Delayed amid pandemic, Kentucky refunding now hinges on rates

The Kentucky Public Transportation Infrastructure Authority has approved the sale of up to $443.8 million of tax-exempt bonds to refund a loan taken out in 2013 under the Transportation Infrastructure Finance and Innovation Act.

Delayed during the COVID-19 pandemic, the refunding now depends on how much savings can be achieved in the rising interest rate environment.

In 2018, the KPTIA began looking at opportunities to pay off the U.S. Department of Transportation's TIFIA loan, which has a 3.88% interest rate. In 2019, it began the process to issue tax-exempt refunding bonds, according to a presentation by KPTIA’s financial advisor, Public Financial Management.

The sale, along with a tender offer, would have also paid off debt from the 2013 sale of $727.9 million of first tier toll revenue bonds for the Downtown Crossing project.

Kentucky and Indiana worked together to develop a cross-river mobility project between Louisville and Clark County, Indiana. The completion of the bridge and tolling, which began on Dec. 30, 2016, was the single largest public infrastructure project ever undertaken by the commonwealth and was completed on time and under budget.

The highlights of the Louisville-Southern Indiana Ohio River Bridges project are the two new bridges, the Abraham Lincoln Bridge at downtown Louisville and the Lewis and Clark Bridge eight miles upriver on the Ohio.

The Downtown Crossing project was a critical part of the plan and included acquisition, financing and construction of the Lincoln bridge across the Ohio River from downtown Louisville to Jefferson, Indiana, along with the reconstruction and reconfiguration of the neighboring Kennedy Bridge. It also modernized the Kennedy Interchange and reconfigured the bridge approaches on the Indiana side.

Last September, the authority planned to issue $191.8 million of Series 2021 fixed-rate first tier toll revenue taxable refunding bonds when it was thought that certain changes in the TIFIA program would allow for a loan-rate rest. A taxable sale on top of the loan-reset was seen as providing greater savings. Ultimately, it was determined that a loan-rest was not eligible to be enacted.

However, a tender exchange for some of the bonds issued was made in 2021, David Miller, managing director at PFM, told the KPTIA board on Monday when it approved the bond issue.

He said some of the existing bondholders tendered their 2013 bonds in exchange for new tax-exempt bonds; for those bonds that were not tendered or exchanged, KPTI sold an advance refunding taxable issue.

“The total amount of the bonds all together was around $185 million and that was in two series, 2021A and 2021B,” Miller said. “We had net present value savings of $58.5 million … the amount of present value savings as a percentage of the refunded par amount of bonds ... in our case was 32% — and that’s kind of off the charts. We really achieved a lot of benefit and that benefit goes to the project in terms of enhanced cash flow to pay for capital improvements including potentially the replacement of Kennedy Bridge in the future.”     

On Monday, KPTIA authorized PFM to move ahead with a tax-exempt sale with the exact timing to be determined at the discretion of the financial advisor and bond counsel when market conditions seem appropriate.

PFM said it is looking at purchasing bond insurance so as to get a higher credit rating and lower interest rate on the deal.

Last year ahead of the taxable refunding, Moody's Investors Service (MCO) raised the underlying rating of KPTIA to Baa2 from Baa3 and Fitch Ratings' upgraded its underlying rating on the authority to BBB from BBB-minus. Fitch also lifted its outlook to positive; Moody's assigned a stable outlook. The bonds were insured by Assured Guaranty (AGO) Municipal Corp.

The goal for the upcoming deal is to achieve savings of at least 1% of the aggregate principal amount of the refunded loan amount. The TIFIA loan has a current balance of $443.8 million.

While this goal is lower than the KPTIA's typical target, the refunding can provide additional benefits by eliminating any possible revenue sharing with TIFIA, and reducing reporting requirements.

“As of earlier this year, we were estimating quite a bit of savings by using this strategy, $43 million, or almost 10% of the refunded par,” said Roger Peterman, a managing partner at the law firm of Dinsmore & Shohl LLC. “But I’m sure you’re aware that the market has changed quite a bit over the past couple of months — it’s moved up over 100 basis points.

“So while we have started taking the initial steps to do a refunding, at this point in time we would not execute a refunding because we would not have the savings levels we think are adequate,” he said.

Still, he noted that the authority’s vote to approve a refunding now gives it the flexibility to move quickly if market conditions become more favorable.

Kentucky has been experiencing an economic recovery as the pandemic fades from the public eye.

Last week, Gov. Andy Beshear said the $22 billion fiscal 2022-2024 budget passed by the General Assembly builds on the economic momentum the state has been experiencing.

He said it makes substantial new investments in infrastructure, such as high-speed internet, cleaner water, and in roads and bridges, while making it easier for businesses to move into the state.

“These are the areas we must invest in today to help the commonwealth become a national leader by turning two years of incredible progress into 20 years of prosperity for Kentucky’s families,” Beshear said in a statement. “With these dollars, we are going to make major investments in critical infrastructure needed to build a better Kentucky and create and attract the jobs of the future.”

The governor’s budget proposal was based on a record revenue surplus, with the General Fund seeing $1.9 billion more than had been projected.

The state will see an additional $100 million from the federal infrastructure bill and will expend more than $2.3 million in state funds over two years to support the expansion of high-speed internet and create an Office for Broadband.

Last year, Kentucky’s Broadband Deployment Fund was created with $300 million in state funds to address the connectivity needs of unserved and underserved communities. Combined with at least 50% required matching federal investments, a minimum of $600 million will support broadband expansion in Kentucky, the governor said, creating more than 10,000 direct and indirect jobs.

For transportation, the budget provides $250 million from the General Fund for major transportation infrastructure projects. Three projects were targeted specifically — the Brent Spence companion bridge project, the I-69 Ohio River crossing in Henderson and the completion of the Mountain Parkway expansion project.

Beshear said these one-time funds are meant to give flexibility in meeting state-match requirements for expected federal grants.

The governor said that with all the businesses moving to Kentucky, it was imperative to continue the effort to improve state infrastructure.

Additionally, the budget expands on efforts to improve water and sewer systems and includes $250 million to support the Better Kentucky Plan’s cleaner water program.

Kentucky’s seasonally adjusted preliminary February unemployment rate was 4.2%, the Kentucky Center for Statistics said late last month.

The preliminary February jobless rate was down 0.2 percentage points from the 4.4% reported in January and down 0.5 percentage points from the 4.7% recorded in the same period one year ago.

The U.S. seasonally adjusted jobless rate for February was 3.8%, down from 4% in January, according to the U.S. Labor Department.

The state of Kentucky is rated Aa3 by Moody’s Investors Service, A by S&P Global Ratings and AA-minus by Fitch Ratings and Kroll Bond Rating Agency. S&P has a positive outlook on the state while the other three agencies assign stable outlooks on the credit.