LOS ANGELES - The Los Angeles County Transportation Commission plans this week to sell its first bonds secured by Proposition C sales tax revenues, kicking off an anticipated $1.2 billion of such debt issues through fiscal 1997.
The new $500 million issue, planned for pricing Tuesday through a group led by Lehman Brothers, will help fund the commission's rail system capital costs.
Although the commission has no existing debt secured by the half-cent Proposition C sales tax increase approved by voters in 1990, the agency is well known in the market because it has $1.44 billion outstanding of bonds, notes, and other obligations secured by Proposition A, a half-cent sales tax increase in place since 1980.
Accordingly, the revenue stream securing this week's sale is generally similar to that generated by Proposition A.
In fiscal 1992, Proposition C sales tax receipts totaled $353.2 million, while Proposition A receipts produced $367.6 million. The disparity exists because certain existing installment sales contracts were not subject to the newer tax increase. By about 1996, however, Propositions A and C are expected to produce about the same amount of revenue, according to the preliminary official statement for this week's deal.
Standard & Poor's Corp. rates the Proposition C revenue bonds A-plus. Moody's Investors Service rates them Al. Those assessments are the same as their ratings on the commission's existing Proposition A bonds.
This week's sale involves one slight variation because the commission is selling so-called second senior bonds. Additional second senior bonds can be issued as long as the pledged tax collected for any 12 consecutive months out of the 18 months preceding the new issuance provided maximum annual debt service coverage of 130%.
By contrast, the commission also can sell so-called first senior bonds in the future. But first senior bonds must meet a higher coverage test of 400% under the same formula.
Other recent deals underwritten by Lehman Brothers, including an Orange County Local Transportation Authority sale, featured similar distinctions for senior bonds.
Leslie Porter, deputy executive director of finance and investments for the Los Angeles County Transportation Commission, said the structure makes sense for an issuer because the first senior bonds are designed to achieve double-A ratings, thereby lowering the cost of borrowing for that debt.
But the commission decided to sell second senior rather than first senior debt now "because there is no advantage in this current market" to issue the higher-rated securities, Porter said.
He noted that the interest-rate spread between A-plus debt and double-A bonds is extremely narrow now, often close to about 10 basis points. Historically, that spread is closer to 25 basis points, Porter continued, so "when the market returns to more traditional spread levels," it will make more sense to sell higher-rated first senior bonds.
For issuers with major funding programs, the first and second senior bond concept "leaves as much flexibility as possible" in structuring debt, said Robert Wilkins 3d, vice president of Charles A. Bell Securities Corp., the commission's co-financial adviser with Lazard Freres & Co.
The chance to obtain double-A ratings on some bond issues also "maximizes [the commission's] opportunities in the future" to use various derivative products, which require either a double-A ranking or the use of insurance, observed Catherine Pfeiffenberger, a senior vice president of Lehman in Los Angeles.
Porter described this week's sale as a "plain-vanilla kind of transaction," adding that "we looked at the possibility of derivatives." but did not see enough advantage in using them.
Porter's said his main hope is for "an improved market" this week. Market participants said it was difficult to gauge possible pricing levels in the face of recent deterioration in the market. "You could quote a price last Monday and then see the whole thing change in just a few days," one trader noted.
The tentative maturity structure calls for $128.55 million of serial bonds, due from 1994 to 2007; $98.92 million of term bonds maturing in 2013; and $272.53 million of term bonds due 2023.
California deals that are tied to sales tax revenue streams tend to get scrutinized more than they used to because of the recession's impact on such receipts.
"The state of the economy came in for a lot of discussion", in meetings with rating agency officials, Porter said.
He believes Los Angeles County's long-term outlook remains positive. But given a recent severe downturn, "the question is, what is the timing for the turnaround?" Porter noted.
The preliminary official statement includes an appendix report on the county's economy from the University of California, Los Angeles, Business Forecasting Project. That forecast sees a weak recovery beginning in 1994.
"The county's economy does not yet appear to be nearing a bottom," the forecast said, partly because the region still faces significant layoffs in government and defense over the next 12 to 18 months.
The forecast estimates that Proposition C sales tax receipts will total $353.8 million in fiscal 1993, drop to $342.4 million in 1994, and then rebound to $366.4 million in 1995, with further increases over the ensuing two years.
Those estimates would provide a debt service coverage ratio of about 800% for the initial $500 million issue, but that ratio would decline as additional Proposition C bonds are sold. The commission, which is building numerous mass transit projects throughout the county, expects over the next three years to issue $700 million of bonds and $200 million of subordinate obligations secured by Proposition C revenues, and $325 million of obligations secured by Proposition A revenues.
In May, the California Supreme Court declined to review a legal challenge to Proposition C, thereby upholding its validity. Certain taxpayers had unsuccessfully charged that the tax increase required two-thirds support rather than the simple majority approval it received.
Also in May, the governor signed legislation that will create a Los Angeles County Metropolitan Transportation Authority to replace the commission and the Southern California Rapid Transit District. That change - designed partly to eliminate duplication of effort by the agencies - will occur next spring, but will not adversely affect the validity of existing obligations, according to the preliminary official statement.