of the market until the situation had stabilized and he had a "handle on how this enterprise was doing and on how to manage through this.”
