Vot­ers Turn West Vir­ginia Loose on Debt Mar­ket

The Bond Buyer - - Front Page - By Shelly Sigo

BRADENTON, Fla. – West Vir­ginia ex­pects to move quickly to is­sue the largest amount of bonds in its his­tory, and an­a­lysts be­lieve the mar­ket will be re­cep­tive to the plan.

Vot­ers statewide over­whelm­ingly ap­proved $1.6 bil­lion of gen­eral obli­ga­tion bonds as part of Gov. Jim Jus­tice’s “Roads to Pros­per­ity Pro­gram.”

Jus­tice said he will call a spe­cial ses­sion of the Leg­is­la­ture for next week to pass leg­is­la­tion to speed up im­ple­men­ta­tion of his $3 bil­lion trans­porta­tion cap­i­tal plan and re­lated fi­nanc­ing, which in­cludes the GOs that were ap­proved on 73% of the 120,510 bal­lots cast in Satur­day’s ref­er­en­dum.

“I am grate­ful to the peo­ple of

West Vir­ginia for shar­ing my vi­sion to jump­start our eco­nomic en­gine,” Jus­tice said in a state­ment. “While this will start the process of fix­ing our state road sys­tem, the most im­por­tant mis­sion I have is to help find and cre­ate jobs for the work­ing men and women of our state.”

The GOs are part of the state’s largest-ever trans­porta­tion fi­nanc­ing plan, which could place up to $2.5 bil­lion of new debt on its bal­ance sheet. The GOs will be is­sued over sev­eral years, backed by var­i­ous sales tax and fee hikes.

The fi­nance plan also in­cludes $440 mil­lion of grant an­tic­i­pa­tion rev­enue ve­hi­cle bonds and up to $500 mil­lion of toll rev­enue bonds.

West Vir­ginia has en­coun­tered fis­cal dif­fi­cul­ties in re­cent years due to its lag­ging econ­omy and de­pen­dency on coal min­ing. Its GO rat­ing has been down­graded one notch by all three rat­ing agen­cies in the last year, though it re­mains in the dou­ble-A cat­e­gory.

Alan Schankel, a man­ag­ing di­rec­tor at Jan­ney Cap­i­tal Mar­kets in Philadel­phia, said the im­pact of the state’s up­com­ing is­suances on mar­ket sup­ply may be lim­ited be­cause of its mul­ti­year is­suance strat­egy, but in­vestors should be in­ter­ested.

“I see re­cep­tion as be­ing strong,” Schankel said Tues­day. “Although the state has taken a rev­enue hit re­lated to fall­ing en­ergy prices and semi-de­pen­dence on coal, state fi­nances are gen­er­ally ap­proached from a con­ser­va­tive view, with a rainy day fund bring­ing re­serves to 10% of rev­enue.”

Only 11% of West Vir­ginia’s 1.2 mil­lion reg­is­tered vot­ers turned out for the sin­gle-topic ref­er­en­dum, ac­cord­ing to the West Vir­ginia Sec­re­tary of State’s of­fice.

The GO bond is­sue passed in all but one of 55 coun­ties, and the gover­nor vowed to de­ter­mine why a ma­jor­ity of vot­ers in Ritchie County struck it down.

State Trans­porta­tion Sec­re­tary Tom Smith said of­fi­cials will move quickly to bring bonds to mar­ket.

“At the end of the month we’ll have the big­gest Garvee bond sale” in state his­tory, he said Mon­day. “That’s about $260 mil­lion worth of bonds al­ready go­ing out the door.”

Af­ter the Garvees are is­sued the state will turn its at­ten­tion to bring­ing the GO bonds to mar­ket, he said.

Jus­tice, who took of­fice in Jan­uary, pushed the trans­porta­tion fi­nanc­ing pack­age to cre­ate jobs and boost the econ­omy. The Moun­tain State has strug­gled with slow rev­enue growth, forc­ing steep state bud­get cuts, and high un­em­ploy­ment un­der­scored by di­min­ished de­mand for coal prod­ucts as cheaper forms of en­ergy such as nat­u­ral gas be­came avail­able.

The state’s mul­ti­year bud­get im­bal­ance led to GO bond rat­ing down­grades in the last year by Fitch Rat­ings to AA from AA-plus, by Moody’s In­vestors Ser­vice to Aa2 from Aa1, and by S&P Global Rat­ings to AA-mi­nus from AA.

About $322.8 mil­lion of state GO bonds are out­stand­ing.

NewOak Fun­da­men­tal Credit Man­ag­ing Di­rec­tor Triet Nguyen said the new debt load West Vir­ginia has cho­sen to take on may not dam­age its credit.

“To the ex­tent that in­fra­struc­ture spend­ing is meant to bol­ster fu­ture eco­nomic de­vel­op­ment, the mar­ket and the rat­ing agen­cies may give the state the ben­e­fit of the doubt for the time be­ing,” Nguyen said, adding that the “rel­a­tive scarcity of West Vir­ginia debt may help keep any po­ten­tial spread penalty to a min­i­mum.”

NewOak cur­rently ranks West Vir­ginia 33rd out of the 50 states in its Mu­niS­core credit risk mon­i­tor­ing sys­tem, he said.

“Iron­i­cally, since West Vir­ginia ranks low on so­cio-eco­nomic fac­tors and well below av­er­age on fis­cal fac­tors, the only bright spot in the state’s over­all score has been its rel­a­tively light debt and pen­sion bur­den,” Nguyen said. “Ob­vi­ously, that will change sig­nif­i­cantly once the newly ap­proved debt is is­sued.”

On Tues­day, Moody’s as­signed an A2 rat­ing to the up­com­ing Garvee debt to be is­sued as sur­face trans­porta­tion im­prove­ment spe­cial obli­ga­tion notes due in 2029.

S&P as­signed its AA rat­ing to the notes, which will be is­sued by the West Vir­ginia Com­mis­sioner of High­ways. S&P also con­firmed its AA rat­ing on $53.4 mil­lion of Garvee bonds sold in 2016.

Both agen­cies as­sign sta­ble out­looks. Garvee pro­ceeds will fi­nance 18 bridge re­place­ment and 13 in­ter­state pave­ment re­ha­bil­i­ta­tion projects. The debt will be se­cured by a first lien on Fed­eral High­way Ad­min­is­tra­tion pay­ments for debt ser­vice un­der Ti­tle 23 of the United States Code.

An­a­lysts said their rat­ings re­flected the strong pro forma cov­er­age of max­i­mum an­nual debt ser­vice from the pledge of el­i­gi­ble fed­eral high­way aid re­ceived by the West Vir­ginia De­part­ment of Trans­porta­tion.

A debt cap ap­proved by the West Vir­ginia Leg­is­la­ture lim­its ad­di­tional Garvee is­suances, and re­stricts the to­tal amount of bonds out­stand­ing to no more than $500 mil­lion, up from the pre­vi­ous $200 mil­lion cap. State of­fi­cials have said the cur­rent avail­able bond ca­pac­ity to­tals $440 mil­lion.

The West Vir­ginia Com­mis­sioner of High­ways even­tu­ally plans to lever­age the full amount of the cap and un­der that sce­nario pro forma MADS cov­er­age would be 6.9 times based on 2017 re­ceipts, which S&P said it would con­sider “very strong.”

S&P’s AA rat­ing re­flects its view of the “strong” MADS cov­er­age and the state’s his­tory of ef­fec­tively man­ag­ing the fed­eral re­im­burse­ment process, ac­cord­ing to an­a­lyst Kevin Archer.

West Vir­ginia’s “Road to Pros­per­ity Pro­gram” also in­cludes the pos­si­ble is­suance of up to $500 mil­lion of toll rev­enue bonds by the West Vir­ginia Park­ways Au­thor­ity.

A traf­fic and rev­enue study is un­der­way to de­ter­mine the ex­act amount of bond­ing ca­pac­ity.

The park­ways au­thor­ity man­ages state’s 88-mile turn­pike.

A new law passed this year al­lows the au­thor­ity to spend bond pro­ceeds on the turn­pike and on road projects in coun­ties ad­ja­cent to the turn­pike.

The gover­nor said he would call a spe­cial ses­sion for Oct. 16 to deal with is­sues re­lated to the trans­porta­tion fi­nance plan and hir­ing.

“We’re go­ing to bond here like crazy,” Jus­tice said.

While he said Mon­day that all de­tails for the up­com­ing spe­cial ses­sion weren’t re­fined, is­sues that he will ask law­mak­ers to tackle in­clude short­en­ing the six-to-nine month process it cur­rently takes to hire state em­ploy­ees, en­sur­ing that West Vir­gini­ans are con­sid­ered for em­ploy­ment first, and hir­ing vet­er­ans.

The state DOT needs a “whole range of folks” to work on road projects, ac­cord­ing to Smith.

The DOT has been “chron­i­cally un­der­staffed for years,” he said, adding that even though some road work has al­ready started as many as 500 new em­ploy­ees will be needed as bonds are is­sued.

The state’s fi­nan­cial ad­vi­sor is Pub­lic Re­sources Ad­vi­sory Group.

More de­tails about the state’s bond is­suance sched­ule are ex­pected in the weeks ahead.

Based on the sched­ule ap­proved in the con­sti­tu­tional amend­ment passed by vot­ers, state of­fi­cials can is­sue the 25-year GOs in four se­ries: up to $800 mil­lion within a year; $400 mil­lion in 2018; $200 mil­lion in 2019; and $200 mil­lion in 2020.

Schankel said that de­spite the state’s fis­cal prob­lems he still ex­pects strong de­mand for West Vir­ginia’s bonds.

“I imag­ine there is plenty of room in most di­ver­si­fied port­fo­lios to add West Vir­ginia ex­po­sure,” he said. ◽

Perry Ben­nett

West Vir­ginia’s leg­is­la­ture will be called into spe­cial ses­sion to speed up the state’s trans­porta­tion fi­nanc­ing plans.

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