Client Since:
2002
Projects:
Financial Advisory
Structured Products
About the Orlando-Orange County Expressway Authority
The Orlando-Orange County Expressway Authority, established in 1963 by the Florida state legislature, operates a 105-mile transportation network through Central Florida. The authority is responsible for the planning, design, construction, operation and maintenance of:
- State Road 408 (Spessard Lindsay Holland East-West Expressway)
- State Road 414 (John Land Apopka Expressway)
- And also major portions of:
- SR 528 (Martin B. Andersen Beachline Expressway)
- SR 417 (Central Florida GreeneWay)
- SR 429 (Daniel Webster Western Beltway).
Over the next five years, the authority plans to invest more than $1 billion into making much needed transportation improvements around metropolitan Orlando. For years, the authority’s work program in Orange County has eclipsed the amounts spent by state and local governments combined and that trend is expected to continue.
Case Study - Stage One
FirstSouthwest restructures Expressway Authority’s debt, expands capital program by hundreds of millions of dollars (2003)
Background
In August 2002, FirstSouthwest was hired as financial advisor for the authority. As financial advisor, FirstSouthwest developed the authority’s refunding and new money bond program. This was the authority’s first issuance away from the Florida Division of Bond Finance, having received legislative approval in 2002 to issue bonds autonomously.
FirstSouthwest developed a plan of finance that lowered the overall costs of financing the authority’s $781 million five-year work plan (2003-2008). The series 2003 program involved four separately sold series of bonds totaling almost $1.1 billion-two series of traditional fixed-rate bonds and two series of variable-rate bonds, which, in turn, were fixed synthetically through a series of interest rate exchange agreements totaling $500 million.
The Challenge
FirstSouthwest was challenged to lower the finance costs of the five-year work plan and to analyze outstanding debt in order to capture additional cash flow savings to increase coverage levels.
The FirstSouthwest Solution
To assist the authority in achieving its objectives, FirstSouthwest initiated the following financing structures:
- Restructuring the outstanding debt to strengthen the credit position of the new debt issuance.
- Identifying refunding savings on approximately $702 million of the authority’s outstanding debt.
- Eliminating future transferred proceeds and yield-blending issues by issuing the new money and refunding bonds as four separate issues instead of one combined issue.
- Restructuring the outstanding debt and taking advantage of low long-term interest rates which allowed the authority to cash fund a higher percentage of its capital projects and lower its reliance on future debt issues.
The Result
Because the transaction was split into four separate tranches consisting of both refunding and new money components, this complex financing received recognition from The Bond Buyer as one of the most innovative deals in the country in 2003.
FirstSouthwest was successful in obtaining upgraded ratings for the authority from Moody’s and S&P. The ratings were raised from A3 to A2 and from A-minus to A, recognizing, among other things, the authority’s ability to manage and implement large capital plans, while not relying on future toll increases. Additionally, the rating agencies cited the authority’s strong projected coverage after considerable near-term bonding, and ample cash reserves which provided significant liquidity.
By restructuring the outstanding debt, the authority saved approximately $3.4 million on the bond issue by issuing the debt on a parity basis.
In addition, the savings on the refunding resulted in a savings of more than $32 million for the authority. By incorporating the use of synthetic fixed-rate debt into the overall financing plan, FirstSouthwest was able to provide a more flexible financing structure and increase the refunding savings by approximately $4.5 million.
Restructuring the outstanding debt and taking advantage of low long-term interest rates also allowed the authority to cash fund a higher percentage of its capital projects and lower its reliance on future debt issues.
Case Study - Stage Two
FirstSouthwest restructures Expressway Authority’s debt, expands capital program by hundreds of millions of dollars (2003)
Background
In March 2005, the authority issued an additional $499 million of synthetic fixed-rate bonds to fund its recently expanded $1.2 billion five-year work plan.
The Challenge
Rising interest rates in early 2004 caused the value of the authority’s $1.2 billion program to shrink to $950 million without pursuing a toll rate increase.
The FirstSouthwest Solution
Tasked with finding a way to fund the increased work plan, FirstSouthwest met this challenge through defeasing a small amount of bonds during the first few years and using the capital planning model to structure the new debt to include a forward starting interest rate lock in July 2004.
Using the capital-planning model the authority was able to show the rating agencies the affordability of the plan at the rate lock level, and as a result, received an upgrade from Moody’s to A-1.
The Result
By entering into a forward-starting swap and locking in the interest rates, FirstSouthwest was able to restore much of the program’s original $1.2 billion value. This enabled the authority to pursue its expanded five-year work plan without having to raise tolls.
Case Study - Stage Three
Forward-starting SIFMA interest rate swap mitigates risk of rising interest rates (2007)
Background
In the beginning of the 2007 fiscal year, the authority had a number of goals it wanted to accomplish with the series 2007A financing. After reviewing the authority’s financial situation and goals with respect to funding its five-year work plan (2007-2011), FirstSouthwest recommended the following plan of finance:
- Issue approximately $425 million of series 2007A new money bonds in June 2007 to partially fund the $1.23 billion five-year work plan. A future $186 million new money debt issue to fund the remaining portion of the authority’s five-year work plan would be completed in June 2008.
- Execute a forward-starting Securities Industry and Finance Market Association’s (SIFMA) index of tax-exempt variable-rate bonds SIFMA cash settled interest rate swap hedge to mitigate interest rate risk on the planned series 2007A bond issue and increase the amount of the five-year work plan.
The Challenge
In the fall of 2006, as the Bond Buyer Revenue Index interest rate fell to a historic low, FirstSouthwest suggested it might want to revisit the benefits of an interest rate hedge on the series 2007A bonds. The authority wanted to lock in the low rates.
The FirstSouthwest Solution
The authority’s finance committee agreed to move forward in executing the forward-starting SIFMA interest rate swap hedge in early November 2006, unwind and cash settle the swap, and issue the series 2007A bonds as fixed-rate bonds in June 2007. The forward starting SIFMA interest rate swap hedges were executed on November 2, 2006, at a rate of 4.014 percent. On June 5, 2007, the sale date of the series 2007A bonds, these hedges were terminated and resulted in an $8 million payment to the authority.
The Result
The resulting structure of the series 2007A bonds accomplished the goals of the authority. The execution of a forward-starting SIFMA interest rate swap hedge by the expressway authority on November 2, 2006, mitigated the risk of rising interest rates and ensured ongoing funding of the $1.23 billion 2007-2011 five-year work plan.
The subsequent rise in interest rates from November 2, 2006, to June 5, 2007, resulted in an $8 million payment to the expressway authority by the swap counterparties (net of all expenses) and resulted in lowering the effective cost of funds on the series 2007A bonds by 0.119 percent.
By mitigating the risk of rising interest rates, it was determined that the expressway authority could increase the amount of bonds to be issued and lower its projected debt service coverage without negatively impacting its current ratings
Case Study - Stage Four
Credit replacement
Background
In 2008, FirstSouthwest served as the financial advisor to the expressway authority for the refunding of its outstanding $499 million of variable-rate revenue bonds, subseries 2005 A-1 through E bonds. The expressway authority had approximately $2.2 billion of revenue bonds outstanding including $499 million of variable rate bonds insured by AMBAC Indemnity with a stand-by bond purchase agreement from Bank of America, JPMorgan Chase Bank, SunTrust Bank and Wachovia Bank. The expressway authority’s bonds are rated A1/A/A by Moody’s Investors Service, S&P and Fitch, Inc., respectively.
The Challenge
When Ambac was placed on Negative Outlook by S&P on December 19, 2007, the expressway authority began to see a widening of trading values that continued for several months as all three of the rating agencies further lowered the ratings of Ambac and the other bond insurers in the market. The trading differential was more than 400 basis points over SIFMA.
The FirstSouthwest Solution
FirstSouthwest began discussions with the expressway authority’s current liquidity providers and Ambac about the feasibility of further securing or replacing Ambac with a bank letter of credit. The expressway authority’s goal was to bring the trading differential of the series 2005 bonds in line with its other variable rate bonds while also preserving the previously paid Ambac bond insurance premium and not negatively impacting the expressway authority’s outstanding interest rate swaps.
As discussions with Ambac continued, FirstSouthwest and the authority worked to lower the remarketing rates. The existing liquidity providers were asked to provide a temporary LOC on the bonds by amending the
existing stand-by bond purchase agreements for 60 days while FirstSouthwest completed negotiations with Ambac and finalized the refunding. The result of entering into this temporary LOC allowed the authority’s remarketing rate to immediately reduce the trading differential from SIFMA. During this time FirstSouthwest also secured commitments for three-year letters of credit from Bank of America, SunTrust Bank and Wachovia Bank to refinance the entire series 2005 bonds, obtained ratings from all three rating agencies and received a forward commitment from Ambac that the authority would have the option to obtain a future bond insurance and surety bond for no charge over the next three years.
The Result
On May 1, 2008, the expressway authority issued its $499 million variable-rate refunding revenue bonds, series 2000B subseries 1–4. Because of the resulting restructuring, the expressway authority’s series 2008B bonds began trading at or below SIFMA.