The San Diego Association of Governments has structured $331 million in green revenue bonds to allay fears of construction risk or federal funding delays.
Proceeds of the bonds it plans to price Tuesday will help fund the $2.17 billion Mid-Coast Corridor Transit Project to connect downtown San Diego by light rail with the University of California San Diego and its adjacent biotech hub 11 miles to the north.
The deal represents one of the first bond sales backed solely by funds from a full funding grant agreement in the public markets in nearly two decades, according to the finance team.
Lead manager Wells Fargo Securities will price the capital grant receipts bonds in two tranches: a $206.3 million A series and $125 million B series.
The Series A are serial bonds that mature in four to seven years and the Series B bonds are super sinker bonds maturing in eight years. The 2019 bonds are being issued to accelerate receipt of funds under an existing federal grant agreement and represent the final piece of financing required for the project.
The super sinker or turbo bonds have a flexible repayment schedule, so that SANDAG has the ability to repay the bonds more quickly if grant proceeds come in from the federal government, as anticipated, with no delays, said Julie Burger, a Wells Fargo director.
The Series A bonds are subject to optional redemption 12 months prior to each maturity date, according to the bond documents.
“It’s a capital investment grant, and very few public market bonds are backed solely by grants,” Burger said, adding that is why they structured the deal the way they did.
S&P Global Ratings assigned its A-minus rating with a stable outlook to the deal.
The San Diego Trolley extension is designed to provide affordable transit service for residents and reduce congestion along major regional corridors, said Andre Douzdjian, SANDAG’s director of finance. The region has a population of 3.4 million and is expected to grow by an additional 700,000 people by 2050, Douzdjian said.
The bonds will be repaid using part of the $1.04 billion Federal Transit Administration grant awarded through a full funding grant agreement signed and executed in September 2016.
SANDAG has already received roughly $430 million. The remaining grant disbursements will be used for a combination of pay-go and repayment of the bonds.
SANDAG expects to open the project for service by November 2021 — a full year in advance of the date required in its federal grant agreement. The project includes nine new stations, five park-and-ride facilities, 14 new and two upgraded traction power substations and 36 new light rail vehicles.
The agency is on track to deliver the project with few hiccups, and a year early, because it used a construction manager/general contractor method of project delivery, rather than a lowest-bidder method, said Jim Linthicum, who heads the capital program for SANDAG.
Use of the method resulted in both cost and time savings on the project that is 60% complete, he said.
The capital investment grants that are securing the bonds are distinct from the well-known grant anticipation revenue vehicle, or Garvee, bond structure, Burger said.
The capital investment grant program provides project specific grants for large transit projects, Burger said. It is paid from the general fund of the U.S. Treasury as opposed to the Highway Trust Fund that provides money that backs Garvee debt, she said.
The bonds are not backed by SANDAG’s half-cent TransNet sales tax, which will be used to repay a $560 million TIFIA loan for part of the project.
The financing for Mid-Coast fits in with SANDAG’s long-range plan, said Darren Hodge, a director with PFM, financial advisor on the deal, of why the bonds aren't back by the sales tax.
“We were trying to be as efficient as we could with every last bit of sales tax dollars,” Hodge said. “It helps that the bonds are secured by the federal grant, so that we do not have to secure them with TransNet dollars, which frees that money up for other projects.”
The turbo bonds are a “credit enhancement to the bond structure that allows for flexibility to repay the bonds earlier assuming the grants occur as expected,” Burger said.
Though investors could make less money in interest payments if SANDAG pays the bonds off earlier, Burger said, it gives certainty that the grants are there to fully pay the debt service.
“Turbo bonds are done regularly in the market, so we feel there will be good demand for that structure,” she said.
The A-minus rating reflects the federal government’s high level of commitment to the Capital Investment Grants program, that the project is more than 50% complete while meeting its schedule and budget targets, and that it has a financial structure that can accommodate funding delays, said S&P Global Ratings credit analyst Kevin Archer.
“Congress’ long-standing support of the new starts program is a primary rating factor; the Fixing America’s Surface Transportation Act authorized $2.3 billion annually in CIG funding through federal fiscal year 2020,” Archer wrote. “While Congress has had a history of making partial appropriations (80%-100% average), it has never canceled or permanently cut FFGA funding for any individual project.”
Many of the most technically challenging aspects of the project are already completed, Archer wrote.
“Another primary rating factor is the accommodating financial structure, which has various risk-mitigating measures,” Archer wrote.
The rating also benefits from a closed lien that prohibits issuance of additional parity debt, except for refunding, and a debt service reserve fund funded to maximum annual interest payment, according to S&P.
As the electrified light-rail line is self-evidently clean transportation, SANDAG and its finance team decided outside verification that the bonds are green was unnecessary, Douzdjian said.
“We are hoping to see participation by green or environmental funds,” Burger said.
The preliminary official statement was mailed out July 16 and the finance team had already heard from investors within a few days, and before investor meetings, planned in San Francisco, Boston and New York ahead of the sale, she said.
“There is a lot of demand in California. It’s a new credit and SANDAG has a pristine name in the market,” Burger said. “We are confident there will be good investor interest when the deal comes to market.”
SANDAG does have a certain amount of respect in the market, Douzdjian said.
Though the deal achieved an A-minus rating. S&P and Fitch Ratings both assign triple-A issuer ratings to the agency.
“I think only five agencies have a triple-A rating,” Douzdjian said. “Though this (deal) is not backed by our triple-A ratings, it got an A-minus rating from S&P, because it’s not backed by our sales tax, but our management team is involved. The triple-A ratings – and the fact we are in the market every year – means the SANDAG name pre-markets itself.”
The short maturities played a hand in the decision to only go for the rating from S&P, he said.
“When we discussed it with our FA and banking syndicate, they thought one rating was sufficient,” Douzdjian said. “Ratings aren’t cheap.”
More issuers are only going for one rating, because investors are doing more of their own research, Burger said.
“That was part of the feeling that the single rating was enough to successfully execute the transaction,” she said.
The finance team is expecting good demand from California specific funds, short-duration funds, mutual funds and anyone looking for something on the short end of the curve, Burger said.
Norton Rose Fulbright is bond counsel and Orrick, Herrington & Sutcliffe is disclosure counsel on the deal.
