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Q

I bought Santa Rosa Bay Bridge Bonds from FMS a while ago and just noticed on the site that they are listed as “Rev Technical Default. “However, you’re still selling them at a premium, and neither the Moody’s nor S&P sites indicate any problem. The most recent Moody’s rating is from June, the credit outlook is stable and there’s no watch. What’s up?

A

James A. Klotz responds:

As I’m sure you are aware, the Santa Rosa Bay Bridge has fallen short from its original projections for both ridership and revenues. As a result, the authority was forced to use funds from its debt service reserve to make full payments to bondholders. Under the indenture, this constitutes a “technical” default since debt service coverage tests were below the level required and the debt service reserve was utilized. Investors holding both the insured (which you own) and uninsured bonds have been paid in full and on time. This means there is no “payment” default. Such a payment default would occur if revenues were so low that the debt service reserve was completely drawn down and there were inadequate funds available to pay bondholders the full amount promised. In this instance, insured bondholders would still receive the full amount due them since bond insurance would “kick in” and pay any shortfall.

The rating agencies have Santa Rosa rated below investment grade due to its weak revenue and traffic history. Recently, traffic has increased substantially and revenues have increased at a rapid rate. While some of this increase is due to new construction at the south end of the bridge in combination with better consumer acceptance of the bridge, the state Department of Transportation and other experts believe that a portion of the increase may also be due to reconstruction of I-10 and the widening and reconstruction of a parallel “free” bridge, which has driven traffic to Santa Rosa. We won’t know to what extent the traffic increase is due to reconstruction efforts and the inconvenience of the alternative routes until those projects are complete.

In the meantime, estimates of a potential payment default on the uninsured bonds have been pushed out by several years. The rating agencies, while keeping non-investment grade ratings on the bridge, have chosen to keep “stable” outlooks on the Bridge since present traffic and revenue patterns are expected to keep the bridge out of payment default for several years. When the overall trend is better known upon completion of the I-10 and other bridge projects, the rating agencies will likely review Santa Rosa and determine whether the rating should change.

[From J.L. in Florida: Thanks very much for your detailed response. I’d forgotten that the bonds I purchased were insured. I seldom buy bonds below investment grade, but double-checked only the coupon and maturity date before writing you. One of the chief advantages of FMS is that all the bonds have been analyzed by you as well as by Moody’s and/or S&P.]