The operator of three toll roads in California’s Orange County is selling $2.3 billion in bonds to refund debt as revenue trails projections.
The Foothill/Eastern Transportation Corridor Agency, which runs 36 miles (58 kilometers) of roads in California’s third-most-populous county, joins issuers nationwide selling a combined $11 billion of debt this week. California’s largest toll-road system is borrowing to refinance bonds and extend maturities and tolls by 13 years, to 2053. It requested state permission to do so in 2012, and got clearance in October.
California Treasurer Bill Lockyer’s Debt and Investment Advisory Commission said in July that the agency might default on $2.4 billion of debt unless it reduced annual payments by lengthening maturities. Revenue from the roads fell short of projections the past six years as commuters chose free highways amid a drop in housing values that disproportionately hurt inland suburbs.
“Even with the restructuring, you still need growth in traffic and regular toll increases,” said Howard Cure, director of municipal research in New York at Evercore Wealth Management LLC, which oversees $4.7 billion. “It’s risky, but it’s less risky because of the restructuring.”
There are signs that the routes’ finances are reviving along with California’s prospects. A Federal Reserve Bank of Philadelphia index tracking the state’s economy was the highest since at least 1979 in October.
From July through October, traffic rose 2.8 percent from the same period of 2012 and revenue was up 7.6 percent, according to a Nov. 15 statement from the road agency.
“This is good news for commuters and recognizes the economic recovery that is occurring in Orange County and the surrounding area,” Neil Peterson, chief executive officer of Transportation Corridor Agencies, which oversees Foothill/Eastern, said in the release. “The refinance plan provides the agency with greater flexibility to withstand future economic downturns.”
The bonds are scheduled to sell Dec. 11 and 12, said Lisa Telles, an agency spokeswoman. The deal is expected to save $900 million through 2040, she said.
“Even without the proposed refinancing, the Foothill/Eastern Agency is not, and has not, been at risk of default nor bankruptcy,” Telles said via e-mail.
Fitch Ratings' analysis says prospects for revenue growth are limited because of a lack of land for housing development. The company grades the bulk of the deal BBB-, one step above junk.
The highways cross the foothills of the Santa Ana Mountains to connect inland suburbs with Orange County cities such as Irvine, 40 miles southeast of Los Angeles. In one example of the expense drivers face, a 14-mile trip from the starting point of one of the toll roads to a business park in Irvine would cost $8 when paying cash, according to the roads’ rate card.
Tax-exempt Foothill-Eastern bonds maturing in January 2040 traded at an average yield of 5.83 percent Nov. 26, or about 1.78 percentage points above benchmark debt, data compiled by Bloomberg show. The spread is up from about 1.6 percentage points in June.
“The refunding will certainly help ensure that the agency continues meeting its debt-service obligations,” Tom Dresslar, a Lockyer spokesman, said by telephone. “However, it doesn’t end their financial challenges.”
By extending maturities 13 years, the agency would limit annual increases in debt service to 3.75 percent, rather than 4.4 percent, according to Fitch’s report.
Savings from the refinancing should go toward speeding up repayment of bonds maturing from 2040 to 2053, Dresslar said.
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