DALLAS -- The Texas National Research Laboratory Commission Financing Corp. today prices $250 million of lease revenue bonds that will offer investors no direct security in the federal Superconducting Super Collider project.
But even though bondholders will have no mortgage on the $8.24 billion project, Wall Street analysts say the four-tier financing structure gives the state and federal government incentives to continue funding the largest scientific project ever built.
"There is no direct security interest in the project assets," said Richard Raphael, senior vice president at Fitch Investors Service. "There is a negative pledge that says the state can only use the project if it pays. It's kind of like an eviction clause."
Project officials expect a strong reception when the issue is priced today by a group led by Goldman, Sachs & Co. "I think it will go well," said Ed bingler, executive director of the commission established to finance Texas's $1 billion share of the project. "I think the ratings indicate that we offer a great degree of comfort."
Fitch and Moody's Investor Service rated the first-ever lease revenue bonds a single-A. Standard & Poor's Corp. assigned A-munis to the bonds.
Peter D'Erchia, senior vice president at Standard & Poor's, said that Texas lease bonds traditionally are rated A-plus, two notches behind the state's double-A general obligation bonds.
While still a strong rating, he said the A-minus on these bonds "helps distinguish our concerns" over future federal and foreign funding for the project.
According to bond documents, Congress is expected to provide $5.649 billion of the total funding. Despite some opposition, the project has been funded at near the levels of the originally sought appropriations.
"The support has always been very strong," Mr. Bingler said, adding, "It's always going to be a challenge.'
At the same time, foreign governments are expected to provide as much as $1.725 billion of project funding, although little of that money has yet been collected or pledged. Further, some have estimated that the project cost could reach $10 billion.
Analysts says Texas has demonstrated a commitment to the project -- which is being built south of Dallas in Ellis County -- when its voters authorized $500 million of GO bonds. At the same time, lawmakers approved $500 million state-funded revenue bonds for the facility.
The sale this week marks the first time revenue bonds have been used for the project; $250 million of GOs were sold for it last year.
The lease-revenue structure gives bondholders no direct security. In fact, the mortgage to the project is held by the U.S. Department of Energy, which is developing the research facility.
Because of tax law restrictions against using federal money to pay debt service on tax-exempt bonds, the commission is using a complex four-tier lease structure to ensure that state revenues will pay bondholders.
Here is how the arrangement will work: The Department of Energy will lease the project to the commission, which will sublease it to the newly formed Texas National Research Laboratory Commission Financing Corp.
In a third step, the financing corporation will lease the project back to the commission for payments equal to an estimated $20 million a year in debt service. That money will come from the state general fund appropriations authorized by Texas lawmakers.
Finally, the commission will lease the Super Collider project back to the Department of Energy, bringing the deal full circle.
Analysts say the state and federal government have incentives that make terminating the lease agreement unlikely.
Fitch noted that the project is a rarity for the federal government because it involves equity paid by Texas and foreigh governments. Also, the agency said, the project has broad scientific and potential commercial applications.
"The state has many incentives to continue appropriating lease payments even if the federal government withdrew funding," Fitch said. The incentive: the state could lease all assets that were over 50% funded by the $1 billion contribution to the project as long as it pays bondholders.
"There is some measure of security that is derived by a negative covenant," said George Leung, vice president and managing director for state ratings at Moody's. "That provides a practical incentive."
