DALLAS – The Oklahoma Turnpike Authority may pay higher borrowing costs on a $420 million sale of toll revenue bonds because of the surge in bond yields since the deal was sidelined last month pending state Supreme Court validation.
"Rates have moved about 50 or 60 basis points" higher since the Nov. 9 election of President-elect Donald Trump, according to Wendy Smith, finance director for OTA. "We do wish we could have gotten it done before then."
Even with rising rates and the likelihood of at least a 25 basis-point increase in the Federal Reserve's overnight rate at the Dec. 13-14 meeting of the Federal Open Market Committee, OTA still plans to price the bonds before the end of the year if the state Supreme Court validates them in time.
"We would be able to get to market about two weeks after we receive validation," Smith said. "We were hopeful to get into the market right before Christmas. We're continuing to monitor the market."
"It remains to be seen whether rates will move back to pre-election levels – especially in light of the expected Fed rate hike," Oklahoma State Bond Advisor James Joseph said.
"I know the OTA would like to begin their projects as quickly as possible," he said. "So, I don't expect a delay based on market rates, assuming a favorable opinion is received from the Oklahoma Supreme Court."
Joseph said the rising rates have affected a couple of Oklahoma deals.
"We have delayed an Oklahoma Capitol Improvement Authority advance refunding with a 2018 call date," Joseph said. "That could carry over into January or later depending on where rates go from here. There are also a couple of small issues that are on hold pending greater market stability."
Smith said the OTA is so certain of the court's validation that it is not developing a backup plan in the event the court rules against the bonds. The request for the opinion was a pro-active step after a lawsuit challenged the validity of the bonds on a claim that they were improperly approved by the state Legislature.
Oklahoma lawyer Jerry Fent, who has frequently challenged state bond issues in court, contended that the bill authorizing the OTA bonds violated the state constitution's ban on combining multiple subjects in a single bill. The court ruled against Fent's claim Oct. 3.
Smith said OTA was seeking validation because it wanted assurance against any future lawsuits.
For OTA, the bond deal is a critical step in advancing its Driving Forward capital plan and one of the largest from the Sooner State this year.
Proceeds from the bonds would help pay for a new east Oklahoma County toll road and improvements on the Gilcrease Expressway, the Muskogee Turnpike, the Turner Turnpike, the H.E. Bailey Turnpike and the Kilpatrick Turnpike.
New turnpikes are designed to relieve congestion on the fast growing south side of Oklahoma City, particularly on Interstate 40.
In September, the authority voted to increase toll rates to pay for the entire Driving Forward program, which is expected to cost about $935 million and require debt issuance of up to $1.1 billion.
Tolls would increase 12% as soon as practical after the validation. Another 2.5% increase would take effect Jan. 1, 2018, followed by another 2.5% increase effective July 1, 2019.
"The debt service coverage ratios are expected to remain fairly stable through the sizable Driving Forward capital plan given the multi-year rate increase passed by the board that requires no further action to implement rate increases," according to analyst Earl Heffintrayer at Moody's Investors Service, which rated the upcoming bonds Aa3 with a stable outlook.
S&P Global Ratings conferred its AA-Minus rating on the bonds, which will be issued as $398.7 million of Series B and $22.4 million of Series C refunding and second senior-lien revenue bonds. The outlook is stable.
"The long-term rating reflects our opinion of the OTA's strong competitive position, pledge of apportioned motor fuel excise tax revenues to the bonds in addition to net toll revenues that could pay debt service, strong debt service coverage that we expect will continue, and experienced management team," said S&P Global Ratings credit analyst Todd Spence.
Hilltop Securities, Michael Newman, senior vice president for First Southwest Co. is financial advisor on the deal. Newman also advises on financing for the Oklahoma Department of Transportation and Tulsa Airports Improvement Trust among other large issuers in the transportation sector.
John Moore, vice president for Wells Fargo, is lead banker on the deal.
The OTA board reaffirmed the selection of Wells Fargo in September after reports of improper business practices on the retail banking side of the business.
"The Underwriting Division of Wells Fargo is functionally separate from the retail banking operations and was not subject to the improper practices recently reported," board secretary G. Carl Gibson told fellow board members. "We originally chose Wells Fargo as lead underwriter for their superior performance in other OTA financial transactions. It is our belief that our selection remains sound."
In addition to financing the new tollways, bond proceeds will be used to refund portions of the Series 2007A bonds and privately-placed 2016A bonds.
As of Dec. 31, 2015, OTA had $949 million in debt outstanding, according to Moody's.
"The authority's variable rate percentage remains elevated, but refundings and other measures have decreased this exposure from previous years," Heffintrayer said. "Variable rate debt now makes up 32% of the total debt outstanding, as opposed to the 55% in 2011."
Annual debt service requirements are expected to rise to approximately $130 million in 2019 from recently levels of about $90 million, if the full $1.1 billion of Driving Forward debt is issued. Debt service is expected to remain at those levels through 2027, according to Moody's.
Established by the state in 1947, the OTA operates 10 turnpikes covering more than 600 miles.
OTA's board of directors includes Gov. Mary Fallin, who is a member ex-officio, and six members. All members are appointed by the governor with the consent of the state Senate. The governor may remove any member of the authority, at any time, with or without cause.
