Colorado Refunds as Transport Rates at 17-Year Low: Muni Credit

The Colorado Department of Transportation, which borrows to build highways and bridges, refinanced $104.7 million of revenue bonds as yields on five-year AA+ transport bonds reached the lowest since at least 1994.

The cheap rates enabled Colorado to refund AA rated Series 2004A bonds maturing in 2016 for net-present savings of at least 3 percent, Benson Stein, the department’s chief financial officer, said in a telephone interview from Denver.

“We never thought that there would be an opportunity to refund the Series 2004A bonds, but interest rates actually went down enough that we could finally achieve 3 percent savings,” Stein said.

Yields on five-year tax-exempt AA+ rated transportation debt fell to 1.12 percent this week, the lowest in at least 17 years, according to a Bloomberg index dating to 1994. The Colorado deal priced with all debt maturing in 2016 with a 1.41 percent yield, or 28 basis points above the index, according to Bloomberg data. A basis point is 0.01 percentage point.

The refinancing resulted in net-present savings of $3.28 million, according to the department’s sale documents.

The bonds are limited obligations of the department. Federal gas-tax revenue from the federal Highway Trust Fund and state motor-fuel taxes and vehicle registration fees back the debt, Stein said.

Garvee Bonds

Standard & Poor’s said Aug. 19 that bonds secured by the federal trust fund allocations, called grant anticipation revenue vehicle bonds, or Garvee bonds, may face rating cuts if Congress fails to address the possible expiration of the federal gasoline tax. A reduction in funding, a delay in extending the gasoline tax or postponing vital road surfacing programs “could all have an impact on our ratings on Garvee bonds,” according to an S&P report.

Permanent funding for the trust fund expired in September 2009 and Congress has approved temporary extensions. The status of that finance does pose “some risk,” John Hallacy, head of municipal research at Bank of America Merrill Lynch in New York, said in a telephone interview from San Francisco.

“And there is concern about whether the federal gas tax at least will be continued,” Hallacy said. “There’s some risk there, although we don’t think it’s a very big one. Transportation programs are very popular.”

Colorado’s Garvee bonds don’t rely primarily on federal highway funds as the state pays principal and interest costs on the bonds before receiving the federal allocation, Stein said.

“These are not what are called naked Garvees, where the sole pledge is the Federal Highway Administration revenues,” Stein said. “We actually pay with state funds and then seek reimbursement from the federal government.”

Tax-Exempt Yields

Yields on top-rated 10-year tax-exempt debt were 2.2 percent yesterday, below the year-to-date average of 2.9 percent, and higher than the 2.17 percent 2011 low on Aug. 23. Yields on top-rated 30-year tax-exempt bonds yesterday were 3.84 percent, following a year-low two days before of 3.84 percent. The 2011 average is 4.55 percent.

Investors withdrew about $148 million from U.S. municipal-bond mutual funds through Aug. 24, the fifth straight week of outflows, Lipper US Fund Flows said yesterday.

Following is a description of a pending sale of municipal debt:

FULTON COUNTY, GEORGIA, which encompasses Atlanta and is the state’s most populous county, will sell as soon as next week $257.6 million of water and sewer revenue refunding bonds. Previously sold water and sewer bonds are rated Aa3 by Moody’s Investors Service’s, its fourth-highest grade. Citigroup Inc. is the senior manager of the sale. (Added Aug. 26)

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