Another Orange County, Calif., toll-road financing is coming to market shortly, but municipal analysts can breathe a little easier this time around -- this one at least will be secured by a letter of credit.

Undoubtedly, some analysts are still getting over the eye strain of studying Orange County's previous toll-road offering, involving $1.1 billion of senior and junior lien bonds for the San Joaquin Hills Transportation Corridor Agency. One analyst joked recently that he is still trying to finish the prospectus, which weighed in at roughly 350 pages for the senior lien portion alone.

The upcoming deal, by contrast, will be much more modest, at least in terms of dollar size. And it will involve a legally separate entity -- the Foothill/Eastern Transportation Corridor Agency.

The issue also will feature a much different structure than the San Joaquin deal.

Last week, the Foothill/Eastern agency's board approved a variable-rate demand bond structure, secured by a direct-pay letter of credit from Morgan Guaranty Trust Co.

Proceeds from the issue, which could total up to $50 million, according to an agency spokesman, will help finance a small portion of the planned 30-mile Foothill Transportation Corridor, as well as help fund design and other costs of the planned 23-mile Eastern Transportation Corridor.

A three-mile segment of the Foothill corridor is expected to open to traffic this fall. Other portions of the Foothill and Eastern Corridors are scheduled for completion in the latter part of the 1990s. Regardless of how municipal analysts view these tollway transactions, one thing is certain: Analysts are going to see more of them in the future, and their analyses will need to become increasingly sophisticated.

The recent San Joaquin financing "represents a growing trend in municipal finance: the use of innovative techniques to meet the challenge of raising capital for infrastructure investment," Standard & Poor's Corp. said in a recent credit comment.

The rating agency "expects this trend to continue as infrastructure needs outstrip municipalities' traditional financing capacity."

Historically, financing for these projects relied largely on direct funding from local governments, which used existing revenue bases. The newer trend is more dependent on user fees to finance the projects.

The innovative financing techniques also will present an analytical challenge as issuers begin sailing on uncharted waters.

The San Joaquin financing highlighted the challenge well. It came to market with a stand-alone BBB rating from Fitch Investors Service. Standard & Poor's provided a private opinion on the issue to the corridor agency, but never assigned a public rating to the deal.

Those ratings discussions, which one analyst referred to as "the saga of the rating agencies," provided just one of the fascinating backdrops to the complex San Joaquin deal.

Fitch Helped

Some analysts said the Fitch rating helped confirm their view of the deal, but others were almost as adamant in saying the financing did not merit an investment-grade rating.

Differences of opinion are expected to arise again as more projects that reflect higher construction or operating risks come to market.

In its recent commentary, Standard & Poor's observed that innovative techniques are expected to pop up in various areas, listing independent power projects as one example and toll roads as another.

Compared with innovations such as state revolving funds, independent power projects "have a higher-risk profile, since they are supported solely by their operations, rather than a contractual guarantee to pay whether or not the facility works," the report said.

Because of the range of risks involved, these projects "can fall on either side of the investment-grade border," the report added.

The Sacramento Municipal Utility District is pursuing an independent power project financing later this year on which it hopes to achieve an investment-grade rating.

Rating agency officials anticipate there will be growing interest in tapping the public markets for such power-project deals, partly because of increased restrictions imposed by other lenders and a pullback by letter-of-credit providers in general.

Start-uptoll roads are similar to independent power projects in terms of credit profile, the Standard & Poor's report says.

The projects "involve in-depth analysis of the ability to construct the road within time and budget constraints. the projections for utilization of the road once it is operating, and, finally, the extent of competing facilities in the area," the agency observed.

These start-up roads also "can fall on either side of the investment-grade border," the agency added, "with only the exception reaching the A category."

Given the anticipated growing demand for such financings, rating agency officials are gearing up to develop criteria for the issues.

Fitch and Standard & Poor's, for example, in recent months released rating criteria for independent power projects.

Diane Schenkman, an assistant vice president of Moody's Investors Service, said her agency expects shortly to provide specific criteria that would have to be met for an investment-grade rating on a start-up toll road.

Since traffic projections for some toll roads have been "pretty far off," Schenkman noted that "you have to look at them with a lot of scrutiny."

Time Consuming

Digging into and fully understanding the feasibility study for such deals is "a very time consuming process," she said, "but it really is the crux of the analysis."

The Moody's criteria also will cover factors such as construction risk and various project-related risks.

Standard & Poor's also is working on developing criteria for start-up toll roads, said Peter Bianchini, a director for the firm in San Francisco.

"We've started to see a lot more of these run through the office." Bianchini said, adding that officials working on projects in Mexico and Norway are among those expressing an interest in toll-road ratings.

"We're definitely hearing about a lot of [projects]," both domestic and international, he said. The challenge for analysts is "trying to apply a reasonableness standard to the projections coming in," Bianchini added.

Since innovative financings can also be extremely complex, it is difficult to generalize how the market will treat them.

The San Joaquin financing certainly demonstrated the possibility of market access for such issues.

But the San Joaquin financing also featured an intensive marketing effort that went on for the better part of a year. And when the deal finally was sold, "a screaming municipal market" also helped in placing the bonds, one market participant observed.

Other projects of that type will continue to require intensive case-by-case study, analysts said, especially when the jury is still out on how the San Joaquin project is going to perform.

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