Gilt-edged North Carolina continues its financing spree this month, bringing its third and largest infrastructure deal to investors looking for safety in high-grade bonds.
The state will price $700 million of tax-exempt, limited obligation bonds by negotiation with BofA Securities as the book-runner on Thursday.
Barclays, Citi, JPMorgan, Loop Capital Markets, and Wells Fargo Securities are in the selling group. Hilltop Securities is the state's financial advisor.
Robinson, Bradshaw & Hinson PA is bond counsel. Moore & Van Allen PLLC is disclosure counsel. McGuire Woods LLP is underwriters counsel.
The deal is the second tranche of the $3 billion Build NC statewide transportation financing program. The state issued $300 million in 2019 to finance all or portions of 55 projects.
Thursday’s fixed-rate issuance is structured with bonds maturing serially from 2021 to 2035. The debt will be secured by motor fuels and use tax revenues from the highway fund and highway trust fund, and a debt service reserve fund.
Debt service is subject to annual appropriation by the General Assembly.
The bonds received AA-plus ratings from Fitch Ratings and S&P Global Ratings, and an Aa1 rating from Moody's Investors Service. The outlook on the debt is stable.
All three rating agencies affirmed their triple-A ratings on the state's general obligation bonds in advance of the Oct. 8 sale of $400 million of Connect NC bonds, the fourth tranche of a $2 billion higher education and state capital infrastructure financing program approved by voters in 2016.
Issuers should take advantage of the market’s favorable conditions to finance infrastructure projects, Chris Hamel, senior fellow at Municipal Market Analytics Inc., told The Bond Buyer Tuesday.
"Eye-popping low interest rates and a depressed economy is the right environment for quality credits to be accessing the bond market and advancing their planned infrastructure improvements," said Hamel, who focuses on municipal infrastructure needs.
Municipal issuers should follow through with their project financings, as a federally funded program has been elusive, he said. "The prospect of an enhanced, robust federal infrastructure program has proven itself unlikely through the years," he added.
State officials did not respond to questions about the upcoming deal.
The bonds will provide a cash infusion to help the North Carolina Department of Transportation pay for projects that have a regional impact, according to State Treasurer Dale Folwell.
“The hardworking men and women at DOT and the hundreds of contractors across the state need sustainable and consistent funding to address current and future road-building and repair needs of North Carolinians,” Folwell said, when he announced the upcoming transaction on Oct. 5.
North Carolina may be ahead of the curve in its ability to finance infrastructure projects with the coronavirus pandemic impacting revenues.
Some state and local governments are struggling to invest in infrastructure, American Road & Transportation Builders Association officials said during a webinar Oct. 15.
Some 18 states and 25 local transportation agencies have canceled or delayed projects worth more than $10.9 billion due to economic losses caused by the COVID-19 pandemic, said Alison Premo Black, ARTBA senior vice president and chief economist.
“What we found over the summer, the amount of construction work did continue, but we have definitely seen signs of distress and growing concern over the revenue situation for state and local governments,” Black said.
As of Sept. 15, at least 49 states, transportation authorities and local governments have publicly projected declining revenues due to the pandemic, according to ARTBA.
Black said North Carolina was hard hit as well.
In response to the COVID-19 outbreak, Gov. Roy Cooper issued a stay-at-home order on March 27. In mid-May, the state began a phased reopening process that is still in progress.
The stay-at-home order had a "direct negative impact" on motor fuels tax revenue deposited in the highway fund and the highway trust fund as a result of people driving less, according to a roadshow presentation for the upcoming deal.
Based on unaudited year-end numbers, NCDOT experienced a shortfall of approximately $209.4 million for 2020, the presentation said.
In May, the Office of State Budget and Management and the Fiscal Research Division of the General Assembly released a revised consensus revenue forecast, reducing the previous forecast for highway funds by $513 million for fiscal year 2021.
"COVID-19 negatively affected highway use tax receipts in April and May, but rebounded in June," the roadshow said. "DOT realized higher motor fuel tax revenue after June 30, in excess of $80 million, in part due to late filings of taxes of motor fuels by businesses allowed by the Department of Revenue."
As a result of economic conditions due to the pandemic, highway use tax revenue is expected to decline because fewer car sales and leases.
"Because the duration and breadth of the pandemic are not yet known, the total impact on the revenue sources for the highway trust fund cannot be determined at this time," according to the roadshow. "However, the pandemic is expected to have an adverse impact on the financial condition of the HTF, which could be material."
The preliminary official statement includes a lengthy disclosure of the state's response to the respiratory virus that causes COVID-19, and its effects on revenues in the highway fund and HTF. It said revenues were down 11% from April to September.
Coverage of the HTF's general obligation debt service, outstanding Build NC bonds debt service and annual statutory commitments was "strong at 7.4 times in fiscal 2020," despite the decline in revenue, Moody's said in rating the upcoming bond sale.
Fitch said it expects long-term growth to resume at a pace that exceeds inflation as the economy recovers from the pandemic-induced downturn.
“Given expected leveraging and current high debt service coverage by revenues in the HTF, the bond structure can easily absorb a decline in revenues expected to result from a moderate recession scenario or a drop in revenue equivalent to the largest prior decrease,” said Fitch analyst Karen Krop.
In addition to the Build NC and Connect NC deals this month, the North Carolina Turnpike Authority issued $500 million of senior lien, turnpike revenue bond anticipation notes on Oct. 16.
The four-year BANs, rated BBB by Fitch and S&P, are being used to delay drawing from a higher-cost loan through the federal Transportation Infrastructure Finance and Innovation Act, state officials said.
The interim financing will pay a portion of costs associated with land acquisition, design, and construction of an 18.8-mile extension of the Triangle Expressway toll road around the greater Raleigh area.
North Carolina may also pursue a $5.28 billion infrastructure bond package next year, depending on the outcome of year's election.
Cooper, a Democrat, is seeking a second term in the governor's office. He faces Republican challenger Lt. Gov. Dan Forest in next week's election.
Earlier this year, Cooper sought a new infrastructure financing package that was rejected by both chambers of the Republican-led General Assembly.
The package included $988 million of healthcare limited obligation bonds to finance healthcare facilities, public health labs, vaccine development and other related capital needs.
Cooper also proposed placing a $4.3 billion infrastructure general obligation bond referendum on the November 2021 ballot. He said the financing would be used for pre-K and high school projects, higher education needs, water and sewer infrastructure, and to support new affordable housing programs.
If Cooper wins reelection and Democrats take majority control in both chambers, they could move forward with the healthcare bond issue and referendum next year. All seats in the House and Senate are up for election this year.
