WASHINGTON -- Delaware's transportation trust fund is poised to test the market next Tuesday with its first competitive bond sale since the state formed the fund in 1987 to oversee transportation financing.
The Delaware Transportation Authority, on behalf of the trust fund, plans to issue $70 million of transportation system senior revenue bonds on a competitive basis. Since it first issued debt in 1988, the trust fund has negotiated all of its refunding and newmoney deals.
"We've got a credit that is more valuable today than it was in 1988, and we've got a credit that is strong, and now wc should try to test out the market and see what our competitive status is," said William Ankner, director of financial management and budget in the state's transportation department.
The upcoming sale amount is lower than past offerings because the trust fund is cutting its reliance on debt to finance transportation projects, state officials said.
But "we're still excited about it because it's a new avenue for the authority to pursue," said Debra Chambliss von Koch, Delaware's director of bond finance. Von Koch and other state officials said future deals will be reviewed on a case-by-case basis to determine whether to make them competitive. Delaware will still do negotiated deals, but at certain times competitive issues "make sense," von Koch said.
The trust fund's decision to go competitive comes at a time when there is regulatory pressure for issuers to do so. However, state officials said the regulatory environment was not a deciding factor.
As part of a new program to increase pay-as-you-go transportation financing, the trust fund has removed $200 million of projected debt issuance under its six-year financing plan, state officials said. The plan now projects a total of $329 million in debt issuance from fiscal 1995 through fiscal 2000.
The state formed the trust fund, which relies on dedicated tax and other revenue rather than general fund support, to finance all transportation projects with transportation-related revenues.
With issuance of the 1994 series limited obligation bonds on Nov. 1, the trust fund will have $478.9 million of outstanding senior bonds. Bond proceeds will be used to fund part of the current capital plan. Standard & Poor's Corp. rates the mast fund's bonds AA-minus and Moody's Investors Service rates them AI. The bonds are expected to be insured.
The offering will be the trust fund's seventh issue, said Gerard McNesby, the fund's administrator. Most earlier issues were refundings, and the most recent new-money bonds were issued in August 1992, McNesby said. The trust fund plans to go to market once a year in the future, he said.
A major reason why the trust fund chose to negotiate past deals was, in addition to some market turbulence in the early 1990s, the fact that "we were a story bond. People needed to know and get more comfortable with the credit," McNesby said. Story bonds refer to bonds, often unrated, for which issuers need to tell a story to get investors interested.
"We believe we no longer are a story bond," because the trust fund now has a track record as a good credit, McNesby said. Taking into account other market factors, "we think the time is right to test out the competitive market on this issue," he said.
State officials do not yet know how much they could save by going competitive. "There are a lot of things that go into this decision .... They are going to get the best deal at 11 on Tuesday that they can get," said Daniel Cohen, a director with O'Brien Partners Inc., the financial adviser on the issue.
"We are keeping our fingers crossed" about the market's stability on Tuesday, von Koch said.
The bonds will be backed by revenues from motor fuel taxes, motor vehicle document and registration fees, and other miscellaneous transportation-related fees. Other sources include toll and concession revenue derived from the trust fund's ownership and operation of the Delaware Turnpike, and investment earnings. The state imposes and collects the levies and transfers them to the trust fund.
There are no "bells and whistles" on the issue that the market hasn't seen before, said Cohen.
The trust fund has received good market reception in past sales, the state officials said. In addition, because of the general decline in market supply, "there's a great demand for m-exempt bonds in general, and even more of a demand for high-quality credits like ... the authority's," Cohen said. "So there are many factors that had to be visited and evaluated in making this decision," he said.
Dillon, Read & Co. has played a prominent role in past negotiated deals, and the trust fund has been "very happy" with the firm and other underwriters, Cohen said. Taking into account those relationships is "probably the most difficult pan of the decisionmaking process" on whether to go competitive, he said.
Participants in Tuesday's sale are expected to include Dillon Read; Merrill Lynch & Co.; Morgan Stanley & Co.; and Prudential Securities Inc.
The trust fund's ability to reduce its dependence on debt sterns largely from "fundamental changes" in the structure and operation of the transportation department made this year by Anne P. Canby, the state's transportation secretary since March 1993, Ankner said.
Canby has applied principles of business practice "to start getting the capital program to be real," Ankner said.
When Canby came on board, the trust fund was relying on debt to fund roughly 70% of the capital program, McNesby said. But passage of the federal Intermodal Surface Transportation Efficiency Act in 1991 prodded Delaware and other states that were seeking federal transportation dollars to put more emphasis on system preservation, maintenance, and management, rather than construction of new roads.
In response to this shift and to Delaware's general efforts to reduce bonded indebtedness,"we saw a need to ... reduce reliance on debt to maintain more flexibility," McNesby said. After the legislature passed new revenue packages in 1993 and the transportation department reassessed its capital spending, the trust fund increased its pay-as-you-go forecast from roughly 30% of the capital budget to more than 48% over the next six years, he said.
The high percentage of debt financing "was alarming because it really cut back on the flexibility that the secretary has, but also, it's not good business to be that captured by debt," Ankner said.
As part of her program to focus on good business practice, Canby created an integrated transportation and financing mechanism under which "we can hold individuals accountable, is credible, and allows us to make investments on time and within budget," Ankner said. The new office of financial management and budget headed by Ankner oversees all of the department's financial operations.
In addition to removing $200 million from projected debt issuance, the trust fund also has reprogrammed almost $58 million of old money that had "fallen down into the bottom of the bucket within the department as projects came in under budget," Ankner said.
The capital program's new emphasis on managing and reinvesting in existing capacity, rather than building new capacity, will make the trust fund a lesser presence in the municipal bond market, Ankner said. But the restructuring and rethinking behind the financial plan "reflects something that is credible, that is affordable, and is doable," he said.
As part of the efforts to reduce reliance on debt, Gov. Tom Carper and the legislature 'agreed to increase revenue dedicated to the trust fund through the next five years. Approved increases in the motor fuels and other taxes will raise projected new revenue from a 1993 estimate of $125.6 million to $177.1 million through fiscal 1999.
In addition to more pay-as-yougo funding, another benefit from restructuring the capital program is an increase in debt service coverage for senior bonds, Ankner said. "We're going to be seeing our current projection for 1995 of 4.86 on the coverage for the senior bonds," compared with a projection made in 1988 for 1995 of 2.87, he said.
