By James Nash
September 11, 2013

California’s largest toll-road agency, whose revenue has trailed projections for six years, is nearing the biggest default in the $3.7 trillion municipal market since Detroit’s record bankruptcy.

The Foothill-Eastern Transportation Corridor Agency, which operates 39 miles (63 kilometers) of toll highways in Orange County, risks default on $2.4 billion in debt, a consultant to California Treasurer Bill Lockyer’s Debt and Investment Advisory Commission said in July. The county itself filed for protection in 1994, the biggest U.S. municipal bankruptcy at the time, after losing about $1.7 billion on derivatives.

Bonds for three highways linking inland suburbs to coastal business parks are rated one step above junk and traded last month at their lowest price this year. The agency asked late in in 2012 to extend maturities and tolls by 13 years, a proposal the state Transportation Department has yet to accept. With benchmark municipal yields setting a two-year high this month, the window to complete the refinancing may be closing.

“The projections that were originally put into place when they issued debt didn’t come to fruition,” said Howard Cure, director of muni research for Evercore Wealth Management LLC in New York. “Built into this kind of project is the expectation that they can improve the amount of traffic and the collection of tolls. When you fall behind early on, it just makes the problem that much worse.”

Evercore’s $4.7 billion in assets don’t include Orange County toll-road bonds.

Consultant Warning

The consultant to Lockyer’s debt panel warned that Foothill-Eastern would risk defaulting unless it reduces repayments by extending maturities.

Default “could have a negative effect on the outlook of investors on the creditworthiness of California in general,” the consultant, Westlake Village, California-based Montague DeRose & Associates LLC, said in the report.

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