Illinois tollway sets next bond sales for its $14 billion capital program
6 min read
The Illinois State Toll Highway Authority has signed off on a 2023 budget package that authorizes $1.47 billion of capital spending with a steady level of borrowing planned to keep its $14 billion, 15-year Move Illinois capital program on track.
The authority’s board adopted a $1.55 billion budget at its December meeting. The authority will spend $517 million on debt service and $427 million toward maintenance and operations, with other funds paying for projects.
Two bond sales of $400 million and $500 million are planned in 2023 to fund capital projects as the 294-mile system in northeastern Illinois enters the 12th year of its capital program.
“This budget carefully considers the Tollway’s 2023 operational and capital program needs, while ensuring our revenues continue to be invested wisely,” the authority’s board chair and chief executive officer, Dorothy Abreu, said in a statement.
The operating budget rose by 3.9% from 2022 and relies on $1.52 billion from tolls and evasion recovery. The numbers project rising toll revenue from an annual increase in commercial truck toll rates put in place in 2008.
The authority in recent years has issued new money on an annual basis late in the year, but its next new money sale for about $400 million is expected in the first quarter followed in the third quarter with $500 million. Both are planned to sell under the tollway’s senior lien and would be sold with a fixed-rate structure.
BofA Securities and Jefferies are senior managers. PFM Financial Advisors and Backstrom McCarley Berry are advising.
“This includes the $400 million noted in the 2022 budget and the $500 million included in the 2023 budget,” authority spokeswoman Joelle McGinnis said in an email. “The dates of the bond sales and final amounts are subject to change based on financial and market conditions.”
The first-quarter borrowing, after Jan. 1 redemptions, will put the authority’s debt tab at $7.2 billion, according to budget documents.
The authority between 2013 and 2021 sold $4.3 billion to fund portions of the Move Illinois Program with $1.5 billion still to come, comprised of the $900 million in 2023 and $600 million expected in 2024, according to the budget.
The board also had given the agency authorization to sell up to $900 million of senior lien, fixed-rate paper to refund 2013 and 2014 bonds “for purposes of reducing debt service,” according to budget documents, but the authorization expires at the end of the year and is contingent on achieving total net present value savings of at least 8% of the aggregate par amount of refunded bonds. Refunding deals are much less likely to pencil out in this year’s rising-rate environment.
The 2023 budget does not assume any refunding savings.
The 2023 capital plan allocates $314.8 million for system-wide roadway and bridge repairs to keep the existing Tollway system in good repair as required under bond covenants. Another $615.3 million will fund the ongoing design and reconstruction work for the Central Tri-State Tollway (I-294) Project.
Another $506.3 million is allocated to continue planning and construction for the new I-490 Tollway and new interchanges connecting to the Jane Addams Memorial Tollway (I-90), Tri-State Tollway (I-294), the Illinois Route 390 Tollway, as well as providing direct access in and out of O’Hare International Airport as part of the Elgin O’Hare Western Access Project.
By the end of 2023, the authority expects to have spent $11.5 billion of the $14 billion program.
Toll revenue has bounced back from the early weeks of the COVID-19 pandemic when the state mandated closures and many motorists moved to remote work. Toll revenue dropped to $1.24 billion in 2020 from $1.46 billion in 2019 but picked up steam in 2021, rising to $1.44 billion with $1.48 billion expected this year and $1.51 billion next year.
Commercial vehicle transactions dipped early in the pandemic but for January through August 2022 were 1% above the same period in 2021 and 6.9% over the same period in 2019.
Passenger transactions are still in recovery mode. They were up 4% from January through August 2022 from the same period 2021 but remain 8.6% below the same period in 2019.
Commercial toll hikes accompanied passage of the capital program and that has lifted revenue.
In recent years, the increases were tied to a percentage of the consumer price index over the previous year but in September the board voted to change the formula to one based on the last three years, easing the hit for toll payers.
“This change in calculation method was undertaken to reduce volatility in the annual adjustment, increase its predictability to facilitate budgeting and near-term financial planning, and incorporate the recent sharp increase in inflation more gradually,” according to the final budget document.
“The COVID-19 pandemic and response were the primary causes of the significant decline in toll revenues from 2019 to 2020. Toll revenues, inclusive of evasion recovery, is budgeted to recover to $1.519 billion in 2023, or 104 % of the pre-pandemic 2019 amount. The actual extent of continued recovery from the impacts of COVID-19 is uncertain,” budget documents say.
The agency’s rebound tracks the toll road sector nationally and some slowdown could lie ahead depending on the course of the economy but rating agencies say the sector is generally faring well enough to manage headwinds.
“We expect U.S. not-for-profit toll road ratings, which were among the most resilient of the transportation infrastructure asset classes, with no downgrades throughout the COVID-19 pandemic, will be stable given the almost complete rebound in traffic during 2022 supported by continued commercial vehicle traffic and toll rate increases implemented by many operators,” S&P Global Ratings said in its sector outlook published in November. S&P rates 55 not-for-profit toll operators, including the Illinois tollway, which it affirmed at AA-minus with a stable outlook in October 2021.
Of the 15 largest U.S. toll-backed issuers as measured by debt outstanding, 12 raised toll rates, which in some instances compensated for weaker passenger vehicle traffic.
Moody’s Investors Service expects the toll road sector will remain financially sound in 2023 but revised its sector outlook to stable from positive.
“The change reflects our expectation that traffic and revenue growth will slow in 2023 as weakening macroeconomic conditions reduce consumer purchasing power, dampening passenger and commercial traffic growth,” Moody’s said. “Revenue growth will be slightly higher than traffic growth because of inflation-linked toll rate increases.”
Improved financial metrics heading into 2023 provide a cushion and managers could cut or re-scope nonessential capital investments to preserve their credit quality to offset elevated construction costs and interest rates, Moody’s said.
Moody’s raised the tollway’s rating to Aa3 from A1 in November 2021 citing traffic recovery and reduced concerns about the state government’s fiscal strains. The outlook is stable.
“The improvement in the state’s financial profile lowers the likelihood that it would attempt to look to the tollway to assist with non-system liabilities,” Moody’s said. The rating agency raised the state another notch in April lifting it to Baa1.
The tollway operates as an independent agency by state statute and toll revenues are pledged first to operations and debt repayment. A 2016 constitutional amendment installed a lockbox on transportation revenues so that they can only be spent on transportation-related uses.
Fitch Ratings is holding the transportation sector outlook and ratings covering toll roads at neutral for 2023. “Growth should remain largely undeterred for U.S. airports, toll roads and ports next year in the face of recession,” Fitch said in its outlook published Dec. 1.
“Persistent inflation and higher interest costs will make operating costs and financing of capital projects significantly more expensive,” said analyst Seth Lehman. “This could lead to delays or paring back of capital improvement projects, though Federal funding could serve as a positive counterbalance.”
Traffic growth should continue for toll roads, though it will level off to some extent in 2023. Toll roads with automatic inflation-linked toll rate increases are facing a second year of atypically high annual rate increases, though some toll roads are hitting ‘pause’ on automatic increases to provide customers some economic relief.
Fitch rates the Illinois tollway AA-minus with a stable outlook.
Even though the authority operates autonomously from the state government, the Illinois governor and lawmakers wield power over the agency through board appointment powers and the potential for legislative actions.
The ISTHA’s bonds are among the highest rated debt related to the Illinois state government but it still pays penalties for the association. A 20-year bond in the authority’s 2021 sale landed at a 43 basis point spread to Refinitiv Municipal Market Data’s AAA benchmark and has been more recently evaluated trading at a 79 bp spread. The 20-year in a 2020 sale landed at a 50 bp spread.
