CHICAGO - The Illinois State Toll Highway Authority will issue up to $400 million of toll-backed revenue bonds next month, the first of two new-money borrowings to finance a record year of capital spending.
The $1.6 billion of capital spending planned this year is part of the 15-year, $12 billion Move Illinois capital program launched in 2011. The authority operates 286 miles of toll highways in 12 counties in northern Illinois.
The deal comes after turnover in authority leadership following the election of Gov. Bruce Rauner, who ousted incumbent Pat Quinn. The agency's deal timing, which is driven by its financing needs, coincides with uncertainty over whether the state will head into the new fiscal year July 1 without a budget.
"The tollway anticipates being able to proceed with our transaction and operations given we do not receive any state funds," said the authority's finance chief Michael Colsch. "There is segregation in both operations and revenue flow from the state."
The only potential impacts Colsch envisions are possible administrative hiccups if the government is partially shut down and the agency needs some type of permit. Colsch said his confidence stems from his long tenure with the state over several decades. He previously worked as state debt manager and next week's potential shutdown would not be Illinois' first.
Even with little direct revenue link to the troubled state government, the tollway authority does pay an interest rate penalty because of the Illinois name, as do most Illinois-based issuers. In a new money sale last fall, the agency, rated at AA-minus levels, paid a yield of 3.53% for a 2039 maturity, compared to the 2.89% Municipal Market Data triple-A benchmark yield.
The sale is slated for as soon as the week of July 6.
Bank of America Merrill Lynch and William Blair & Co. are senior managers. Citi and Morgan Stanley are co-senior managers. Public Financial Management Inc. is general advisor to the agency and Acacia Financial Group is advising on the transaction. Mayer Brown LLP is bond counsel.
"We are heading into the heaviest construction month of the year and we have what is historically our largest capital investment on an annual basis this year," Colsch said in an interview along with the agency's debt manager William O'Connell.
The bonds will sell in a fixed-rate structure with delayed principal repayment occurring between 2027 and 2040 to fit into the agency's overall debt portfolio. A second sale is planned possibly in the fourth quarter for about $400 million.
The agency has not yet named a team on the later sale and is weighing whether to launch a new request for proposals process for financing pools. The agency conducted an RFP in 2012 putting pools in place through the end of 2015 but can extend it for one additional year. Colsch said a decision is expected later this year.
The agency is tentatively eyeing an additional $700 million of new money borrowing for next year and is watching for refunding opportunities. The board has authorized a refunding of fixed-rate 2008 paper of $350 million but savings remain short of the agency's goal. BMO Capital Markets and Ramirez & Co. are seniors for any refunding.
The agency has shed its penchant for synthetically fixed issuance under its prior capital program, chipping away at the percentage of its debt portfolio in a floating rate. It's now down to about 25%. It should continue to fall as more fixed-rate new money is issued.
The agency has moved some of its floating-rate debt to fixed to shed bank risks but current rates fall short of between 60 to 100 basis points of the agency's targets to move any more in the near-term.
"The structure is working well at this point, so we don't see a pressing need to restructure," Colsch said. "If we can convert it for a relatively low cost and eliminate some of the risks we would undertake that but at this point we feel the cost are little too expensive."
The authority has nine liquidity or credit providers on its floating rate bond portfolio with expirations in 2016 and 2017. The $1.3 billion of paper is swapped to a synthetic fixed-rate under nine agreements negatively valued at $257 million earlier this year.
The sale comes after Rauner has made his mark on the authority's top leadership. The authority is managed by 11 board directors, including nine appointed by the governor with the consent of the Senate. The governor and secretary of transportation serve as ex-officio members.
Former DuPage County board chairman Bob Schillerstrom has taken over as tollway board chairman from Paula Wolff and Greg Bedalov, who led DuPage County's economic development arm, has been named executive director. He replaces Kristi Lafleur.
Schillerstrom's law firm Ice Miller LLP is serving as underwriters' counsel on the upcoming transaction, an appointment made before Schillerstrom became chairman. The firm will bow out of future work, Colsch said. Schillerstrom is a partner in the firm's public affairs group.
Ahead of a sale last year, Moody's Investors Service affirmed the tollway's senior-lien Aa3 rating and stable outlook that applies to about $5 billion of debt. Fitch Ratings and Standard & Poor's affirmed the authority's AA-minus rating and stable outlook.
The bonds are secured by toll revenues and the agency pledges to charge a rate sufficient to repay debt, fund reserves and maintain a targeted debt-service coverage ratio.
The long-term capital program relies on $3.7 billion of borrowing. To support the program, the board adopted a one-time 87% increase in passenger tolls and a 60% increase in commercial vehicle tolls that will be phased in and then adjusted annually based on inflation starting in 2018.
Rating agencies have described the authority's significant addition of debt to support both the capital program and additional debt-service reserve funding as a challenge, along with managing a big capital program and its high floating-rate and swap exposure.
Positive factors include rapid debt amortization, debt-service coverage ratios forecasted over two times including all planned debt, maintenance of strong liquidity levels, and slightly better than forecasted financial results for fiscal 2013.
