7 Remedies for Ailing Tollway Are Proposed

Seven new proposals for ending the financial troubles of the San Joaquin Hills toll road surfaced Thursday as directors of Orange County’s largest turnpike authority continued their 20-month search for ways to prevent the highway from defaulting on its bonds.

The proposals from investment bankers, two high-ranking county officials and a French toll road company were submitted to a special review committee of the Transportation Corridor Agencies, which operate 51 miles of tollways in east and west Orange County.

“I never expected so many alternatives to come in,” said Orange County Supervisor and committee member Bill Campbell, who received the proposals late Wednesday afternoon. “Some are intriguing. I’d like to find a way to consider them.”

The San Joaquin Hills tollway, which winds through the coastal hills between Newport Beach and Laguna Niguel, has never attracted enough customers to meet revenue projections. Unless its finances are corrected or subsidized, the turnpike could result in the second-largest municipal default in U.S. history.

A panel of six TCA board members, which met for the first time Thursday, was created last week to review plans to combine the operations of 16-mile-long San Joaquin Hills with the more successful Foothill-Eastern corridor and refinance their debt with a $4-billion bond issue.

The agency’s staff and financial consultants -- some with stakes in any resulting bond deal -- recommend that $3 billion in fixed-rate bonds be sold and that the TCA enter agreements for $1 billion in interest-rate swaps with investment banks.

The recommendation came after 20 months of evaluating 14 possible solutions, including various refinance schemes, loans, mergers without bond sales and using surplus revenue from the Foothill-Eastern.

TCA officials and advisors view the deal as the only way to keep the San Joaquin Hills from violating agreements with investors in 2006 and eventually defaulting on almost $1.9 billion in bonds in 2014.

But some board members, such as Campbell, Orange County Supervisor Chris Norby and Yorba Linda Mayor Ken Ryan, question the risks of the plan and have lobbied for safer and less costly alternatives.

Panel members are scheduled to begin discussing the new proposals Wednesday and must determine whether any have merit by April 8, the date TCA board members have set for a vote on the merger.

Among the proposals is an offer by Cofiroute Global Mobility, a French toll road company, to guarantee the debt of the San Joaquin Hills for 15 years.

In exchange, Cofiroute, which once owned the 91 Express Lanes along the Riverside Freeway, wants to manage the Foothill-Eastern and the San Joaquin Hills for the life of the guarantee. The proposal, company officials say, would avoid costly refinancing and buy the TCA time to consider other options.

In another proposal, Norby contends that surplus revenue from the Foothill-Eastern corridor is more than adequate to pay the debt service of San Joaquin Hills.

Norby says his plan would save the TCA $1.8 billion to $2.6 billion in debt payments and at least $162 million in fees because refinancing would be unnecessary.

Further, Norby said the proposal would save motorists $3.6 billion in future tolls because the authority’s bonds would be paid off on time, allowing the Foothill-Eastern and the San Joaquin Hills toll roads to become freeways quicker. A refinance would extend the pay-off from 2036 to 2044 for the San Joaquin Hills and from 2040 to 2044 for the Foothill-Eastern.

In a third proposal, Wall Street investment bank Morgan Stanley suggested creating a trust fund of surplus revenue from the combined highway operations and using it to back new bond issues.

Money from those sales would pay off enough San Joaquin Hills bonds to keep the road out of technical default. Such a default might occur as early as 2006, when the TCA is expected to violate an agreement with investors to take in $1.30 in revenue for every $1 paid out in expenses and debt payments.

Orange County Treasurer-Tax Collector John M.W. Moorlach suggested that the Foothill-Eastern system offer $190 million for the option to buy the San Joaquin Hills. The deal would provide the San Joaquin Hills with money to pay debt service and avoid the proposed refinancing that could result in almost $2.8 billion more in debt payments, he said.

The recommended refinancing “probably is the most appropriate Wall Street response to their situation,” Moorlach said. “However, what is good for Wall Street isn’t always good for Main Street. Our 1994 bankruptcy debacle certainly proves the point.”

Kinsell, Newcomb and DeDios, an investment bank in San Diego County, suggested the TCA rely more heavily on federal loans, loan guarantees and lines of credit available for major transportation projects. The corridor agency now has a $240-million federal line of credit that extends for the life of the proposed refinance plan.

Finally, Merrill Lynch recommended two solutions, both involving small or partial refinancings. One proposal calls for the two tollway operations to be combined but refinancing only a portion of San Joaquin Hills’ bonds.

To help defer a default, Merrill Lynch analysts say that a bond issue of $95 million could be used to pay interest and principal coming due on San Joaquin Hills bonds sold in 1993 and 1997.