Laura Lockwood-McCall Director, Debt Management Division Oregon State Treasury
ODOT s Debt Profile The Oregon Department of Transportation (ODOT) has issued over $2.4 billion in transportation revenue bonds since 2000 to fund a wide range of Oregon bridge and highway projects throughout the state $2.14 billion in outstanding bonds as of 6/30/12 These revenue bonds are supported by various ODOT revenue streams, including gas taxes, weightmile and DMV fees Initial pledged minimum debt service coverage on bonds was 3.0x revenue 2
ODOT Subordinate Lien Bonds In 2006, in order to increase debt capacity, ODOT established a subordinate lien bond program with a lower minimum debt service coverage requirement of 2.0x annual revenue Senior lien bonds rated AAA/Aa1/AA+ Subordinate lien bonds rated AA+/Aa2/AA During this same time period, ODOT established a variable rate bond program to reduce its overall cost of funds while better managing its assets and liabilities ODOT s variable rate bond program was sized to match its average monthly cash balances Between 2006 and 2007, ODOT issued five series of Subordinate Lien VRDBs totaling $265.3 million 3
ODOT Subordinate Lien Bonds Dexia was selected as the liquidity provider for this program based on their aggressive fee of only 9.5 basis points per annum over a ten-year period This French/Belgian bank also agreed to very favorable term out provisions in the Stand-by Purchase Agreement (SBPA) with the State ODOT s VRDBs were remarketed weekly by 3 different remarketing agents, each charging 5 bps per annum VRDBs have saved ODOT approximately $40 million in interest costs to date compared to issuing 25-year fixedrate bonds at a benchmark interest rate of 4.0% 4
Impact of the 2008 Credit Crisis on The weekly remarketing rate paid on tax-exempt VRDB s is compared to the SIFMA index, with a +/- spread based on the market s perception of the underlying credit of the liquidity provider For the first few years of the program, ODOT s weekly VRDB rates were generally very close to the weekly SIFMA index rate In the fall of 2008, the bond market perceived that Dexia s credit was deteriorating, prompting many investors to put ODOT s VRDB bonds back to our remarketing agents, who in turn had to set the weekly rate at widening spreads to the SIFMA index to attract buyers ODOT s VRDB Program For several weeks at the height of the credit crisis, some $50 M in VRDBs could not be resold to investors, forcing Dexia to purchase the bonds from our dealers While the State considered terminating its business relationship with Dexia, the attractive annual liquidity fee of only 9.5 basis points and a calming bond market led us to take a wait and see attitude 5
9.00 8.00 Lehman files for bankruptcy ODOT Variable Rate Revenue Bond Program Weekly Interest Rates from 2008 to mid-2011 7.00 Interest Rate 6.00 5.00 4.00 Weekly VRDBs with Dexia Liquidity and Remarketing Fees Weekly SIFMA Rate 3.00 2.00 European Debt Crisis 1.00-6
Impact of the 2011 European Debt Crisis In 2011, renewed concerns about Dexia s long-term financial viability in the wake of the European debt crisis led to higher rates on ODOT s weekly VRDBs By July, these rates averaged 2.40%, which was 225 basis points above the weekly SIFMA rate of 0.15% While refunding into a fixed rate mode was considered, in the end, we decided to continue ODOT s successful VRDB program but to replace Dexia as the liquidity provider 7
Replacement of Dexia Opened Up New Financing Options In August 2011, the State solicited bids from several creditworthy banks to provide replacement liquidity for ODOT s outstanding VRDBs In addition, banks were asked to submit bids to directly purchase a $265.3 M floating rate note (FRN) issued by ODOT on parity with its other subordinate lien revenue bonds This alternative was considered because liquidity fees for even short-duration SBPAs had skyrocketed since 2008, even for those municipal issuers with very high credit ratings The direct purchase option also had the advantage of eliminating remarketing and bank credit risk from the VRDB program Finally, recent SBPA negotiations for other state agencies had proven to be long, painful and drawn out, with much less favorable terms than in previous variable rate transactions 8
Private Placement FRNs Came to the Rescue! Five banks responded to the State s solicitation, with the winning bidder offering to directly purchase a 3-year FRN at a spread of 45 basis points to weekly SIFMA without any upfront fees Although this bidder also offered to provide a SBPA at 46 basis points for 3 years, the ease and simplicity of the direct private placement approach easily won the day One-time rating agency review and fees vs. on-going rating surveillance fees No annual remarketing or liquidity fees ODOT s weekly rate is now based on their superior credit rating, not on a bank s credit rating 9
3.00 ODOT Variable Rate Revenue Bond Program Weekly Interest Rates Since Replacement of Dexia with Privately Placed FRNs 2.50 2.00 European Debt Crisis Weekly VRDBs with Dexia Liquidity and Remarketing Fees Interest Rate 1.50 1.00 Weekly Floating Rate Notes (private placement) Weekly SIFMA Rate 0.50-10
Some Last Thoughts on Private Placements While not required under current securities law, the State decided to report this private placement transaction to investors on EMMA Although the private placement of FRNs proved to be the most expedient way to solve ODOT s VRDB interest rate problem in 2011, we will examine both private placement and public sale options when the existing private placement agreement expires in 2014 In an ideal world, ODOT would like to find investors willing to purchase Subordinate Lien FRNs with a longer maturity date (7-10 years), but at aggressive spreads to SIFMA 11