Road to Disney World Lures Vanguard as Debt Yields SinkElizabeth Campbell and Brian Chappatta
A central Florida county is building a toll road through swampland near Walt Disney World to speed the commutes of local workers, financing the project by selling low-rated debt to yield-hungry investors.
The $70 million tax-exempt deal from Osceola County drew Vanguard Group Inc., the world’s biggest mutual fund company, whose head of municipal securities, Chris Alwine, foresees demand for more infrastructure funding. Citigroup Inc. predicts next year will bring the most muni toll-road issuance since 2010 as officials ramp up investment.
The Poinciana Parkway being dug from the muck outside Orlando shows how America’s aging road system stands to benefit from the search for yield with interest rates close to generational lows. Investing in the project is like wagering on a start-up venture: The bonds bear the lowest investment grade and are backed by tolls to be collected on an unproven route.
“There’s inherent demand given the level of congestion in the area,” said Alwine of Valley Forge, Pennsylvania-based Vanguard. The company oversees about $130 billion in munis, including about $42 million of the Osceola toll bonds.
“We look at the route relative to alternatives, the fares that are proposed, and then the cushion, and we’re comfortable with the deal,” he said.
Road projects financed by lower-rated debt are getting added attention as a slowdown in municipal borrowing has helped drive benchmark yields to one-year lows.
Tollway endeavors financed by riskier debt aren’t limited to Florida. Colorado High Performance Transportation Enterprise, part of the state Transportation Department, sold $20 million in bonds in February for a route from Denver to Boulder, deal documents show. Fitch Ratings ranked the securities one step above speculative grade. Higher-rated issuers, including New York’s Thruway Authority, have also sold toll bonds this year.
Citigroup expects $14 billion to $15 billion in toll-road issuance in 2015. That would be the most since 2010, when borrowing surpassed $16 billion in the last year of the Build America Bonds program.
Those sums are still a drop in the bucket compared with what the nation needs to fix its roads. More than 40 percent of American highways are congested, and it would take about $170 billion of work annually to improve conditions, according to a 2013 report from the American Society of Civil Engineers.
“There’s a desperate need for infrastructure spending,” said Vikram Rai, a fixed-income strategist at Citigroup in New York. “There will be spending in this space, but the need for infrastructure spending has to overwhelm the environment of fiscal restraint.”
Investors looking for extra yield and willing to take on more risk should consider newly issued toll-backed munis rated BBB or BB, while assessing the potential for hiccups such as construction delays, Rai said. The bank prefers projects where there aren’t competing toll-free options.
Poinciana Parkway bonds maturing in October 2047 traded today at an average yield of 4.83 percent, the lowest since the federally tax-exempt obligations were issued in March, data compiled by Bloomberg show. Investors have asked for about 2.4 percentage points of extra yield on average since April 1 to buy the debt instead of benchmark securities.
The nearly 10-mile (16-kilometer) road will ease traffic for travelers from Poinciana to Orlando and Walt Disney World, said Atlee Mercer, chairman of the Osceola County Expressway Authority. The project involves building a bridge across environmentally sensitive swampland, he said.
Standard & Poor’s rated the deal BBB-, one step above junk, saying traffic may trail expectations.
About half the workers in Poinciana, a community of 53,000 about 36 miles southwest of Orlando, are involved in the tourism, entertainment or restaurant industries, including Walt Disney World, the Universal Orlando Resort and SeaWorld, according to Mercer. Walt Disney Co. employed 3,700 people in Osceola County in 2008, making it the largest employer after the public schools, deal documents show.
“The people we’re talking about are hourly workers -- if they’re late, they don’t get paid for that time,” Mercer said. “What we’re offering them is much more assurance that when they leave their house in the morning, they know when to leave and they know when they’ll get there.”
The tollway’s full opening is scheduled for December 2016, when the rate is set at $2.25 for a full-length trip, peaking at $3.90 in 2045, deal documents show. Projections call for 11,744 average weekday transactions in 2018, with the tally more than quadrupling by 2045, for annual revenue of about $36 million, according to forecasts.
S&P called the projections “aggressive” in a March 19 report. These risks have Wells Fargo Advisors focusing more on transportation projects with stronger credit ratings, said Dorian Jamison, a muni analyst at the company in St. Louis.
“We would generally recommend against going too far down the credit spectrum,” Jamison said. “Those bonds tend to underperform more dramatically when things start to go the other way.”
The case of Osceola highlights the infrastructure needs of growing municipalities. The county’s population climbed 11 percent from April 2010 to July 2013, making it the nation’s 20th fastest-growing county with 10,000 or more people, and ranking it second in Florida behind Sumter County west of Orlando, Census data show.
Roads are just one area where investment is lacking nationwide. Including categories such as bridges, rail and ports, about $3.6 trillion needs to be spent by 2020 on the nation’s critical systems, according to the report from the engineering group.
“Eventually, you’re going to have to come back to market and fund infrastructure,” Alwine said. “The infrastructure needs are not lessening, they’re growing.”