O.C. Tollway Merger Vote Delayed Again

With continued concerns about financial risks, directors of Orange County’s toll road authority Thursday delayed for the second time in two weeks voting on a complicated plan to save the failing San Joaquin Hills tollway.

The issue before the Transportation Corridor Agencies is whether to merge the operations of the San Joaquin Hills and the successful Foothill-Eastern tollways and refinance their combined debt with a massive $4-billion bond issue.

If nothing is done, the agency operating the San Joaquin Hills corridor faces default by 2014 in paying the interest on $1.5 billion in bonds, representing the second-largest municipal bond default in U.S. history.

The corridor, which has been plagued by lower-than-expected traffic and revenue, could be in technical default as early as 2006, when it is expected to violate an agreement with bondholders to earn $1.30 in revenue for every $1 paid out in debt service and expenses. In that event, bond insurance companies and investment banks would take over the highway and raise tolls, fees and fines to pay off bondholders.

Financial analysts say a default could interfere with pending plans to complete the toll road system and discourage financial institutions from buying government bonds in Orange County, which was racked by the 1994 bankruptcy.

In Thursday’s action, two of the corridor agencies’ three boards -- one for the San Joaquin Hills and the other for the Foothill-Eastern -- approved the merger.

The ultimate decision, however, was delayed by the Transportation Corridor System board, which was created by the TCA last April in an exploratory merger -- and which voted 17 to 3, with one abstention, to postpone the matter for no more than 50 days.

All three boards must approve of the merger.

Even had the corridor system board voted on the merger and refinance plan, there would not have been enough support Thursday for consolidation. The merger requires 16 approving votes on the board of 21, and at least six board members said they were opposed.

Directors who supported the delay said they were concerned about the risks of the $4-billion bond issue and wanted more time to explore other ideas that might be financially more secure for the corridor agency.

Under the plan recommended by the TCA staff, $3 billion in tax-exempt bonds would be sold at fixed interest rates, and $1 billion in more risky interest-rate transactions known as swaps would be entered into with financial institutions, such as investment banks.

If completed, it would be one of the largest municipal bond deals in Wall Street history.

“My problem today is that we have been narrowed down to one alternative with a risky financial option,” said Orange County Supervisor and corridor board member Bill Campbell, who has been skeptical of the merger’s refinance package.

Campbell, who obtained a delay last week to more fully assess the risks of the merger, proposed that a decision be reached by April 8.

Meanwhile, the TCA will set up a six-member ad hoc committee of board members to analyze other options, such as a fixed-rate bond issue, a series of smaller refinancings or loans from the Foothill-Eastern tollway to the San Joaquin Hills.

Campbell and others, including corridor board Chairman and county Supervisor Tom Wilson, said they were more comfortable with fixed-rate bond issues, which are considered more stable than swaps.

Corridor officials and some of Campbell’s colleagues, who voted against the delay, said the agencies’ staff, a battalion of financial advisors, and board members have studied the merger and at least a dozen other options for more than 20 months. They say the consolidation and refinance plan with its interest-rate swaps appear to be the best option.

Under the proposed swaps, the TCA would sell variable-rate bonds, then negotiate a fixed rate below the market rate with financial institutions that would agree to pay the interest to holders of the variable-rate bonds.