SAN FRANCISCO A plan to sell $3.9 billion of bonds to bail out a toll road agency in Orange County, Calif., may not pass go, as officials there brainstorm rescue options that do not involve borrowing.
We were getting out of debt with more debt, said John Moorlach, the countys treasurer. That just didnt seem so attractive to me.
At stake is the fate of the San Joaquin Hills Transportation Corridor Agency. It operates a 15-mile toll highway that has fallen short of traffic projections and, as a result, is on track for eventual default on its bonds.
The San Joaquin road shares a staff with another Orange County agency, the Foothill/Eastern Transportation Corridor Agency, which operates a toll highway system that is financially solvent.
Having already refunded the debt of both roads once, the staff sought to salvage the San Joaquin agencys finances by using a new agency, the Transportation Corridor System, to issue $3.9 billion in new tax-exempt bonds to acquire the assets of the two toll roads and take out their outstanding bonds.
Given the chance to move forward with the deal last month, the boards of the three agencies instead asked for more time to study the situation and see if there are other alternatives.
That opened the door for some other very creative solutions, said Bill Campbell, a county supervisor and board member for all three agencies. Campbell is on a subcommittee tasked with taking an in-depth look at all the financing proposals.
Those ideas include a proposal from fellow supervisor Chris Norby to have the Foothill/Eastern agency simply purchase the San Joaquin agency. The Foothill/Eastern agency would then use its own surpluses to cover the debt service shortfalls of the San Joaquin agency.
In another vein, private toll road firm Cofiroute Global Mobility, which runs the operations of another Orange County toll road, proposed guaranteeing the debt of the San Joaquin agency in return for the right to operate the Foothill/Eastern and San Joaquin routes. The firm is working with Lehman Brothers, Campbell said.
Thats fairly intriguing, Campbell said. They believe they can do it cheaper than were doing it right now. You essentially solve the credit problem for a medium-term time frame.
Campbell said Merrill Lynch & Co. and Morgan Stanley have also come forward with much smaller-scale proposals to restructure a portion of the San Joaquin agencys debt.
Moorlach developed his own proposal, calling for the Foothill/Eastern agency to pay $190 million to buy an option to purchase the San Joaquin agency, which would use the funds to meet its current debt service.
The $3.9 billion bond proposal calls for a negotiated deal lead by Citigroup Global Markets Inc. that included $1 billion of variable-rate debt synthetically fixed through an interest rate swap.
Citigroup, under its former name of Solomon Smith Barney, was lead manager for the San Joaquin agencys $1.4 billion 1997 refunding and co-senior manager on a $1.75 billion 1999 refunding deal for the Foothill/Eastern agency.
In his written proposal, Moorlach described the $3.9 billion plan as the most appropriate Wall Street response, but he added a big caveat.
What is good for Wall Street isnt always good for Main Street. Our 1994 bankruptcy debacle certainly proves this point, wrote Moorlach, who rose to prominence for predicting the financial troubles that led to the countys bankruptcy in the 1990s.
At the end of the day, it was just trading debt, Moorlach said in a phone interview last week about the proposed bond refinancing. And weve been there too many times with these toll roads.
Moorlach does believe that keeping the San Joaquin road out of default serves the public interest. The Foothill/Eastern roads future extension plans could draw some traffic from the San Joaquin one, which could give those bondholders grounds to sue, he said. That, Moorlach said, is why the Foothill/Eastern would be well served by contributing to a restructuring plan.
Campbell said he has no beef with the firms that developed the $3.9 billion refunding plan.
They were very bright people working with a set of constraints and creating a solution, he said. The benefit of other people coming in is theyve thrown out some of the constraints.
His subcommittee plans another meeting Wednesday. A final decision is still due by April 8, Campbell said.
