Maine bond bank brings transportation deal after credit revamp

The Maine Municipal Bond Bank is kicking off the new year by reviving its transportation revenue bond program.

In case the TransCap program's absence wasn't enough to entice investors, the state revamped its credit structure, too.

"The TransCap program has been around for a while, but they have made some substantial changes with this issuance," Moody's Ratings analyst Daniel Kowalski said.

The Maine Municipal Bond Bank is set to price $250 million of transportation infrastructure revenue bonds on behalf of the Maine Department of Transportation on Jan. 15.

BofA Securities is the deal's manager and Hilltop Securities is municipal advisor. Hawkins is bond counsel.

The deal consists of two series, both with maturities from 2026 through 2040. The deal includes $190 million of tax-exempt highway and bridge bonds, Series 2026A, and $60 million of federally taxable general transportation project bonds, Series 2026A. Both series have a 10-year par call, according to an online investor presentation about the deal.

The bonds are part of the TransCap program, through which the Maine Municipal Bond Bank issues debt backed by state revenues on behalf of MaineDOT. TransCap bond proceeds are devoted to infrastructure projects across the state.

TransCap was created in 2007, according to the preliminary official statement for this deal, and in 2008, the MMBB issued the first $50 million of TransCap bonds, backed by motor fuel tax revenues.

The state issued more TransCap bonds over the years, but there are no TransCap bonds outstanding, according to the POS.

In 2023 and 2024, the state legislature amended the program. This will be investors' first chance to purchase bonds from the updated TransCap resolution.

Maine increased the percentage of motor fuel tax revenue that flows to the TransCap fund, to 10.25% from 7.5%. It also allocated a new source of revenue: auto-related sales taxes.

In the new TransCap bond program, there are two different credits: highway and bridge bonds, which are backed by the motor fuel tax revenue and half of the sales tax revenue, and general transportation project bonds, which are backed by the other half of the sales tax revenue.

The HWB bonds, as their name suggests, will support highway and bridge projects, and the GTP bonds support other transportation-related infrastructure projects in Maine.

The legislature also tweaked part of the TransCap program's structure: whereas the state had previously held the TransCap trust fund, it now rests with the bond bank.

The state "took off the appropriation requirement," Kowalski said. Giving the bond bank direct control of the funds strengthens its credit.

"From a credit perspective," Kowalski said, it adds up to "three big changes."

The HWB bonds are rated AA by S&P Global Ratings and Aa2 by Moody's Ratings. The GTP bonds have the same Moody's rating, but are rated AA-minus by S&P.

S&P's rating report described the HWB bonds as "exhibiting low volatility" and benefiting from the diversity of two revenue streams.

"In contrast, our moderate-to-low volatility assessment of auto-related sales taxes securing the GTP bonds reflects our view of these pledged revenues to be a narrower and economically sensitive revenue stream," S&P's analysts wrote, "compared to a broader sales and use tax and the more diversified mix of revenues securing HWB bonds."

"There's a longer history on motor fuel taxes," Kowalski said. "The auto-related sales taxes can expand with inflation, whereas the motor fuel taxes, they are not inflation adjusted, they are flat. And they have been flat since [around] 2012."

The auto-related sales tax is a 5.5% tax on sales of motor vehicles, parts and equipment, according to S&P. The TransCap program receives 8.8% of Maine's total auto-related sales tax revenue.

In S&P's rating report, its analysts noted some of the strengths of the bonds, including strong maximum annual debt service coverage for both credits, good legal covenants, a debt service reserve fund, and Maine's diverse economy.

But S&P's analysts added a caveat: "In our opinion, these strengths are somewhat offset by the susceptibility of the pledged revenue sources to economic conditions."

The bond proceeds will support MaineDOT's capital program. Its current work plan covers 2025 through 2027 and totals more than $4.8 billion, according to the POS.

The GTP bond proceeds could fund ferry system improvements, such as boat and terminal construction, ferry bridges and related facilities; port and marine infrastructure improvements; dredging of shipping channels; public transit enhancements; rail projects; and trail and sidewalk improvements.

The MMBB last issued TransCap bonds in a 2021 refunding deal. According to S&P, those bonds "have been defeased with funds deposited to the trustee, which will provide for all future debt service payments on the defeased bonds at their maturities through September 2026."

TransCap bonds have a 15-year maximum final maturity, according to the investor presentation.

This deal will likely be investors' last chance to purchase TransCap bonds until 2027, at least.

MaineDOT authorized the MMBB to issue TransCap bonds "in amounts that in total do not exceed $250 million through the state fiscal year 2027," according to the POS.