O.C. Tollway May Take the Junk-Bond Route

A proposed tollway intended to reduce traffic on Interstate 5 through South County might have to be financed with up to $245.9 million in junk bonds because of rising cost estimates and plans to bail out the struggling San Joaquin Hills turnpike.

If junk bonds are used, the Transportation Corridor Agencies would face higher debt payments and a more difficult time raising capital to build the 16-mile Foothill South tollway from Oso Parkway in Rancho Santa Margarita to Interstate 5 in or just south of San Clemente.

The proposed turnpike, opposed by environmentalists because some potential routes cut through swaths of open space and San Onofre State Beach, would be built by the Foothill/Eastern Transportation Corridor Agency, which oversees the Foothill and Eastern toll roads.

Agency officials told Foothill/Eastern board members Wednesday that about $660 million in investment-grade bonds would be sold to investors along with $245.9 million in non-investment-grade, or so-called junk, bonds to build the Foothill South.

TCA officials said junk bonds would probably be needed because the estimated cost of the Foothill South had escalated from $700 million three years ago to $875 million today. The planned turnpike was proposed in 1987.

The TCA oversees Orange County’s tollways, which include the San Joaquin Hills through western Orange County and the Laguna Freeway, a short link from the Eastern tollway to Laguna Canyon Road.

Further complicating plans to build the Foothill South is a proposal to use surplus revenue from the 241 tollway to keep the San Joaquin Hills tollway from defaulting on $1.9 billion in bonds by 2017. The road could be in the early stages of default as early as July.

The $1.16-billion package of loans and payments is scheduled to be approved by the boards of both roads Nov. 10.

Analysts say using junk bonds will increase the cost of financing the Foothill South since a higher interest rate will be needed to attract investors. Also, junk bonds may be more difficult to sell because some institutional investors, such as mutual funds and pension funds, are prohibited from buying non-investment-grade bonds for their portfolios.

Though final rates have yet to be determined, interest for the Foothill South junk bonds might be about 7.8% compared to 7% for the investment-grade bonds, officials said.

“They are a challenge to market, but it depends on the conditions at the time they are sold,” said Bob Rich, a financial analyst for the Foothill/Eastern board.

Junk bonds have been used by the TCA before to finance construction of the San Joaquin Hills toll road. Out of about $2 billion in bonds, $90 million were non-investment-grade.

Rich contended that selling junk bonds to finance the Foothill South would be easier than selling those for the San Joaquin Hills, which was the first tollway in California to rely on bond financing.

At Wednesday’s hearing, tollway board member and Lake Forest City Councilman Peter Herzog said he was concerned about the financial package.

Herzog said other options to bail out the San Joaquin Hills tollway that would save up to $1 billion -- some of which could be used to build the Foothill South and reduce the reliance on junk bonds -- hadn’t been fully considered.

Among them are proposed loans from two companies: the National Infrastructure Capital Group, an investment firm; and the Macquarie Infrastructure Group, one of the world’s largest private builders of tollways.

“These should be looked at, but there was specific direction [by tollway board members] not to bring these forward,” Herzog said. “We now have only one possibility for the San Joaquin Hills [bailout], and that still has questions.”

Orange County Supervisor and tollway board member Bill Campbell, who developed the bailout plan, said, “It was the best the agency could do at this time.”

If a better deal for the San Joaquin Hills surfaces later, “we will be much better off, but something has to be in place before they can do anything else,” Campbell said.

As for financing the Foothill South, Campbell said federal loans may be available that would reduce the amount of junk bond financing needed.