Tollway Deal Bond Ratings Withdrawn

A Wall Street rating agency on Friday withdrew its investment grade ratings of a proposed $3.9-billion bond deal that is designed to save the failing San Joaquin Hills toll road in west Orange County from default.

Officials for Moody’s Investors Service said they canceled the ratings because the Transportation Corridor Agencies has postponed a decision to merge the operations and finances of the San Joaquin Hills and the successful Foothill-Eastern tollway.

On Feb. 2, Moody’s gave the corridor agency’s bond deal its lowest investment grade of Baa3, one step above junk status. Standard & Poor’s, another ratings agency, also has issued the tollway authority its lowest investment grade for $3.4 billion in bonds and a junk rating for $500 million in bonds.

The Moody’s withdrawal was expected, said Clare Climaco, a spokeswoman for the corridor agency. “The ratings cannot be held because the recommended acquisition finance plan was based on current market conditions and the anticipation that the board would take action.”

Climaco said the corridor agency will request new ratings once a financial plan is approved.

Ratings are an important gauge of risk because they indicate the ability of the issuing company or government agency to pay interest and principal.

On Thursday, one of the TCA’s three boards of directors delayed for up to 50 days a merger vote so board members can study other options to save the San Joaquin Hills road. The 8-year-old tollway has proved less popular than expected, resulting in less-than-projected toll revenue.

The corridor agency staff has recommended a $3.9-billion refinancing that calls for the sale of almost $3 billion in fixed-rate bonds and $1 billion in interest-rate swaps with financial institutions, such as investment banks.

Some board members consider the swaps riskier than relying exclusively on fixed-rate bonds. Under the proposed swap, the TCA would sell variable-rate bonds that carry lower rates than fixed-rate bonds.

The TCA would 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.

As a result, the TCA would obtain a stable, below-market rate, while the financial institutions would profit from the difference in interest between the variable-rate bonds and the fixed rate they negotiated with the TCA.