Muni Credit News Week of October 30, 2017

Joseph Krist






Tax-Exempt Senior Lien Private Activity Revenue Bonds (Transform 66 P3 Project)

Moody’s: Baa3

A long awaited private activity bond financing should hit the market this week from the Virginia Small Business Financing Authority. Proceeds of the PABs will be loaned to I-66 Express Mobility Partners LLC (the concessionaire) and will be used together with the proceeds of a $1.2 billion TIFIA loan to help finance the construction of the I-66 outside the beltway project. Construction on the project is expected to start later this year and December 31, 2022 is the expected project completion date.

The bonds are guaranteed by LLC members are unrated Ferrovial Agroman SA, Ferrovial Agroman International Ltd, Ferrovial Agroman US Corp, Allen Myers VA Inc. and Allan Myers, Inc.. The project includes a security package during construction including a $750 million performance bond which will be reduced to not less than 2.5% of the Design/Build (DB) price and effective for a warranty period of 5 years after project completion as well as a $750 million payment bond, which will be in effect until one year after project completion. The overall maximum aggregate liability of the Design Build Joint Venture (DBJV)  towards the developer under the DB contract is limited to 50% of the contract price.

The PABs obtained a Baa3 rating from Moody’s. This was based on the high leverage of the project (debt/mile around $89 million), a back-loaded debt amortization profile, uncertainty around the future traffic profile over the long-term horizon of the concession and the potential for high volatility in revenues. Constraints to the rating include the fact that managed lanes are a relatively new asset class in the United States and there is very limited performance data in particular over a longer time period.

The project encompasses the I-66 outside the beltway managed lanes project along a 22 mile corridor on I-66 between US-29 at Gainesville, Virginia and I-495 (Capital Beltway) in Fairfax County, Virginia. I-66 Express Mobility Partners LLC has entered into a 50-year concession agreement in December 2016 with the Virginia Department of Transportation and will be responsible for the design, build, finance, maintenance and operation of two tolled express lanes in each direction and for the design, build and finance of three general purpose lanes in each direction and associated infrastructure, which will be operated and maintained by VDOT. I-66 Express Mobility Partners LLC, is the borrower and concessionaire and is wholly owned by I-66 Express Mobility Partners Holdings LLC. I-66 Express Mobility Partners Holdings LCC is owned by Cintra Global Ltd. (10%), Cintra Infrastructures SE (40%), Meridiam Infrastructure North America Fund II (26.7%), I-66 Blocker, LLC representing Dutch pension fund APG (13.3%) and John Laing Investment Limited (10%). The Design-Build joint venture comprises Ferrovial Agroman U.S. Corp. (70%) and Allan Myers Va, Inc. (30%). Operating activities will be self-performed by the consortium.



A contract between PREPA and a small independent contractor to provide services in the restoration of the Puerto Rican power grid. The contract has a value of $300 million. PREPA and Whitefish signed the deal with no competitive bidding process in late September, despite Whitefish having only two employees at the time and little history working on infrastructure repair. Puerto Rico officials say Whitefish won the contract because it didn’t require a deposit the island couldn’t afford.

“The size and terms of the contract, as well as the circumstances surrounding the contract’s formation, raise questions regarding PREPA’s standard contract awarding procedures,”  according to the chairman of the House Energy and Commerce  Committee. Among the questions are the legality of provisions including one that provides that “In no event shall PREPA, the Commonwealth of Puerto Rico, the FEMA Administrator, the Comptroller General of the United States, or any of their authorized representatives have the right to audit or review the cost and profit elements.”

An Energy and Commerce hearing on the administration’s approach to recovery efforts will be held this week, giving lawmakers the chance to probe the Whitefish contract and more general issues, including the slow pace of repairs on the island. As those hearings approach, the governor of Puerto Rico has asked the management of PREPA to void the contract which FEMA did not approve.

The process continues PREPA’s streak of management errors that left the utility poorly prepared for a natural disaster let alone one of this scale. Now its lack of managerial acumen threatens to shove the recovery off track


The NYS Housing Finance Agency has enacted new requirements for projects it finances such that they qualify for “green bond ” financing. All new construction projects must meet the U.S. Environmental Protection Agency (EPA) Energy Star Programs standards to enable projects to be Climate Bond Certified as Green Bonds, using criteria established by the Climate Bond Initiative (CBI).

New construction projects must also select one or both of these two programs: Enterprise Green Communities Criteria or NYSERDA Low-Rise New Construction Program or Multifamily New Construction Program. As an alternative to these two programs,  HFA may choose to approve projects that prefer to implement standards of one of the nationally recognized leaders in the sustainability and energy efficiency industry such as the Passive House Institute US (PHIUS) or Passive House Institute (PHI); National Green Building Standard; Leadership in Energy and Environmental Design (LEED).

Applicants must document that project meets the rigorous CBI criteria for low carbon emissions. Applications must include signed contracts with qualified energy consultants to certify that the criteria of selected standards will be met.

Now the Agency is positioned to issue some $115 million of green bonds to finance the construction of three multifamily housing projects in the State. Two of the projects are in Brooklyn and one is in Suffolk County on Long island. The bonds will be issued under the Agency’s Affordable Housing Bond resolution which secures bonds from repayments on its portfolio of geographically diverse project mortgage loans, credit facilities, and debt service reserve funds.

So the bonds represent a proven credit of long standing but by establishing standards and procedures for compliance, allow the agency to access an expanding class of socially and/or environmentally responsible investors. And so the municipal bond market continues to evolve.


In June, a US Court dismissed for lack of jurisdiction an interlocutory appeal from the district court’s order denying the Salt River Project Agricultural Improvement and Power District’s motion to dismiss SolarCity Corporation’s antitrust lawsuit based on the state-action immunity doctrine, the panel held that the collateral-order doctrine does not allow an immediate appeal of an order denying a dismissal motion based on state-action immunity.

Now the District plans to market its first issue of revenue bonds since that setback in the anti-trust case.

Solar-panel supplier SolarCity Corporation filed a federal antitrust lawsuit against the Salt River Project Agricultural Improvement and Power District (the Power District), alleging that the Power District had attempted to entrench its monopoly by setting prices that disfavored solar- power providers. The Power District moved to dismiss the complaint based on the state-action immunity doctrine. That doctrine insulates states, and in some instances their subdivisions, from federal antitrust liability when they regulate prices in a local industry or otherwise limit competition, as long as they are acting as states in doing so. The district court denied the motion, and the Power District appealed. The Circuit Court joined the Fourth and Sixth Circuits in holding that the collateral-order doctrine does not allow an immediate appeal of an order denying a dismissal motion based on state-action immunity.

So what is the issue for Salt River? SolarCity sells and leases rooftop solar-energy panels. These solar panels allow its customers to reduce but not eliminate the amount of electricity they buy from other sources. Many SolarCity customers and prospective customers live near Phoenix, Arizona, where the Power District is the only supplier of traditional electrical power. Allegedly to prevent SolarCity from installing more panels, the Power District changed its rates. Under the new pricing structure, any customer who obtains power from his own system must pay a prohibitively large penalty. As a result, SolarCity claims, solar panel retailers received ninety-six percent fewer applications for new solar-panel systems in the Power District’s territory after the new rates took effect.

Clearly Salt River sees  Solar City as an economic threat. As a political subdivision of the State of Arizona, the District argues that it has authority to set prices under Arizona law and so is immune from federal antitrust lawsuits. The district court denied the motion, citing uncertainties about the specifics of the Power District’s state-law authority and business. The district court also decided not to certify an interlocutory appeal, but the Power District appealed nonetheless. The District is appealing this particular provision of a more expansive proceeding in which a “final decision” has not been issued by the District Court. The Power District argues that an interlocutory order denying state-action immunity is immediately appealable under the collateral-order doctrine.

Salt River is concerned that the ongoing litigation could, among other things make it more difficult for the District to finance its operations as it attempts to deal with a rapidly changing environment for generators and distributors of electric power. On one front, Salt River has been on the progressive dynamic side of the overall issue through its agreement to close the 2.25 MW Navajo Generating Plant, a coal fired facility due to unfavorable plant economics. On this other front, Salt River faces an independent provider of solar based electricity which would be expected to substantially reduce demand for power from Salt River. This would be a credit negative for salt River in that it would be forced to spread its fixed cost base over a much smaller number of customers. Hence, the effort to “discourage” solar City’s efforts to provide power.

Now the District is seeking to market its first bond issue after this decision. S&P has decided that it is maintaining its AA stable rating on the District’s $3.7 billion of debt. S&P cites the fact that SRP’s residential customers accounted for about 50% of 2017 retail revenues, which we view as contributing to revenue stream stability. Electric retail revenues represented 90% of fiscal 2017 operating revenues. Its ability to raise rates on  an unregulated basis and good debt service ratios are cited to support a cap on the rating level rather than any negative outlook due to what it calls ” uncertainties emissions regulations and their related compliance costs present.” The legal threat to the Phoenix retail base was not referenced.

We think that when an entity reacts to something like a change in technology and goes for the no-competitive practices grenade, they are letting us know that the threat is at least somewhat existential. We’re not saying that it’s a non-investment grade credit but some negative action – at least in outlook pending the results of the litigation – is warranted. Not the rating agencies best moment.


The IL Teachers’ Retirement System investments generated a positive 12.6 percent rate of return, net of fees, during fiscal year 2017 – a return that exceeded the System’s custom investment benchmark of 11.4 percent. TRS ended FY 2017 on June 30 with $49.4 billion in assets. Gross of fees, the TRS return for FY 2017 was 13.3 percent. Total investment income, net of fees, was $5.5 billion. The 30-year investment return for TRS currently is 8.1 percent, net of fees, which exceeds the System’s long-term investment goal of 7 percent.

Before we break out the bubbly we note that while the System’s funded status improved modestly during FY 2017 from 39.8 percent to 40.2 percent, the unfunded liability increased. At the end of the fiscal year the unfunded liability was $73.4 billion, compared to $71.4 billion at the end of FY 2016. The System’s three-year return at the end of FY 2017 came in at 6.1 percent, matching the System’s custom benchmark. The TRS five-year average of 9.9 percent at the end of the last fiscal year exceeded the benchmark of 9.3 percent. The 10-year average for FY 2017 of 5.4 percent barely topped the custom benchmark of 5.3 percent.


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