The Bizarre Bonds Behind Rt. 460

Tax exempt bonds for a new 55-mile stretch of four lane highway between Suffolk and Petersburg, are scheduled to hit the market tomorrow, Dec. 20.

The project is expected to cost $1.5 billion, mostly funded by public money, and will be open by 2018.

 Yet the mix of bonds raises serious questions about the long-term debt of the project and who eventually will pay for these bonds.

The bonds will be issued in two series, according to an official statement by Rt. 460 Funding Corporation of Virginia, a non-stock, non-profit entity set up by the state. (See listing at EMMA.)

Its board is staffed by state and Commonwealth Transportation Board officials, including Rodney Oliver, interim executive director of the Virginia Port Authority, a state agency, and Aubrey Layne, a member of the Commonwealth Transportation Board.   

The first series, 2012A, called current interest rate bonds, will be issued in two tranches and will carry interest rates from 5 to 5.125 percent, are expected to raise $231.6 million.

The second series, 2012B, called capital appreciation bonds, will have multiple issues and are expected to raise $61.76 million.

The second series are known as zero coupon bonds because they don’t carry an interest rate. Instead, the principle and interest rate are paid in full when the bonds mature.

Ratings agency, Standard & Poor’s, has slapped a BBB- grade – low by credit standards – on both series, meaning the debt payer has adequate capability to pay but economic conditions and changing circumstances could lead to the borrower’s capacity to pay.

California school districts that have used capital appreciation bonds, known as CABs, found they owed more money than they borrowed. In one instance, a school district owed $1 billionon a $100 million loan.

Debt payments on these bonds are deferred until the next generation and they cost more money than traditional tax exempt bonds.

The excessive costs of these bonds have raised concerns with California lawmakers.

The bonds have referred to as the equivalent of a payday loan. And one California state senator, a Republican, said that "In any other circumstances, it would be called usury," according to a Reuters article. 

The Players:

Route 460 Funding Corporation of America

Hunton & Williams LP, representing Funding Corp. of Virginia, and also serving as bond counsel

Bank of America Merrill Lynch and J.P. Morgan are the underwriters

Jones Day, counsel to the underwriters

U.S. Bank National Association, trustee

Va. Attorney General, representing the Va. Dept. of Transportation