Municipal Credit Consultant
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ANOTHER P3 TOLL ROAD BANKRUPTCY
On March 22,2007, a concession agreement was executed between the Texas Department of Transportation and SH130 providing for the financing, construction, and operation of a toll highway in Texas. Financing was provided one year later by a consortium of foreign banks and a TIFIA loan ($440 million) from the U.S. Government. If you recall, privatization of roads had been a goal of the Bush administration and then Texas Governor Rick Perry.
Texas State Highway 130 (SH 130), also known as the Pickle Parkway, is a highway from Interstate 35 in San Antonio along Interstate410(Texas) and Interstate 10 to east of Seguin, then north as a tollway from there to Interstate 35 north of Georgetown. SH 130 runs in a 131-mile (211 km) corridor east and south of Austin. The route parallels I-35 and is intended to relieve the Interstate’s traffic volume through the San Antonio-Austin corridor by serving as an alternate route.
The highway was developed in response to the tremendous surge in truck traffic on the I-35 corridor brought on by the North American Free Trade Agreement during the late 1990s, especially truck traffic originating from Laredo. The road opened for operation in November, 2012. It quickly became known for two things – it had the highest speed limit in the U.S. at 85 mph and almost no traffic.
It is difficult for toll highways which run essentially parallel to free limited access roads like 1-35, to attract sufficient numbers of users. It is often difficult to convince potential users that the savings in time and fuel are enough to offset the cost of tolls. SH 130 levied a toll for a passenger car that was nearly $20 and a heavy truck would be over three to five times over in recent years, which made the cost/benefit analysis less favorable to potential users.
These forces combined to generate revenue yields from the road coming in well below ability to service the $1.1 billion of outstanding debt that financed construction. The continuation of these trends and the lack of any real alternatives led the to consortium to seek bankruptcy protection earlier this year.
Last week, the debtors proposed a plan of reorganization which effectively turns the project over to its creditors. A new corporate entity will be formed to operate the road and the outstanding debt will be refinanced with a combination of debt and Payment in Kind or PIK instruments. So effectively, it is up to the lenders to fix the problem and recover their investment.
What is of real interest to municipal investors is the role of Cintra, S.A. as one of the members of the original consortium which built and operated the project, This represents the third failed P3 project in the US in which Cintra has been a primary participant which has not achieved the desired results. It was the initial purchaser of the Chicago Skyway which benefitted the City of Chicago but which Cintra divested itself of in a year’s time and the ill-fated Indiana Tollway privatization. That deal was hailed as a huge success for Indiana and its Governor Mitch Daniels but was a financial failure for Cintra. Based on that track record we would be wary of any P3 involving Cintra.
MOODY’S GREEN BOND RATINGS
The Upper Mohawk Valley Regional Water Finance Authority received a green bond assessment of GB1 for $8.78 million of water system revenue bonds the first GBA from Moody’s Investors Service to be issued in the U.S. The assessments range from GB1 for excellent to GB5 for poor. The assessment is designed to help investors determine if green bond proceeds are being used to achieve “positive environmental outcomes,” according to Moody’s.
Beginning in July, the rating agency has assigned four GBAs, the first three of which went to European entities. There a growing number of investor classes both individual and institutional who invest specifically in projects designed to address environmental issues. There are mutual funds which are marketed as “green” investment funds. Moody’s attributed the demand for these ratings to institutional buyers primarily . The existence of an outside “objective” assessment of the “green” status of the bonds will address compliance and marketing issues for the funds.
The Upper Mohawk Valley Regional Water Finance Authority bonds are to be issued soon to help finance an increase in the water system’s resiliency and the furtherance of its mission to provide safe drinking water to users. The authority is an instrumentality of New York State that serves 130,000 residents through 38,900 service connections in the eastern portions of the eastern portions of Oneida and Herkimer counties as well as the city of Utica.
According to Moody’s calculations, global green bond issuance during the second quarter reached a new quarterly high of $20.3 billion, raising total volume for the first half of the year to $37.2 billion, an 89% increase over the same period a year ago. The U.S. accounted for about 22.8% of the second quarter issuance and 19.8% of first quarter issuance, Moody’s said. U.S. Issuers in the second quarter were from Massachusetts, New York, California, Maryland, Indiana, Cleveland, Ohio, New Jersey, Rhode Island, and St. Paul, Minn.
Determining factors would include whether bonds issued to finance a project will reduce a carbon footprint, deter climate change, or improve water quality. The GBA will be based in part on the disclosure practices of the issuer and borrower and how transparent they are. The GBA is determined according to five key factors: organization; use of proceeds; disclosure of the use of proceeds; management of proceeds; and ongoing reporting and disclosure on environmental projects financed or refinanced with the bonds.
In the example of the Upper Mohawk Valley Regional Water Finance Authority, Moody’s said the authority is effectively organized and properly staffed with qualified and experienced personnel. The bonds, are explicitly designated as green bonds in the draft official statement by the Authority. They are being issued under the authority’s capital improvement plan to improve the water system’s infrastructure through increased capacity and dependability with proceeds allocated to raw water transmission upgrades that will improve the authority’s ability to draw water from the Hinckley Reservoir during major droughts that lead to below-normal water levels in the reservoir.
A small share of proceeds will finance design of two new water storage facilities as well as improvements to a water treatment plant and pumps and regulating stations. The authority discloses information on these projects in its annual comprehensive financial reports and on its website in capital projects committee reports.
The projects are expected to be completed within 12 months and the first-year initial disclosure is supposed to indicate in detail how the proceeds were expended, the contractors performing the work and receiving payments, and the actual work that was completed. In order to maintain the designation Moody’s says that “annual reporting will also include updates on four key metrics that at the same time link up to base line disclosures that permit comparative analysis”. “These include reservoir water levels versus transmission capacity, conveyance of purified potable water during the year, trihalomethane levels and the total amount of hydroelectric power produced by the turbines within the water treatment facility.”
It is fair to ask if there should be any concern as to whether the rating agency is stepping outside of its area of expertise. Would it be more proper to consider this the realm of engineering and/or environmental consultants? On whose expertise are they relying for ongoing chemical or other water quality analysis? Will a credit like the NYC Water and Sewer Finance Authority get credit for its renowned water quality and minimal treatment requirements? We ask because historically the rating agencies have relied on their stand that their credit ratings are just opinions to protect themselves from the consequences of overrating bonds. They seem to be making the case that the GBA is a more quantitative assessment rather than just an opinion.
ILLINOIS TESTS THE MARKET
Illinois is going to see if it can take advantage of its most highly rated credit by issuing Sales Tax Revenue Bonds during the week of August 22. Build Illinois bonds have a first and prior claim on the state share of the 6.25% unified sales tax and a first lien on revenues deposited into the Build Illinois Bond Retirement and Interest Fund (BIBRI). Debt service payments on the junior obligation bonds are subordinate to outstanding senior lien debt service; the senior lien is not closed. The security includes strong non-impairment language, and no requirement for annual appropriation.
These provisions are seen as providing a degree of insulation to the bonds from the larger credit problems plaguing the State’s GO credit. The trustee and the state’s debt manager transfer monthly 1/12th of the greater of 150% of the certified annual debt service or 3.8% of the state’s share of the sales tax up to the certified annual debt service requirement. The 3.8% of revenues has, since fiscal 2013, been greater than the debt service requirement, accelerating annual debt service funding.
Coverage of annual debt service and MADS requirements is very high for both liens. Additional security features include additional bonds tests that require debt service be no more than 5% of the state’s prior year sales tax receipts to issue senior lien bonds and 9.8% to issue junior obligation bonds; this effectively requires 20x coverage to issue senior lien bonds and 10.2x coverage to issue junior obligation bonds.
Revenue performance since the end of the recession has shown good year-over-year growth in all years except 2013. Sales tax revenues grew 4.1% and 4.5% in fiscal years 2014 and 2015, respectively. This year has been impacted by lower gasoline prices, with just 0.7% year-over-year growth in sales tax revenues in fiscal 2016. The state taxes gasoline sales as a percentage of the per-gallon price.
This issue is coming to market with ratings from S&P (AAA negative outlook) and Fitch AA+ (stable outlook). Moody’s has a much different view of the degree of insulation the credit has from the State’s well-known problems, assigning a Baa 2 rating to the bonds. Over the years the segregation of state sales tax collections in a variety of jurisdictions and credit environments, in our view, has stood the test of time. That serves as the basis for our view that the Moody’s assessment is too harsh supporting the State’s move to come to market without soliciting a Moody’s rating.
At the same time, the fact that the senior lien is not closed precludes a AAA rating in our view. This in spite of the strong credit provisions we have described. All in all, the bonds represent a solid AA credit.
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.