ATLANTA - When Georgia hits the market with $822 million of Garvee-like bonds next month to fund a portion of the state's $9.1 billion in transportation needs, some potential buyers say the deal's structure might make them wary of buying the debt, but officials stress adequate coverage is provided to bondholders.
Concerns center on a debt service reserve fund being in place, and the reliability of the federal highway reimbursements that will be used to secure the bonds, which are similar to grant anticipation revenue vehicles, or Garvees.
The state's newly created State Road and Tollway Authority will issue the bonds. At this point, officials have not included a debt reserve fund in the bond resolutions, but neither have they ruled one out, explained Matthew Nichols, an attorney with Sutherland Asbill & Brennan, one of the bond counsels working on the deal.
"The authority has provided for a debt service fund if it's determined it's needed during the marketing process," Nichols said. "It still has the flexibility to add that in before pricing."
A potential buyer of next month's sale said one concern was compounded by the debt being issued as 20-year bonds. The current authorization for federal administration highway reimbursements expires Sept. 31, 2003. By that time, Congress must decide whether to reauthorize another bill for an additional five years, or through 2008. There is concern that those reimbursement dollars are at risk because they are subject to Congress approving the reauthorization, which observers say is likely, but not definite.
Federal highway receipts are derived from Title 23 of the U.S. Code or any successor legislation relating to federal aid for highways. The previous federal statute covering appropriation of federal highway funds expired Sept. 30, 1997, and was replaced by the Transportation Equity Act for the 21st Century, which is effective through fiscal year 2003.
The uncertain future of that funding, coupled with the fact that the bonds will be secured solely by the federal highway dollars, is why some buyers are edgy, according to another source familiar with the deal. Veronica Curvy James, the bond and finance director for the State Road and Tollway Authority, said that while she understands the concern, the deal has been structured to provide adequate protection to bondholders.
"The 2002 bonds will have 12 times coverage," James said. "We expect that they will be insured. We don't expect, nor are we seeking, ratings of higher than single-A."
The strong coverage is based on the annual receipts of federal reimbursement dollars, she said.
James noted that although the reimbursements are the bonds' sole security, buyers should not fret over how their investment will be paid if those dollars were to be insufficient to make debt service payments. James pointed to Georgia's gilt-edge bond rating and the low likelihood that the state would allow the debt to default and jeopardize its strong credit standing.
Noting that the state would do what it has to do to repay the debt, James said resources that would be used to pay off the debt in a default scenario would be identified from legally available funds of the state should that unlikely event ever occur.
Scott Trummer, an analyst with Fitch Ratings, said the rating that would be assigned would be based on the entire Garvee program. He noted that while the debt coverage is currently very strong, the agency would look at how that coverage will stand over the entire length of the program, and what, if any, additional bonds test will be in place.
"Typically, most issues have a backup pledge, like a state gas tax, and they typically go out in one or three authorization cycles," Trummer said.
Fitch in April projected that the amount of oustanding Garvee debt will double to $10.4 billion by 2004.
When Mississippi sold $200 million of Garvees in 1999, Fitch noted that the deal's high coverage levels, as well as backing by state taxes and fees, earned it a AAA bond rating. Those coverage levels ranged from 13.3 times to 16.2 times and extended the 10-year life of the transaction.
The absence of a debt service reserve fund in these types of deals is not uncommon. Ohio was the first state to leverage its Federal Highway Administration reimbursement through the issuance of Garvees. And although the lack of such a fund and the fact that the maturity extends past the expiration of TEA-21 were considered weaknesses, the sale still garnered double-A category ratings.
James stressed that the Georgia deal will not be "pure" Garvees, but instead referred to the debt as Garvee-like. The spun-off term has come up in transportation circles as the Federal Highway Administration has encouraged limited use of the term Garvee, Sutherland's Nichols said. Unlike pure Garvees, Garvee-like debt relies on the entire pool of federal grants that the state receives, as opposed to dedicating a particular grant to a project.
Last year, Michigan Department of Transportation sold $400 million in variable-rate grant anticipation notes, which relied on the state's entire pool of federal highway grants. Those notes were enhanced by insurance from Financial Security Assurance and liquidity from Dexia Public Finance Bank. Sources familiar with that sale acknowledged that the risk of such deals crops up for buyers who believe the federal government is going to end the federal highway program. However, market players also say those risks are sometimes worth taking, considering the speedy completion of needed projects.
In November and December, Georgia sold $350 million of guaranteed revenue bonds and $300 million of bond anticipation notes for road projects.
Georgia officials have not determined an exact sale date, but say it will likely take place in mid-August. The Georgia Investment and Finance Commission last week approved the amount for the deal, which will be Georgia's first Garvee-like issuance. Gov. Roy Barnes pushed for the use of debt secured by federal dollars last year as a way to speed up the Governor's Transportation Choices Initiative.
By selling the bonds, projects that could take up to 20 years to complete could be finished in seven to 10 years, said state transportation officials.
Along with Sutherland, King & Spalding and Thomas, Kennedy Sampson & Patterson are also serving as bond counsel. The senior managers are Goldman, Sachs & Co. and Salomon Smith Barney Inc. Co-managers are Jackson Securities Inc., Lehman Brothers, Merchant Capital LLC, Raymond James & Associates Inc., and the Malachi Group.
The bonds will be insured, but the insurer has not been selected. Other details, such as how much of the debt will be term bonds and how much serials, are also being finalized.
The fact that the bonds will be insured should provide some comfort to bondholders, according to Patrick Early, the manager of municipal bond research at A.G. Edwards & Sons Inc. He declined to speculate on how the deal will do without knowing the details or seeing the preliminary official statement, but said that in general, weaknesses such as longer maturities are less of a concern if the insurance is adequate.
"Insurance almost wipes out the penalty if there are features that are less than desirable," he said.
The authority's James said officials are finalizing the POS.
When the idea of selling debt backed by federal dollars first came up, officials said as much as $1 billion could be sold at one time. However, as cash flow needs were analyzed, it was determined that only up to $822 million was needed, explained James. Over the next five years, $5.8 billion of debt could be issued, she said.
