CTRMA 2013 Refunding – Case Study
In April 2013, FirstSouthwest served as financial advisor to Central Texas Regional Mobility Authority (“CTRMA” or the “Authority”) on a complex refunding of three series of bonds, a $167 million senior lien debt issue, a $66 million subordinate lien TIFIA loan, and a $45 million subordinate lien Build America Bond issue. This refunding was undertaken to create annual cash flow savings and eliminate major covenant or bond related issues for each individual series. This case study highlights FirstSouthwest’s expertise and client relations to request improved ratings on the bonds, aggressively market the debt through a nationwide roadshow and investor conference, and obtain excellent pricing in the midst of a heavy spring calendar.
Over the past eight months, rates have been at or near historic lows, which prompted CTRMA and FirstSouthwest to review refunding candidates. Rates had decreased to an extent where gross savings were achieved with the Authority’s inaugural debt issues from 2005, its 2005 Senior Lien Bonds and the 2005 TIFIA loan. Compounding this refunding opportunity was that the Senior Lien Bonds were wrapped by National Public Finance Guarantee Corp (“National”), a bond insurer who had included onerous bond covenants in the original financing, preventing the Authority from adding new toll-road projects to the Turnpike System. Moreover, due to the successful performance of the Authority’s 183A facility, TIFIA loan prepayments were set to kick in which would accelerate principal amortization of the TIFIA loan by 14 years, and would accelerate even faster if a new managed lane and toll road projects were added to the system (MoPac Improvement Project and SH 71 Projects, respectively).
Due to upcoming sequestration cuts that would affect Build America Bond (“BAB”) subsidy payments, CTRMA began to review refunding the $45 million Taxable Series 2010 Subordinate lien bonds that were issued as BABs. When originally financed, FirstSouthwest worked with the financing team to include an extraordinary par call provision if a change in law occurred which would alter the amount of subsidy provided. When sequestration cuts were signed into law in March 2013, CTRMA decided to include the BAB refunding into the refunding program
While the bond issue was being structured and assembled, FirstSouthwest worked closely with CTRMA leadership to design a rating strategy to argue that the Authority could obtain a rating upgrade on its outstanding debt. FirstSouthwest worked with the Traffic and Revenue consultant to create a new traffic study that reflected historical transactions on both roll roads, and also worked with the General Engineering Consultant to produce a report to that monitored progress on outstanding construction projects and an updated projection for ongoing operations and maintenance. With hard data in hand, FirstSouthwest created a rating agency presentation that was led by CTRMA and presented to Moody’s and S&P. These presentations were well received, given the underlying strength of the current local and state economy, growing transactions on both toll roads, and high but not unrealistic projections for future residential and commercial development in the tollroad study areas. In the end, Moody’s upgraded CTRMA by one notch, to Baa2 for the senior lien bonds (stable outlook) and Baa3 for the subordinate lien bonds (stable outlook). S&P reaffirmed their ratings (Senior: BBB- [stable outlook], Subordinate: BB+ [stable outlook]), but did note that they would likely reconsider ratings once construction on the Manor Expressway was complete and the tollroad was operating as planned.
Once ratings were obtained, CTRMA began the marketing process by recording a netroadshow and embarking on a national roadshow to advertise the bonds to major institutional bond investors around the country. In the middle of the marketing process, CTRMA and FirstSouthwest attended the JPMorgan Transportation Investor Conference and held eight one-on-one sessions with bond investors. All together, over a 10 day period, CTRMA and FirstSouthwest met with over twenty bond investors in person or over the phone, and were able to communicate the credit in a timely and thorough fashion.
FirstSouthwest structured the refunding into three series, a $156 million fixed rate senior lien issue, a $30 million 3 year soft put issue, and a $104 million fixed rate subordinate lien issue. The two fixed rate issues were senior managed by JPMorgan, and the soft put was sole managed by Loop Capital. In order to increase present value savings and have a manageable portfolio of non liquidity backed variable rate debt, FirstSouthwest structured a $30 million soft put structure, which CTRMA will continue to remarket over time until maturity. FirstSouthwest worked with JPMorgan to split the TIFIA refunding into senior and subordinate portions, which increased average annual savings and would not adversely impact coverage ratios.
In the days leading up to pricing day, market tone was firm to improving on credit spreads for the Authority bond issues. As pricing began, orders began to come in for CTRMA. Over a one and a half hour period, CTRMA had over $3.2 billion in orders on the $260 million senior and subordinate issues, an aggregate oversubscription rate of over 12x. This resulted in yields tightening 6-15bps across the yield curve. For the soft put, it was 5x oversubscribed, resulting in yields decreasing 5bps and a stepped coupon of 9% (a similar, higher rated Texas toll road issue netted a 10% stepped coupon rate in late 2012). Overall, the refunding created $29.3 million on gross savings, and $17.5 million or 5.97% on a present value basis.
CTRMA was ecstatic about the refunding results on pricing day. The market was extremely firm, and the senior managers did an excellent job selling the bonds in a busy marketplace. Through each step, FirstSouthwest led the financing process, providing advice to the client when it was needed, relying on consultants and investment banks to provide their respective services, and ultimately serving as fiduciary as the Authority navigated the circuitous boundaries of a complex refunding. FirstSouthwest is extremely proud to serve as financial advisor to CTRMA, and will use this refunding as a touchstone to future engagements with this and other financial advisory clients.