Wall Street’s credit crisis may be the death blow for a planned toll-road extension that California surfers have been fighting for 10 years.
Surfers contend that the road would destroy a prime spot for riding waves. They’re joined by environmentalists, including the California Coastal Commission, which ruled against the project. Toll-road authorities appealed to the U.S. Commerce Department to overturn the commission’s rejection.
The department upheld the coastal commission’s objection in a ruling issued today. A spokeswoman for the Transportation Corridor Agencies, manager of Orange County’s toll roads for the state, said the agency is reviewing the ruling and hasn’t yet decided on the next step.
Even if toll-road proponents eventually win permission to build, the credit crunch may increase the cost of raising $1.1 billion to complete the final link of the Foothill/Eastern toll roads. Plans to sell more bonds in 2010 might be scuttled altogether, said Ken Naehu, who manages $2 billion in fixed income at Bel Air Investment Advisors LLC in Los Angeles.
“It just might not be doable at these levels,” he said. “I’ve seen $150 million bonds that have had a difficult time selling to investors. You can imagine what it would be with another zero added to it.”
The Transportation Corridor Agencies used toll-backed bonds rather than tax money to finance construction in the 1990s. As more vehicles travel free roads, revenue is missing projections and the bonds’ value is declining, threatening their credit ratings.
Seeking Federal Loan
The agency is seeking a $1.1 billion loan from the U.S. Transportation Department to refinance $4.24 billion of bond debt. Revenue in the year ended June 30 fell 0.9 percent to $193.8 million, 17 percent less than forecast.
Opponents of the project say drainage from the roadway would pollute a prime surfing spot called Trestles and threaten the Pacific pocket mouse, which is listed as endangered by the U.S. Fish and Wildlife Service. The road would cut through San Onofre State Beach, a coastal-canyon park overlooking the Pacific Ocean.
“This road will kill Trestles,” said Jerry Collamer, 66, who has surfed there since 1954. He calls the San Mateo Creek, which empties into the ocean, “the last pristine coastal watershed in Southern California.”
Clint Eastwood, Surfers
Other opponents include film star Clint Eastwood and the Surf Industry Manufacturers Association, which receives funds from companies such as Huntington Beach-based Quiksilver Inc., the largest maker of surfing apparel. Orange County’s surfing industry generated $7.5 billion in U.S. sales in 2006, according to the group.
The Sierra Club, California State Parks Foundation and National Resources Defense Council also object to the extension.
“It’s not going to happen where they are proposing it,” said Mark Rauscher, an oceanographer for Surfrider Foundation, a group based in San Clemente that works to protect beaches and surfing spots. “There is actually a lot of wildlife.”
In upholding the California Coastal Commission’s objection today, the Commerce Department said it could override the decision only if “no reasonable alternative to the project exists” or if the road was “in the interest of national security.”
Neither of those conditions were met, the department said.
Easing Traffic
Proponents, including Governor Arnold Schwarzenegger, back the road as a way to alleviate traffic on Interstate 5, the main freeway between San Diego and Los Angeles. The Transportation Corridor Agencies said a September survey showed that 58 percent of local residents want the new artery built.
“It’s clear that the road needs to be built and it will have to be built,” said Tom Margro, chief executive officer of the toll-road agency. “The economics will dictate when that happens.”
It’s too early to tell whether financing for the final 16 miles (26 kilometers) can be obtained at a rate low enough for tolls to cover bond payments, Margro said. The 36-mile Foothill and 15-mile San Joaquin legs of the toll road are generating enough revenue to pay holders of existing bonds, he said. Tolls are 25 cents to $5.25, depending on time of day and distance traveled.
Bond Ratings
A drop in toll revenue may trigger a downgrade of the agency’s bonds from Baa3, one step above junk, Moody’s Investors Service said in its 2007 bond analysis. That would push up the agency’s cost for new bonds further.
Margro said the bond market might improve by the time the agency seeks financing in 2010. The construction cost might drop as more contractors seek work in the weak economy, or the county might build the remaining freeway in installments, he said.
The project might be salvaged through cost-cutting modifications, said Cherian George, an analyst for ratings company Fitch Inc. The road might be built with fewer ramps and with two lanes in each direction instead of three.
Current conditions in the credit market “certainly could delay it,” George said. “I don’t know if it will stop it.”
The agency may have to offer yields approaching 10 percent to sell new debt, based on a Bloomberg Fair Value evaluation of the agency’s existing securities. Tax-exempt bonds with a 2040 maturity paying 5.75 percent would trade at a price to yield about 9.5 percent now, according to Bloomberg Fair Value, compared with trades of less than 6 percent in early September, based on data reported to the Municipal Securities Rulemaking Board.
“The credit meltdown has helped our cause because it will make it that much harder to raise financing to build this road,” said Surfrider’s Rauscher. “They have to show it will make money.”
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