DALLAS – Congressional action on transportation helped spur an upgrade for some outstanding Michigan Garvee bonds ahead of a $613 million refunding deal.
The Michigan Department of Transportation heads into the market Wednesday with the federal grant anticipation revenue vehicle deal.
Ahead of the deal, Moody's Investors Service upgraded the Michigan DOT's 2007 Garvees to A2 from A3, bringing it up to the A2 rating of its 2009 Garvee bonds.
The refunding deal was also rated A2; S&P Global Ratings assigned its AA rating.
Both agencies assign a stable outlook.
The upgrade reflects the more solid credit footing created when Congress passed the Fixing America's Surface Transportation Act.
The upgrade of the 2007 bonds recognizes the elimination of a key risk facing the bonds posed by an acceleration provision in the 2009B bonds that was eliminated with the increase in federal aid.
The Michigan DOT will refund bonds from issues in 2007 and 2009.
"The A2 rating incorporates the solid coverage of debt service by pledged revenues, as well as the mitigated uncertainty surrounding authorizations of the federal highway grants that comprise pledged revenues," Moody's said. Pledged revenues are subject to appropriation by the state.
The bonds are secured by the state share of the federal highway reimbursements received each year by the state.
"The principal credit challenges for Garvees are periodic uncertainty regarding reauthorization of the federal transportation grant programs, which have historically covered six-year periods, and volatility in federal transportation revenues," said Moody's.
Michigan annually receives grant proceeds from the federal government under the Federal Aid-Highway Program. Fixing America's Surface Transportation Act, which was signed into law in December 2015, increased federal highway funding by 15% through 2020. It authorizes $305 billion in funding over the next five years for transportation projects.
For MDOT, the law effectively eliminated the risk of an acceleration of the principal of the department's 2009B bonds, according to Moody's. FAST Act also mitigated the uncertainty surrounding the authorizations of the federal highway grants that comprise the pledged revenues for MDOT's Garvees, at least through 2020.
"Without the prospect of an acceleration of the principal of the 2009B bonds, all three of Michigan's series are now of equal standing," said Moody's.
MDOT is also set to get increased state aid. On Nov. 10, 2015 Gov. Rick Snyder signed a $1.2 billion legislative transportation revenue package. Roughly one-third of the revenues flow to MDOT; two thirds are allocated to counties, cities and villages. Beginning in January 2017, an estimated $600 million annually will be raised and dedicated for transportation purposes.
Public Financial Management is the financial advisor. Loop Capital Markets and Bank of America Merrill Lynch are the joint book runners on the refunding.
Refunding of the series 2007 bonds is a traditional advance refunding issue. However, the 2009 refunding piece represents a "crossover" advance refunding and the bonds will remain outstanding until they are called on Sept. 15, 2018.
Passage of the federal funding was labeled a credit positive for $11 billion of rated state road and transit debt secured by federal transportation grants, Moody's said when the package was signed in December. Twenty-four states have issued Garvee bonds for highway or transit projects over the last 15 years, according to the Federal Highway Administration.
