Many Mid-Atlantic and New England drivers heading south often take a shortcut: the almost 18-mile-long Chesapeake Bay Bridge-Tunnel, linking the Delmarva Peninsula with the Norfolk/Virginia Beach area. Consisting of two bridges, miles of causeway, and two one-mile tunnels in the middle of open water where the Bay meets the Atlantic, the crossing opened in 1964, and it has awed engineers and the driving public ever since. In 2016, the District operating the facility sought to raise money for an expansion, raising questions about the rating of its bonds. T. Rowe Price credit analyst Colin Bando explains how his approach to credit analysis went beyond the numbers and how that has helped increase opportunities for investors.
InvestmentNews Content Strategy Studio (INCSS): What were the District's expansion plans and why did they raise a red flag?
COLIN BANDO: Over the years, traffic has grown and the District's commissioners have acted to meet demand. In 1991, the District sold revenue bonds to finance studies in connection with expanding the bridges and causeways from two lanes to four lanes, and construction began in 1995. But the tunnels weren't part of that plan. In 2013, the commissioners approved adding another two-lane tube to one of the tunnels, and the District began to seek financing in 2016. The tunnel project would cost about $800 million, take five years to complete, and would materially change the District's financial profile since its outstanding debt would increase significantly.
INCSS: How did that affect its bond ratings?
COLIN BANDO: The ratings agencies downgraded the District, which is typical when a project of this size is undertaken. That, of course, caused the price of the District's existing bonds to fall, since investors perceived them as riskier, given the lower rating. But we viewed the downgrade as an opportunity, because our research and experience with the issuer led us to the conclusion that its debt was far less risky than the market was saying.
COLIN BANDO: T. Rowe Price has been an investor in Bay-Bridge bonds for many years, going all the way back to the first expansion in the early 90s. Since we are located relatively nearby in Baltimore, we've been able to visit the facility regularly over the years, and we have developed a comfortable relationship with the District and Commission. Going by just the downgrade alone, we believed that other investors would miss certain characteristics of the District that made its finances much sounder than the dramatic increase in debt would indicate.
First, unlike similar expansion projects on other bridges and tunnels, current traffic on the crossing wouldn't be affected, nor would revenue. The new tunnel would be constructed alongside the existing one, which would continue in use throughout the project, switching from two-way traffic currently to northbound-only traffic when the new southbound tunnel opened.
Second, this wasn't an all-new project based on “build it and they will come” projections. The facility was already in place and had delivered results for a long time, and existing traffic and tolls were sufficient to cover the new debt, which meant that any greater revenue generated would be a plus.
Finally, because of our longstanding relationship with management, we felt comfortable that they had taken a conservative approach to financing and constructing the new tunnel.
INCSS: What was the outcome?
COLIN BANDO: The District wound up redeeming its earlier bond issues in 2016 before issuing new bonds to pay for the tunnel construction. The rating agencies upgraded the District's issues, which not only vindicated our research and analysis by confirming our perception of their risk, but also resulted in higher prices for the District bonds—a positive outcome for investors.
This is a sponsored special feature, developed by the InvestmentNews Content Strategy Studio, and supported by T. Rowe Price.
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