California Toll Bonds Hampered by Freeways: Muni Credit

Even in traffic-clogged Southern California, too few drivers want to spend as much as $6.25 to travel 12 miles on toll roads. Their reluctance is leading one highway agency to extend $2.4 billion in debt payments by as much as 12 years as investors demand more to hold its securities.

Orange County’s 51 miles (82 kilometers) of toll highways, the most extensive system in the world’s ninth-biggest economy, have fallen short of revenue projections since opening in the 1990s as the two managing agencies raise fares and refinance $4.5 billion in outstanding debt issued to build them. State Treasurer Bill Lockyer is looking into whether the authorities even will be able to raise money for escalating bond payments.

The woes are a caution for investors, said Howard Cure, director of municipal research for Evercore Wealth Management LLC in New York. Long-distance highways with few free rivals -- such as the Ohio and Pennsylvania turnpikes -- have fared better, he said.

“The issue with Orange County is that it’s a stand-alone toll road and there’s competition from free options,” Cure said by telephone. “Additionally, you have a group of people -- Southern California drivers -- who are not used to paying tolls.”

Rosy Forecasts

Cure, whose company oversees $3.8 billion, said most recent toll-road projects have been premised on unrealistic traffic volume, making it difficult to meet debt payments that typically escalate. Operating agencies have responded by raising fares, a dubious strategy in a sluggish economy, Cure said. Operators raised them in 2009, 2011 and 2012, each time by 25 or 50 cents depending on the highway and distance traveled.

The toll roads in Orange County, a jurisdiction that filed for bankruptcy in 1994, are run by two agencies, the Foothill/Eastern Transportation Corridor Agency, which has $2.4 billion in outstanding debt on three highways linking inland areas to the Pacific Coast; and the San Joaquin Hills Transportation Corridor Agency, which owes $2.1 billion in for a 12-mile highway parallel to the shoreline. With interest over the life of both agencies’ bonds, the debt totals $10.5 billion, according to the bodies.

Narrower Penalty

Even with traffic trailing forecasts, San Joaquin Hills Transportation debt’s yield penalty narrowed in 2012. A bond due in 2030 and rated B1 by Moody’s Investors Service, four levels below investment grade, traded Dec. 28 with an average yield of 5.3 percent, about 3 percentage points above an index of top-rated munis with similar maturity, data compiled by Bloomberg show. That difference declined from 3.3 percentage points on Jan. 3.

Foothill-Eastern Transportation bonds have seen their penalty widen. A security due in 2040 and rated Baa3, Moody’s lowest investment-grade rank, traded Dec. 19 with an average yield of 5.6 percent, about 2.9 percentage points above an index of benchmark munis with similar maturity, according to Bloomberg data. That yield difference widened from Jan. 5, when the bonds traded with a spread of about 2.5 percentage points above the index.

With municipal interest rates at their lowest since the 1960s, Foothill plans to refinance its bonds and extend maturities beyond 2040, according to a Dec. 13 staff report. Debt service is due to increase to $298 million in 2040 from $105 million next year, the report said. Tolls yielded $107 million in the year ended June 30, short of the $143 million that the agency projected, according to data on the Transportation Corridor Agencies website.

Ratio Cut

The San Joaquin agency already agreed with bondholders in May 2011 to reduce the required ratio of pledged revenues against principal and interest payments for the next 13 years, according to a press release. Tolls from the highway brought in $93 million in the 12 months ended June 30, compared with projections of $167 million a year, according to Transportation Corridor Agencies.

Highway 73, the San Joaquin Hills Toll Road, parallels both the Pacific Coast Highway and Interstates 5 and 405, all free. The Foothill/Eastern toll roads slice through the foothills of the Santa Ana Mountains, cutting about four miles from the 31-mile commute of a driver in suburban Corona to the business parks of Irvine, compared with the free Highways 91 and 55 and Interstate 5.

Commuter Pain

Even with the U.S. recovering since June 2009 from the longest recession since the Great Depression of the 1930s, the economic downturn disproportionately affected commuters from inland Southern California who take toll roads to jobs in Orange County, said Michael McDermott, a managing director at Fitch Ratings in New York.

Riverside County, immediately east of Orange County, had a 12 percent unemployment rate in October, according to the state Employment Development Department. Orange County had an unemployment rate of 7.2 percent in October, below the 9.8 percent statewide rate, according to the state Employment Development Department. Nationally, the rate was 7.9 percent, the Bureau of Labor Statistics reported.

In May, Fitch revised its outlook for the Foothill/Eastern Transportation Corridor Agency to negative from stable, with a BBB- rating, its 10th highest. The ratings company affirmed its BB rating, 12th-highest and below investment grade, on the San Joaquin Hills Transportation Corridor Agency. The authority’s credit outlook is stable, like 92 percent of the toll-road authorities Fitch rates. Four percent of rated roads have positive outlooks and a like number has been termed negative, meaning a downgrade is possible.

Ohio Proposal

McDermott said toll roads and bridges are becoming increasingly popular as cash-strapped local governments look for ways to accommodate motorists without raising taxes. On Dec. 13, Ohio Governor John Kasich suggested that the state’s turnpike commission issue as much as $1.5 billion in debt to fund transportation projects.

While drivers pay as much as $10.26 in peak periods for a round trip on the floating bridge connecting Seattle to suburbs across Lake Washington, average daily traffic exceeded projections by 18 percent in 2012, according to a Washington State Transportation Department press release.

The Route 520 span is the world’s longest floating bridge at 7,580 feet and tolls are intended to cover the cost of replacing it in 2014 or 2015, according to the transportation department.

Solvency Questioned

Orange County’s toll roads came under scrutiny from California officials in September after a request from former state Assemblywoman Marilyn Brewer, a Republican from Newport Beach, to Lockyer. Brewer wrote that higher fares and less-than-forecast ridership raise the possibility of the toll roads becoming insolvent. Lockyer, a Democrat, responded that the state Debt and Investment Advisory Commission, which he chairs, would look into the matter.

“The straw that broke the camel’s back for me is that they’re making local developers pay development fees on the expectation that their customers will use the toll roads,” Brewer said in a telephone interview. “That’s a stretch. My concern is the fiduciary responsibility of going out for new bonds when they’re having trouble servicing their existing bonds.”

Orange County’s transportation corridor agencies plan to issue about $200 million in new bonds to pay for a five-mile extension of Highway 241, one of the eastern toll roads, said Lori Olin, an authority spokeswoman.

Taxpayers’ Burden

Brewer, who represented areas along the San Joaquin Hills toll road in the state legislature from 1994 to 2000, said she’s concerned that California or Orange County would inherit responsibility for toll-road bonds if the authorities default.

Lockyer spokesman Tom Dresslar said he could not foresee any circumstance in which California would be liable for toll-road debt. Still, Dresslar said Lockyer agreed to the “unusual” inquiry that Brewer suggested because he shares her concern about the toll authorities’ ability to repay their debt.

Olin said the Orange County toll agencies are “nowhere near” insolvency, which would be a prerequisite to bankruptcy, nor would California taxpayers become responsible for their debt in the event of a default.

Highway Bankruptcy

In 2010, the private operator of a 10-mile segment of State Route 125 in San Diego County filed for Chapter 11 bankruptcy, citing traffic that was about half of projections on a road that runs parallel to free alternatives. After the San Diego County Association of Governments bought the highway in 2011 for about one-third of the cost of building it in 2006, the new operator lowered tolls by about 40 percent, it said in a press release. Drivers now pay no more than $3.50 for a one-way trip.

The Orange County agencies have $523 million in reserves to pay debt and haven’t missed a payment, Olin said in an e-mailed response to questions. They’ve restructured their debt to take advantage of low interest rates and to ensure that they’ll be able to meet their debt obligations, she said.

“We do these things because we are responsible issuers intent on paying off our debt,” Olin said. “Our bonds are non-recourse revenue bonds, so taxpayers and TCA member agencies cannot be held responsible for repaying the debt should we be unable to ourselves.”

Following are pending debt sales:

OHIO plans to borrow $219 million of general-obligation debt as soon as Jan. 8, data compiled by Bloomberg show. Proceeds will help finance capital projects and refund debt, according to bond documents. Fitch Ratings rates the sale AA+, its second-highest grade. (Added Jan. 2)

FAIRFAX COUNTY, VIRGINIA plans to sell about $300 million in general-obligation bonds as soon as Jan. 9, according to data compiled by Bloomberg. Moody’s Investors Service rates the debt Aaa, its highest grade. (Added Dec. 28)

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