DALLAS — The Central Texas Regional Mobility Authority, the first toll road agency of its kind in Texas, is looking for yield-hungry investors willing to take a risk on $374 million of revenue bonds at or below investment grade next week.

The bonds will finance construction of the Manor Expressway Project, a 6.2-mile tollway in Austin and Travis County that will use an expanded median of U.S. 290. The existing U.S. 290 will be widened and will remain non-tolled. The total cost of the project is estimated at $359 million.

The issue is expected to include $294 million of senior-lien bonds at the lowest end of investment grade and $80 million of subordinate-lien bonds that are rated one notch below investment grade.

The bonds, all with $100,000 denominations, are expected to appeal primarily to institutional investors.

Bill Chapman, chief financial officer for the mobility authority, expects investors in search of higher yields on both the short and long ends of the curve to buy the bonds.

“We expect a very good response,” he said. “A lot of investors interested in our senior lien are also interested in our subordinate debt. There hasn’t been a deal like ours in the market this year that I’m aware of.”

The offering, the largest in the CTRMA’s eight-year history, is expected to price June 9 through negotiation with book-runner JPMorgan and co-senior managers Goldman, Sachs & Co., Bank of America Merrill Lynch, and Morgan Keegan & Co.  Co-managers are Barclays Capital, Fidelity Capital Markets, Siebert Brandford Shank & Co., Jefferies & Co., RBC Capital Markets, Coastal Securities and Estrada Hinojosa & Co.

First Southwest Co. serves as financial adviser with Ladd Patillo & Associates. Vinson & Elkins is bond counsel with  Fulbright & Jaworski as underwriter’s counsel.

“The rating reflects our view of the general uncertainty associated with forecasts of traffic and revenues on a relatively new toll facility with an expansion project as well as a new facility that rely on projections of wealth levels, residential and commercial development, development of competing and feeder facilities, and increasing tolls,” Standard & Poor’s credit analyst Todd Spence wrote in a rating report. The agency rates the senior-lien bonds BBB-minus and the subordinate lien BB-plus.

Moody’s Investors Service analyst Maria Matesanz said the credit’s rating, which has a stable outlook, could rise if revenue exceeds the base case forecast beyond the ramp-up period and provides higher than forecasted debt-service coverage. Moody’s rates the senior bonds Baa3 and the subordinate bonds Ba1.

Completion of the project ahead of schedule and below budget also could have a positive impact on the rating, according to Matesanz. The CTRMA did complete the first phase of its initial U.S. 183 toll road ahead of schedule and $6 million under budget.

In addition to project costs, the upcoming bonds will refinance a $32.9 million State Infrastructure Bank loan and $60 million of 2010 revenue notes that provided interim financing.

The mobility authority was still considering insurance scenarios last week but was proceeding with plans to issue the bonds without enhancement, Chapman said.

UBS Financial Services Inc. and Charles Schwab & Co. will handle retail distribution under a contract with JPMorgan. Regions Bank, an affiliate of Morgan Keegan, will serve as trustee. Regions is also the holder of the Series 2010 notes that will be refunded with the new issuance.

The senior-lien bonds reach final maturity in 30 years, with amortization from 2021 through 2041. Subordinate-lien bonds carry a 23-year term, with amortization from 2023 through 2034.

Total projected interest for the senior bonds is $497 million and $110 million for subordinate bonds. The authority expects to continue to collect tolls on the project after the bonds are paid off.

The CTRMA, the first regional mobility authority in Texas, has provided a template for others that were granted the right to build toll roads in their regions under state legislation designed to decentralize highway construction.

The mobility authority has been identified as lead agency to develop five new projects in the service area with a preliminary cost estimate of $2.4 billion. All but one of the projects have been designated by the Capital Area Municipal Planning Organization as eligible to be included as part of the CTRMA Turnpike System.

Two projects going through environmental assessment are Mopac/Loop 1 and 183 South. The earliest financing for Mopac/Loop 1 would be in mid-2014. The project is expected to cost $212 million with $69 million of equity from the Texas Department of Transportation. The costs and feasibility of 183A South are still being determined.

The authority and TxDOT have two financial assistance agreements for the Manor Expressway project under which the department will make $128.9 million available in quarterly payments over five fiscal years.

A portion of the funds are to be used to finance project construction and the remaining amount will be used to offset interest of the senior- and subordinate-lien bonds for several years.

The TxDOT grant funds are not subject to repayment, but the mobility authority is required to use any surplus revenue to pay the costs of other transportation projects up to the amount of the funds granted.

The Manor Expressway/U.S. 290 project faces limited competition. There is no east-west highway link between the State Highway 130 tollway to the east and Interstate 35 to the west in north-central Austin. SH 130 is a major north-south alternative to heavily congested Interstate 35.

The existing U.S. 290 highway that will become Manor Parkway is also congested, with average speeds at peak travel times at around 40% of the posted limit. The existing road also has traffic signals that increase travel times.

After ramp-up through 2016, transaction growth on the new tollway is expected to average 5% annually and provide revenue growth of 7.9% annually with scheduled annual toll increases of 3%, according to the CTRMA.

The authority’s growing annual debt service will require strong growth in toll revenues to maintain coverage ratios, particularly during the next 13 years, Standard & Poor’s said.

“In our view, the socioeconomic and development trends in the corridor and metropolitan area provide the underlying demand for good traffic growth,” Spence noted in the rating report.

“However, we believe the senior-lien rating is constrained at the lower investment-grade level due in part to the escalating debt service and the still-limited operating history of the toll road and the uncertainty associated with the new projects, including operating and financial forecasts.”


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