This week on the Talking Michigan Transportation podcast, an update on Gov. Gretchen Whitmer's Rebuilding Michigan program as the deal closes on another $800 million in bonds.
The bonds closed today will cover the cost of rebuilding some of Michigan's most highly traveled freeways. When all of the $3.5 billion bonds are sold over the next few years, they will finance or help accelerate rebuilding or major improvements of 122 major highways across the state.
View the status of road and bridge projects here.
In a unanimous vote in January 2020, the Michigan State Transportation Commission (STC) authorized the department to issue and sell $3.5 billion in bonds backed by state trunkline revenues.
Gov. Whitmer spoke on the podcast at the time about her Rebuilding Michigan plan, rolled out in her 2020 State of the State address and the STC vote.
First up this week, Patrick McCarthy, director of the Michigan Department of Transportation's (MDOT) Bureau of Finance, talks about the latest closing and another favorable market reaction.
Later, Suzanne Shank, president and the largest equity owner of Shank Williams Cisneros & Co., and CEO of Siebert Williams Shank & Co., talks about her firm's role in underwriting the deal. Her firm is the top-ranked minority and woman-owned underwriter of municipal bonds in the country.
McCarthy says the low interest rates are very similar to those for the first closing in 2020, with total proceeds of just more than $1 billion from the $800 million in bonds. The all-in true interest costs are 2.35 percent. The maximum annual debt service maintains 5.9 times coverage against revenues, well above the four times coverage required by STC policy.
In addition to the Rebuilding Michigan bonds issued, MDOT took advantage of favorable market conditions and refunded $68.2 million of trunkline bonds. This refunding will yield net present value savings of $19.3 million, which will be directed back into the trunkline road and bridge program.
During her segment, Shank talks about her firm's role in finding buyers for the bonds and completing the transactions. She also offers some context about who buys the bonds and explains the bonds are garnering a premium on the market because of the solid credit rating and high demand.
This week on the Talking Michigan Transportation podcast, an update on Gov. Gretchen Whitmer's Rebuilding Michigan program as the deal closes on another $800 million in bonds.
The bonds closed today will cover the cost of rebuilding some of Michigan's most highly traveled freeways. When all of the $3.5 billion bonds are sold over the next few years, they will finance or help accelerate rebuilding or major improvements of 122 major highways across the state.
View the status of road and bridge projects here.
In a unanimous vote in January 2020, the Michigan State Transportation Commission (STC) authorized the department to issue and sell $3.5 billion in bonds backed by state trunkline revenues.
Gov. Whitmer spoke on the podcast at the time about her Rebuilding Michigan plan, rolled out in her 2020 State of the State address and the STC vote.
First up this week, Patrick McCarthy, director of the Michigan Department of Transportation's (MDOT) Bureau of Finance, talks about the latest closing and another favorable market reaction.
Later, Suzanne Shank, president and the largest equity owner of Shank Williams Cisneros & Co., and CEO of Siebert Williams Shank & Co., talks about her firm's role in underwriting the deal. Her firm is the top-ranked minority and woman-owned underwriter of municipal bonds in the country.
McCarthy says the low interest rates are very similar to those for the first closing in 2020, with total proceeds of just more than $1 billion from the $800 million in bonds. The all-in true interest costs are 2.35 percent. The maximum annual debt service maintains 5.9 times coverage against revenues, well above the four times coverage required by STC policy.
In addition to the Rebuilding Michigan bonds issued, MDOT took advantage of favorable market conditions and refunded $68.2 million of trunkline bonds. This refunding will yield net present value savings of $19.3 million, which will be directed back into the trunkline road and bridge program.
During her segment, Shank talks about her firm's role in finding buyers for the bonds and completing the transactions. She also offers some context about who buys the bonds and explains the bonds are garnering a premium on the market because of the solid credit rating and high demand.
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Jeff Cranson: Hello. This is the Talking Michigan Transportation podcast. I'm Jeff Cranson, director of communications at the Michigan Department of Transportation.
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Cranson: Today, we're going to focus on the next successful sale of Rebuilding Michigan bonds. First, I’ll be talking with Patrick McCarthy, finance director at MDOT and now a veteran of the podcast. He'll explain why the market has been so favorable and this is a really good time to close in another round of bonds to continue Governor Gretchen Whitmer’s ambitious plan to rebuild as many Michigan freeways as possible. And secondly, I’ll be talking with Suzanne Shank of Siebert Williams Shank & Co. She's a president and equity owner and has managed several MDOT bond sales in the past, and she'll give us the perspective of a financial services firm.
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Cranson: So, again, first I’m with Patrick McCarthy, who is the director of the Bureau of Finance at MDOT, a veteran of the podcast, and becoming quite a veteran of these bond deals. Patrick, thanks for taking time to talk to us about this.
Patrick McCarthy: Thanks for having me, Jeff.
Cranson: So, we're celebrating now the closing on the second round, or tranche, a word that I see that people in the world of finance like, of bonds to deliver the governor's Rebuilding Michigan program. It's another $800 million dollars in principle, and the proceeds are once again tapping one billion dollars. So, I guess market conditions have stayed very similar because those numbers are about the same as a year ago, right?
McCarthy: Yeah, they're very similar to what we issued last August and September. We brought in a little over a billion dollars last year on an $800 million dollar principle, and we're doing the same thing with this second round, or tranche, of bonds for the governor's Rebuilding Michigan program. Interest rates have stayed fairly stable over the last year, and, you know, our bond ratings have stayed consistent. We're a very highly rated issuer, so the so the attractiveness of the bonds that we're issuing is still there. People are willing to pay a premium to invest in our infrastructure and our debt.
Cranson: I mean, overall, these, you know, any offerings by a state department, a state DOT seem pretty safe from a risk standpoint and that's why they're usually good investments. Talk about those ratings, I guess, and put those in context for us.
McCarthy: Sure, our Moody’s and S&P ratings from this bond deal were at the very high end of the ratings that are offered by those agencies, an AA+ and an Aa2 rating from both of those agencies. Those reflect the department's ongoing efforts to manage our debt, as well as our constitutionally restricted revenues that we have that support our programs and our debt service. We have a very strong commission policy that requires us to never end up with more than four times coverage on our bonds, meaning that we would never spend more than 25% of our revenues on our debt service, which is even more stringent, or strict, than what the constitution or Act 51 allows, which is allowing us to spend up to 50% of our revenues on debt service. So, the rating agencies are reflecting that strong debt management and our strong revenue sources with the positive ratings that they give us when we go to the market.
Cranson: So, when you talk about that policy that dictates the four times coverage, that's the State Transportation Commission that authorized this sale of bonds in the first place. You're an accountant, kind of risk-averse kind of guy and yet you've been, you know, an advocate of this because of market conditions and the ability to get money now at low interest rates and stretch it out. We've talked about how, you know, the debt that we're incurring by doing this bonding is really nothing compared to the debt that we're heaping on future generations by letting the system continue to crumble. Could you talk about what has made you, you know, a supporter of this plan?
McCarthy: Sure, absolutely. You know, as we've been stating for as long as I’ve been with MDOT, we just don't have the revenues coming in to support keeping our roads and bridges in the conditions that we are intending to, or that we would like to, keeping them at 90% good and fair condition. Every year that we don't invest an appropriate amount of money in our roads, they will continue to decline causing us to have to spend more and more money to repair them. The maintenance gets more expensive and then when it is time to replace them, they're significantly more expensive than if we'd kept them in decent shape. So, the interest rates that we're paying on this Rebuilding Michigan debt is going to average about 2.3%, which is remarkable. When we were issuing bonds 10 and 15 years ago, we were paying closer to 5% interest to the investor in the bonds. So, we're only paying this this very minimal amount of interest, at the same time these roads would end up costing us more every year as they continue to decline in condition. So, taking this investment, taking these bonded debt proceeds and investing them into these 49 projects is really reducing the citizen’s delay time while they're driving around. It's preventing the department from needing to go out every three to five years to do pretty heavy maintenance on them and not really fixing them with a long-term fix, which is something that the director has pointed out that sometimes the roads look great after they get done with the work on them, but we just did a fix that we could afford to do with the resources that we have available. With the money that we're bonding for right now with Rebuilding Michigan, we're able to fix these roads correctly and with a long-term solution that, you know, we can then get the 30, 40, 50-year lifetime out of the work that's being done now, which is also reflected in the fact that the users of those roadways over the next 25 to 30 years are the people that will be helping to pay back the debt service when we built these roads through their registration and fuel taxes.
Cranson: Yeah, I think you make a really good point about not just thinking in terms of what you pay now at the pump or when you register your car but think of delays and sitting in traffic. Whether you're a commercial interest, you know, trying to get goods to market or you're just a commuter time is still money. That's why we have a user delay cost formula and a calculation for that. Yeah, the more we have to be out there just resurfacing something every few years the more you're delayed, so I think that's a really good way to frame it. Well, this puts us not quite even halfway to the total that was authorized by the commission, the $3.5 billion dollars. What can we expect next?
McCarthy: Well, the department is continuing to let the projects, or award the construction projects, so we've got ongoing construction. If you're driving around the state of Michigan, you are seeing the results of this Rebuilding Michigan program. Around the Lansing area, for sure, you're seeing quite a few projects that are being funded with these bonds. We will continue to deliver the 49 projects. Sometime, probably again next fall, in this August time frame of 2022, we will do the third tranche of the bonding. Then in the fourth year, which we were authorized for by the Commission to issue all of the $3.5 billion dollars over four years, we will assess how the projects have come in, whether they're on budget or under budget, and then make that final decision. Then in that fourth tranche on how much we would need to issue to finish off this list of projects that was approved.
Cranson: So, we found out last week, I think, the latest updates from planning because we were being asked all kinds of questions, obviously, when the infrastructure bill passed the Senate. And one of those questions was, “What it would take in terms of investment to get the majority of trunk lines to good condition by, like, you know, 10 years from now, 2031.” The number is astounding. It would be $1.9 billion dollars extra that we have to invest. Since that's not happening anytime soon, we're not going to see any legislative relief, I think you make a good case for why we need to do what we can and use the tools that we have, and bonding is a good one. So, in terms of past bonding and continuing to monitor the market and the interest rates and save money, can you talk about the most recent refunding?
McCarthy: Sure, thanks. As part of this new money deal that we're closing on right now, we also took advantage of the interest rates that are in the market right now, and we're refunding the 2011 trunk line bonds. So, we issued bonds 10 years ago, and they're now callable. We can call them back and replace them with lower interest bonds that we would issue now. We're going to replace $68 million dollars of bonds and with the replacement, or the refunding, of those bonds, we will end up saving a little over $19 million dollars, which we can then turn around and use those $19 million dollars for other road and bridge programs, not necessarily needing it for the existing debt service that we had planned to pay for. So, we continue to remain vigilant. We continue to manage our debt portfolio and look for every opportunity as they arise to reduce our long-term debt so that we can continue to put more money into the road program.
Cranson: That's great. I think that it's great that you guys are being vigilant. I know your predecessor Myron Frierson felt strongly about that too, and you've continued that kind of focus on finding every way you can to save some money here and there. Talk a little bit beyond bonding about just, you know, what your overall unit does. Contract Administration, obviously, oversight of all the MDOT contracts which are many, but other things, I mean, just making sure that, you know, contractors get paid and the MDOT employees get paid. Could you give us just a broad overview?
McCarthy: Yeah, absolutely. So, we do have our Contract Services area, which does the coordination and the pre-qualification and the payment for our consultants and our contractors. So, we support the advertisement and award of construction and consultant contracts. We do normal procurement, which is dealing with, you know, any of the maintenance activities and items that wouldn't necessarily be federally funded but still have to make sure we follow all of the DTMB rules and regulations for a proper procurement. We have our budget area that's responsible for developing and working with the State Budget Office to put together the governor's budget proposal. Then we negotiate, or assist, with negotiations with the legislature to get a final budget passed. We have our project accounting and billing, so we coordinate with the federal agencies to make sure that we obligate all of our projects correctly and draw down our federal funds that we use for, you know, all the expenditures that we've incurred on federally participating projects, not just federal highway but also aeronautics, transit, and rail. Then we also have administrative functions in my office. We deal with the mail room functions and the warehouse and our print functions as well as phones and facilities. That stuff falls under the administrative side of what our bureau is responsible for managing. Then the last item—not the least but the last—we also are responsible for doing all of the accounting for four departments, not just MDOT’s accounting and book closing cashiering functions, but we also do that for three other state departments. This was an initiative that was started more than 10 years ago when they tried to consolidate accounting functions looking for consistency and efficiency by not having every department need to have their own account office.
Cranson: Well, thanks, Patrick. That's a good overview, and I think it's good to peek behind the curtain a little bit and let people know some of the behind-the-scenes things that go on to make the system work, so thank you once again.
McCarthy: Thanks for having me, Jeff. I appreciate it.
Cranson: Okay, and I’ll be back in just a minute for my conversation with Suzanne Shank about the financial processing of this bond deal.
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Narrator: If you need to get out and stretch your legs, don't forget about the annual Mackinac Bridge Walk. Make your plans to attend the walk on Labor Day and take in some of the best views in the state of Michigan on the Mighty Mac. For more information go to Mackinacbridge.org/walk.
Cranson: So, once again, we're back, and now I’m speaking with Suzanne Shank, who is president and the largest equity owner of Shank Williams Cisneros & Co. and CEO of Siebert Williams Shank & Co. She's going to talk about her firm's role in underwriting this latest bond deal. But let's start first, Suzanne, with a little bit of your background and your Michigan connections and your firm.
Suzanne Shank: Thank you and great to chat with you this afternoon. My firm Seibert, Williams, Shank is coming up on our 25-year anniversary. I was one of the original founders of the firm back in 1996. We are the largest and highest ranked minority and women-owned firm in the country. We are the highest rank for fixed income transactions in both the municipal and corporate sectors as well as participating in equity IPOs. We believe we're the only national investment bank that is both majority women owned and majority minority owned.
Cranson: Well, that's great. Congratulations.
Shank: Thank you.
Cranson: So, can you talk a little bit about how you got into these kinds of deals with, like, municipal bonds and, you know, state agencies?
Shank: Well, I began my professional career after graduating from Georgia Tech as a civil engineer working for General Dynamics many years ago. Then transitioned to the world of finance where I then wanted to work on financing infrastructure projects rather than designing them after going to Wharton Business School. From there, I began working directly in public finance, working with issuers of municipal bonds, which are the primary vehicle through which our national infrastructure is funded for issuers large and small across the country. Obviously, with me being based here in Detroit, I have focused a lot on working with local issuers but still maintain, you know, many relationships. Our firm obviously works with issuers across the country, you know, large and small, many state issuers, lots of transportation issuers, lots of water and sewer issuers, so we are very active in the municipal market on a weekly basis.
Cranson: So, what would the role of your firm be in executing this kind of a deal?
Shank: So, our firm was hired as one of the underwriters, in this case co-senior manager, to really serve as an intermediary between those who want to buy the bonds and the state which is selling the bonds. So, our goal is to help find investors who want to purchase these bonds at the lowest possible rates. That's why the state, you know, hires underwriters to participate in these transactions because we are in the market daily trading with investors who are looking to buy bonds but also in the primary and secondary markets.
Cranson: So, how do you locate those investors, or how do they locate you?
Shank: Oh, well, we have well-established relationships. We have a powerful fixed income sales force that is in constant contact. We happen to be very active not only in the primary market where we're bringing new transactions such as this one, but we're very active also in the secondary market. So, even when there's not new product in the market, we're constantly trading bonds and supporting our clients on the municipal side with respect to keeping activity in their securities.
Cranson: So, what could you say about the buyers for these kinds of bonds, like, you know, when MDOT issues this kind of bond sale?
Shank: Yeah, the key buyers are generally large institutions. Many of them are asset managers who have, you know, manage money for individuals. There are individual investors who are also able to go in with orders through their brokers, but generally, especially at the levels of rates today, I mean, all of the bonds that were offered their yields were through two percent. So, just as you see, you know, homeowners refinancing their mortgages, there have been few times it's been more advantageous to enter the bond market. Despite that, there was robust demand for the bonds and, you know, solid buy and hold investors who came in and put in orders and supported the deal.
Cranson: So, in the first round, you know, a year ago and in this round, we found out that both offerings fetched a premium. Can you talk about that why, you know, $800 million offering actually brings in more than that?
Shank: Well, it's sort of the way the business is working now. We haven't had a huge amount of supply. And as you've seen in recent days, the stock market has been off pretty significantly, and, you know, bonds, in particular municipal bonds, have been viewed to be a very safe investment, and you have the added kick of the tax exemption from both federal and state taxes. So, there is robust demand for these bonds and has been the case for many municipal bond deals that we've seen in, you know, recent months.
Cranson: Well, that's great. I’m really glad that you're working on this for us and sounds like we should look forward to a pretty decent market for a while and hopefully for the next round of bond sales for Rebuilding Michigan.
Shank: Yes, we certainly do need it. You know, as you may know, the American Society of Civil Engineers has rated, for many years, our infrastructure and has given it a D grade. I think we just this year they rated our infrastructure overall as a C grade, but our roads they still rank at D, so we do really need to continue to make consistent, long-term investment to ensure the resilience of our infrastructure.
Cranson: Oh yeah, I mean it's decades of under investment in Michigan and something that I’ve talked to media about quite often and Patrick and I have talked about a lot too is that, sure, I understand some people's reticence at taking on debt, but when you look at what you can get money for right now versus the debt we're heaping on our children and grandchildren by letting the system continue to crumble, I don't think it's a tough decision.
Shank: I agree wholeheartedly. Remember, you're talking to a civil engineer by training, so I agree from every vantage point with that, and I mean, we're starting to make, you know, a bit of progress. I think these financings are doing, you know, a big step in the right direction for our state.
Cranson: Yeah. Well, thank you, Suzanne, again, for taking time to talk with me about this. I really appreciate it.
Shank: Thank you and we really appreciated being able to work with the state on this issue.
Cranson: Thank you again for listening to this week's edition of the Talking Michigan Transportation podcast. I would like to thank Randy Debler and Corey Petee for engineering this week's podcast. To subscribe to show notes and more, go to Apple podcasts and search for Talking Michigan Transportation.