California OCTA refunding supercharged by two upgrades

Boosted by two rating upgrades, the Orange County Transportation Authority saw heady demand when it refunded $48.68 million in toll revenue refunding bonds.

“It was strong investor demand from the get-go,” said Andy Oftelie, OCTA’s chief financial officer. “There were flurries of interest right from the jump, and we slowly continued to get good activity.”

Wednesday’s pricing was a tax-exempt current refunding of bonds that had reached their call date.

“There were a lot of big investors with big orders,” Oftelie said.

The debt supported construction of the 91 Express Lanes, a set of tolled lanes alongside the free State Route 91 highway connecting Orange County and Riverside County. The bonds are repaid with tolls paid by users of the managed lanes.

The finance team included Wells Fargo Securities as senior manager, JP Morgan as co-senior manager, Nossaman LLP as bond counsel, Sperry Capital as municipal advisor and Orrick, Herrington & Sutcliffe as underwriter’s counsel.

The 91 Express Lane bonds had achieved across-the-board double-A level ratings ahead of the sale.

Both Fitch Ratings and Moody’s Investors Service upgraded the credit, while S&P maintained its existing rating. All assign stable outlooks.

“We are proud of that upgrade from both Moody’s and Fitch,” said Jim Martling, a principal with Sperry Capital and OCTA’s financial advisor.

Fitch Ratings upgraded the authority’s Express Lanes toll revenue bonds to AA-minus from A-plus on June 8 and Moody’s lifted them to Aa3 from A1 June 6. S&P has rated the credit AA-minus since 2014.

It’s the first time managed toll lanes have achieved double-A ratings, Martling said, drawing a contrast with monopoly toll roads or bridges. The Express Lanes use a variable toll that rises to keep traffic moving in its segment of the highway and draw motorists from the congested free lanes in 91.

The market at large also saw strong demand on Wednesday, according to The Bond Buyer’s daily market report. New issuers were highly oversubscribed, some as many as five times, especially on the long end.

OCTA’s refunding maintained the final 2030 maturity of the refunded bonds.

The authority first issued debt for the express lanes in 2003, when it bought out the private concessionaire that opened them in 1995 to eliminate a non-compete clause that barred it from expanding the free lanes on 91.

Twenty years later, as the original 2003 debt is refunded for the second time, many of the investors were return customers who already held 91 Express Lanes debt, Oftelie said.

“As an asset class, express lanes are embraced as important transportation tools,” Oftelie said. “Rating agencies had been concerned it was a single asset.”

Most big toll revenue bonds, like California’s Bay Area Toll Authority, have multiple roads and assets, Oftelie said.

“This is a single asset, but the market has come around to appreciating express lanes,” he said.

The authority was able to achieve savings even over when it issued in 2013, when interest rates were at historic lows, because it had 10 years of operating history then and now has 20, Oftelie said.

“We have been through a great recession, the extension of the lane into Riverside County, and we are still achieving all-time highs in both ridership and revenues and the investors recognized that,” Oftelie said.

When the toll lanes were extended into Riverside County, which operates its side of the highway, the ratings agencies thought Riverside might siphon off revenue from OCTA, but that never happened. Instead both counties have done quite well, Martling said.

The Riverside County Transportation Commission’s SR-91 express lanes share a service area with OCTA by connecting to the eastern end of the OCTA’s lanes, according to Fitch’s report.

“RCTC has similar tolling mechanics, high occupancy vehicle (HOV) policy, and lane configuration, and also uses the same operator to monitor traffic and toll collections,” Fitch said.

The lower BBB-plus rating on RCTC’s SR-91 express lanes reflects higher leverage and a more limited operating history, Fitch analysts wrote.

Another peer facility is the Texas Department of Transportation’s I-35E Managed Lanes in the Dallas area, Fitch said.

The Texas credit is rated A-minus with a stable outlook, boasting robust financial metrics, though in comparison OCTA benefits from a longer operating history, even stronger financial metrics, and a short final maturity, Fitch analysts wrote.

The deal also saw repricing during the two-hour sale that shaved about 10 basis points, for a savings of $225,000, Oftelie said.

The bonds refinanced OCTA’s outstanding 2013 senior lien toll revenue bonds secured by the 91 Express Lanes.

“We just matched maturities,” Oftelie said. “They were same as when we originally issued in 2003, and again when we refunded in 2013, the same 2030 maturities. We have never changed the maturity date since we initially issued the debt.”

OCTA achieved total net present value savings of $5.5 million, or about 8.6% off the refunding of the 2013 debt.

The rating upgrade “reflects significant de-leveraging following the 2023 refunding transaction,” Fitch said, further supporting already strong financial metrics, very strong liquidity, a short final maturity with no expectations for additional indebtedness and a prolonged track record of no re-gearing.

“This combination of strengths is quite rare, causing the rating to exceed the A-plus level which typically acts as a ceiling for single asset toll road facilities,” the rating agency said.

Traffic and revenues have remained strong, with a relatively short drop during the pandemic and steady growth over fiscal year 2022 and fiscal year-to-date 2023, Fitch analysts wrote.

The 2023 refinancing lowers outstanding debt from around $78 million pre-refunding to $48 million post-refunding.

The credit’s market acceptance and track record mean it doesn’t have to retain the two fully funded debt service reserve accounts required in 2003, Martling said.

“Express lanes have matured as a well-known credit,” Martling said. “The first in the world was OCTA in 2003.”

The success of the managed lanes through economic ups and downs and the pandemic have demonstrated a “real proof of concept,” Martling said.

“With the pandemic, we made a couple of moves,” said Kurt Avila, OCTA’s project manager. “We always had the customer base, but we suspended account fees and violation processing, during the pandemic. We always wanted to make sure in tough economic times, we were focused on the customer. We knew we had to maintain the money for operations and debt service.”

The managed lanes have always been run like a business, Avila said.

“We have always had strong reserves, had enough to pay debt service, even though traffic dropped 70 to 80% during the pandemic. That was a short time, though; within a year we were back to pre-pandemic levels,” Avila said.

The authority also has a capital program for transportation financed with a voter-approved sales tax. It had $590 million of Measure M2 sales tax revenue bonds outstanding at the end of March, according to its investor relations website.

The authority also is borrowing up to $628.93 million through the federal Transportation Infrastructure Finance and Innovation Act, according to a federal Department of Transportation report. The TIFIA loan will help finance express lanes on Interstate 405, the main highway through Orange County, and be repaid with its toll revenues.

Oftelie said the OCTA has no plans to issue more debt for the 91 Express Lanes.

“Between the amount of cash on hand, and net excess revenues, we can pay for projects on a pay-go basis,” he said.