Florida Looks to Tackle Bridge De­fault

The Bond Buyer - - Front Page - BY SHELLY SIGO

The long-run­ning de­fault of bonds is­sued to build a toll bridge in north­east Florida may come to a head this year as state law­mak­ers weigh mak­ing it a state-owned fa­cil­ity.

Bond­hold­ers, who tech­ni­cally own the Gar­con Point Bridge be­cause of the de­fault, may get to de­cide the fate of the 3.5-mile span, a de­ci­sion that would de­pend on their will­ing­ness to take a hair­cut.

Bills that would re­struc­ture the Santa Rosa Bay Bridge Author­ity’s bonds are among hundreds of mea­sures that state law­mak­ers will con­sider in the next two months. The Florida Leg­is­la­ture’s ses­sion started Tues­day.

The author­ity has $132.2 mil­lion of debt out­stand­ing. Un­der the most plau­si­ble re­struc­tur­ing sce­nario the state may con­sider, bond­hold­ers could be of­fered hair­cuts of be­tween 27% and 45.5%.

Sen. Doug Brox­son, R-Pen­sacola, and Rep. Jayer Wil­liamson, R-Pace, who are from the pan­han- dle re­gion where the bridge is lo­cated, filed bills based on an eco­nomic fea­si­bil­ity study they re­quested to ex­am­ine tak­ing out the SRBBA’s bonds in or­der to pur­chase the bridge over East Bay in Santa Rosa County.

Brox­son, who did not re­spond to a re­quest for com­ment, said in a writ­ten state­ment to lo­cal me­dia in north­west Florida that his bill will al­low law­mak­ers “to be­gin the long awaited dis­cus­sion on the fu­ture of the Gar­con Point Bridge.”

“This bill will en­able us to avoid

the costly court fights and fu­ture lit­i­ga­tion with the bond­hold­ers, and the real risk that the bond­hold­ers can force sig­nif­i­cant toll in­creases on our com­mu­nity,” he said.

The 92-page fea­si­bil­ity study, au­thored by the Florida Divi­sion of Bond Fi­nance, de­tails the pros and cons of main­tain­ing the sta­tus quo, as well as us­ing ten­der of­fers or is­su­ing bonds through the Florida Turn­pike En­ter­prise to buy the bridge from bond­hold­ers at a ne­go­ti­ated price.

“This doesn’t pre­sume tak­ing out the debt at par,” said DBF Director Ben Watkins. “One of the fun­da­men­tal el­e­ments of this plan is that the bond­hold­ers are go­ing to take a hair­cut.”

The pri­mary ben­e­fit to the state, Watkins said, is avoid­ing per­pet­ual lit­i­ga­tion about toll rate in­creases and the state’s re­spon­si­bil­ity.

An­other ben­e­fit, ac­cord­ing to the study, is avoid­ing the cost of main­tain­ing the bridge be­yond its use­ful life should the debt re­main out­stand­ing for the next four decades.

Watkins said he is not ad­vo­cat­ing for or against a plan to pur­chase the bridge, and that he tried to present a bal­anced and neu­tral study that pro­vides law­mak­ers with op­tions that pro­tect the state.

“I did try to lead them to a place where, un­der the right cir­cum­stances, this would be a way to re­solve this long-run­ning prob­lem to clean it up while not im­pos­ing a toll in­crease to ar­ti­fi­cially in­flate what bond­hold­ers would get paid,” he said.

Un­der that sce­nario, the turn­pike would is­sue be­tween $75 mil­lion and $100 mil­lion of AA-rated, 30-year bonds with level debt ser­vice and cus­tom­ary debt ser­vice cov­er­age. The ul­ti­mate is­sue size de­pends on es­ti­mat­ing the gross toll rev­enues of the bridge with­out any toll rate in­crease.

“It’s clear to me from a pol­icy per­spec­tive about the state bail­ing this out and mak­ing a con­tri­bu­tion” to pay off the ex­ist­ing bond­hold­ers, Watkins said. “The state can as­sume no fi­nan­cial re­spon­si­bil­ity for this.”

There is no ap­petite for rais­ing tolls to in­crease what the state would pay for the bridge, he added.

Bond pro­ceeds would pro­vide a cash pay­ment to ex­ist­ing bond­hold­ers that would im­pose a hair­cut of ap­prox­i­mately $35.2 mil­lion to $60.2 mil­lion.

As an added com­po­nent, the study said the turn­pike could also is­sue a subor­di­nate se­ries of non-re­course bonds se­cured by resid­ual toll rev­enues – if there are any. Watkins said these most likely would be non-rated.

“In ef­fect, the subor­di­nate lim­ited obli­ga­tion bonds would be used as a ve­hi­cle to com­pen­sate ex­ist­ing bond­hold­ers for, and in­su­late turn­pike from, the fi­nan­cial risks associated with the bridge,” the study said. “In­vestors took on the rev­enue growth risks when pur­chas­ing the author­ity’s debt, and they will re­tain that risk un­der this struc­ture.”

Al­though the subor­di­nate piece would place bond­hold­ers in the same po­si­tion they are cur­rently in, Watkins called the po­ten­tial cash pay­ment and subor­di­nate bond offer “a very fair deal,” and one that the trustee could use to con­vince bond­hold­ers to ac­cept.

Al­though the con­cept of a “bailout” would not ap­ply to many bond is­sues, Watkins pointed out the Gar­con Point Bridge was a startup toll fa­cil­ity, and as such the orig­i­nal high-yield bonds sold at in­ter­est rates rang­ing be­tween 6.25% and 6.80%.

“No bond­holder bought this with a gun pointed at their head,” he said, while adding that some re­tail pur­chasers may not have been aware of all the risks. When they were is­sued, the bonds car­ried in­vest­ment-grade rat­ings of BBB-mi­nus from Stan­dard & Poor’s and BBB from Fitch Rat­ings.

Be­fore any deal is brought to bond­hold­ers, the Leg­is­la­ture must pass ei­ther Se­nate Bill 1436 or House Bill 1281.

The iden­ti­cal mea­sures would au­tho­rize the Florida Depart­ment of Trans­porta­tion to pur­chase the bridge by ac­quir­ing the SRBBA’s out­stand­ing bonds for an amount that does not ex­ceed the fore­casted gross rev­enues of the bridge. The bills pro­hibit any toll rate in­crease in con­nec­tion with the ac­qui­si­tion. That doesn’t mean tolls will never go up. “Fol­low­ing any ac­qui­si­tion by the depart­ment, an in­crease in tolls for use of the bridge shall not be per­mit­ted ex­cept as re­quired by law or as re­quired to com­ply with the covenants con­tained in any res­o­lu­tion un­der which bonds have been is­sued,” ac­cord­ing to the bills.

The turn­pike re­quires tolls to be in­dexed to in­fla­tion, a stan­dard that ap­plies to its debt and fa­cil­i­ties, “and pre­sum­ably” that would in­clude the Gar­con Point Bridge, Watkins said.

Florida could face sub­stan­tial le­gal and main­te­nance costs if the bonds re­main out­stand­ing.

The fea­si­bil­ity study es­ti­mates that it will not be un­til 2064 that the SRBBA debt is paid off un­der the cur­rent rate of toll col­lec­tions. The bonds were orig­i­nally is­sued in 1996 with fi­nal ma­tu­rity in 2028 – a 32-year life.

Leav­ing the debt out­stand­ing through 2064 would put the pay­ments well past the ex­pected use­ful life of the bridge.

FDOT would be legally re­quired to pay for the on­go­ing op­er­a­tions and main­te­nance as it does now, and “may be re­quired to make cap­i­tal im­prove­ments to ex­tend the re­main­ing use­ful life of the bridge un­til the bonds have been paid off,” the study said.

“If the state does noth­ing, FDOT will likely be sued by the bond trustee in an ef­fort to force an in­crease in the toll rates on the bridge,” it said. “The re­sult­ing lit­i­ga­tion will likely be time con­sum­ing and ex­pen­sive.”

In 2015 trustee Bank of New York Mel­lon threat­ened to sue the state if FDOT did not raise tolls to $5 each way from the cur­rent $3.75. At the time, there was no bridge over­sight board to per­form that func­tion. The FDOT said it did not have author­ity to raise toll rates.

BNY Mel­lon re­signed as trustee in July 2016, and was re­placed by UMB Bank NA of Minneapolis.

De­spite the change in trustee, the fea­si­bil­ity study said the pos­si­bil­ity of a law­suit over tolls will haunt the state as long as the bonds are out­stand­ing.

The fea­si­bil­ity study also chron­i­cles his­tor­i­cal de­ci­sions that doomed the SRBBA’s fi­nance plan, in­clud­ing traf­fic and rev­enue that sig­nif­i­cantly un­der­per­formed the orig­i­nal es­ti­mates, leav­ing the author­ity in­sol­vent.

The author­ity’s board mem­bers last met in 2014. After that, they re­signed rather than in­crease tolls.

The use of an “ag­gres­sive as­cend­ing debt ser­vice struc­ture” and non-callable cap­i­tal ap­pre­ci­a­tion bonds - both of which are con­trary to state pol­icy - also con­trib­uted to pay­ment de­faults in Jan­uary 2012, July 2012, and Jan­uary 2013 after the debt ser­vice re­serve was ex­hausted.

The trustee ac­cel­er­ated the bonds on Jan. 1, 2013, declar­ing all prin­ci­pal im­me­di­ately payable. In­ter­est con­tin­ues to ac­crue.

To build the bridge, the SRBBA in 1996 is­sued $75.5 mil­lion of fixed, cur­rent-in­ter­est bonds and $19.5 mil­lion of cap­i­tal ap­pre­ci­a­tion bonds.

While the cur­rent out­stand­ing amount has mor­phed into $132.2 mil­lion, the CABs will boost the to­tal amount rapidly due to the ac­cre­tion of in­ter­est, the value of which in­creases at a com­pounded rate.

Prior to the bond sale, ini­tial dis­cus­sions led state of­fi­cials to be­lieve the debt would be sold only to so­phis­ti­cated in­sti­tu­tional in­vestors.

“Own­er­ship of the bonds is scat­tered and very di­verse,” the fea­si­bil­ity study said.

The Divi­sion of Bond Fi­nance be­lieves “a ma­te­rial amount of the bonds were ini­tially sold to or are cur­rently held by re­tail in­vestors, many of whom are likely to be Florida res­i­dents,” ac­cord­ing to the study. ◽

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