Muni Credit News April 26, 2016

Joseph Krist

Municipal Credit Consultant

FL ADOPTS P3 LEGISLATION

Recent legislation created The Florida Department of Transportation Financing  Corporation as a nonprofit corporation for the  purpose of financing or refinancing projects for the department.  It permits the Department to finance P3 projects through the issuance of tax-exempt bonds. It shall be governed by a board of directors consisting  of the director of the Office of Policy and Budget within the Executive Office of the Governor, the director of the Division of Bond Finance, and the Secretary of Transportation. The  director of the Division of Bond Finance will be the chief executive officer of the corporation and shall direct and supervise the administrative affairs of the corporation and  control, direct, and supervise the operation of the corporation.

The legislation authorizes the department to adopt relevant federal  environmental standards as the standards for a program. Sovereign immunity from civil suit in federal court is waived. The Legislature found that there is a public need for the rapid construction of safe and efficient transportation facilities for the purpose of traveling within the state, and  that it is in the public’s interest to provide for the construction of additional safe, convenient, and economical  transportation facilities. The law requires that in connection with a proposal to finance or refinance a transportation facility pursuant to this section, the department consult with the Division of Bond Finance of the State Board of Administration. The department must provide the division with the information necessary to provide timely  consultation and recommendations. The Division of Bond Finance may make an independent recommendation to the Executive Office  of the Governor.

Specifically, The Department of  Transportation may request the Division of Bond Finance to issue bonds secured by toll revenues collected on the Alligator Alley , the Sunshine Skyway Bridge, the Beeline-East Expressway, the Navarre Bridge, and the Pinellas Bayway to fund  transportation projects located within the county or counties in  which the project is located. The law provides that the department’s Pinellas Bayway System may be  transferred by the department and become part of the turnpike  system under the Florida Turnpike Enterprise Law. Upon transfer of the Pinellas Bayway  System to the turnpike system, the department shall also  transfer to the Florida Turnpike Enterprise the funds deposited  in the reserve account established shall be used by the Florida Turnpike Enterprise solely to help fund the costs of repair or  replacement of the transferred facilities.

The  department may enter into a service contract for a project  may enter into one or more such service contracts with the corporation and provide for  payments under such contracts, subject to annual appropriation  by the Legislature. Each service contract may  have a term of up to 35 years. The obligations of the department  under such service contracts do not constitute a general  obligation of the state or a pledge of the full faith and credit  or taxing power of the state, and such obligations are not an  obligation of the State Board of Administration or entities, but are payable solely from amounts available in  the State Transportation Trust Fund, subject to annual  appropriation. The Florida Department of Transportation Financing Corporation may issue and incur notes, bonds, certificates of  indebtedness, and other obligations payable from and secured by amounts payable to the corporation  by the department under a service contract. The duration of  any such note, bond, certificate of indebtedness, or other  obligation or evidence of indebtedness may not exceed 30 annual maturities. Debt may be sold through competitive bidding or negotiated  contracts, whichever is most cost-effective.

Such obligations are exempt from taxation; however, such exemption does not apply to any tax imposed under chapter 220 on  the interest, income, or profits on debt obligations owned by  corporations.

KANSAS – THE SONG REMAINS THE SAME

Last year at this time, Kansas legislators were facing  a $400 million hole in the FY 2016 budget. This year the gap is $290 million after increases in sales and cigarette taxes. Governor Sam Brownback would fill the gap by taking $185 million from the state highway fund, delaying more than two dozen projects, and he would cut spending to state universities by 3 percent, about $17 million, for the fiscal year beginning July 1. That would continue a 3 percent cut he ordered earlier this month.

More than $1.5 billion has been shifted from the highway fund to the state’s general fund and other state agencies since 2011. Until now, Brownback made assurances that all highway projects would go forward. But his budget message last week led the state Department of Transportation to announce the delay of 25 projects slated to begin over the next two to three years, including a Kansas 68 widening project in Miami County. Projects currently underway aren’t affected.

Other moves would require approval by the Legislature, which returns from a spring recess on Wednesday. Three options have been offered by the Governor.

One option would sell off a portion of the state’s future tobacco settlement money for quick cash. The first option was to sell a portion of the state’s future payments from a national tobacco settlement, which Kansas dedicates to early childhood education programs, to bondholders for a one-time infusion of $158 million. It’s a contentious idea. Kansas along with most other states receives a payment each year of some $58 million, although the annual payment is expected to decline in the future as smoking declines.

A second option would delay a $99 million state payment to the Kansas Public Employees Retirement System until fiscal year 2018. Current retirees’ benefits wouldn’t be affected by the delay, he said. A third option would make 3 to 5 percent cuts to most state agencies, including funding to K-12 public schools and state universities. A 3 percent reduction to K-12 schools would be about $57 million.

The options offered by the Governor are either one-shots (the tobacco bonds), irresponsible pension funding deferrals (Kansas has one of the lowest pension funding ratios). None of them are positive for the State’s credit and would continue a pattern of offloading the results of the failed tax cut experiment on to the credits of underlying entities to the detriment of their ratings. We see Kansas as an environment to avoid for credit conscious investors so long as Governor Brownback clings to his failed tax cut program. S&P would seem to agree keeping the State’s credit on negative outlook this week.

HIGH YIELD DOWNGRADE

Iowa Fertilizer Company LLC has been downgraded by Fitch to B+. The project generating revenues for the company’s controversial $1.2 billion tax-exempt deal has experienced a substantial delay in start-up is expected to necessitate a draw on the cash-funded debt service reserve for mandatory 2016 payments. These payments and construction cost shortfalls are expected to be funded by a $150 million letter of credit-backed (LOC) subordinated loan facility from sponsor OCI N.V.

The project fully exhausted its contingency and issued an additional $100 million of combined senior debt and sponsor equity in June 2015, and additional funding will be required to complete the facility. Further change orders and contractor claims are still being negotiated, indicating that final costs could rise further.

The project will utilize commercially proven technologies with relatively low maintenance risk. At the same time, it’s main products have historically exhibited considerable price volatility. Fitch estimates that a shift in the supply-demand balance could negatively impact prices, as a 10% change in nitrogen product prices will result in a 0.40x-0.50x change in debt service coverage ratios.  Management’s latest expectation is that ammonia production will begin in the September/October 2016. These obligations total an estimated $168.3 million. Construction progress, the status of OEC’s claims, and market fertilizer prices over the next few months will determine the likelihood that IFCo can meet its obligations relying only on projected sources of funds available to the project company.
Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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