Perhaps investors holding Washington Public Power Supply System bonds should take heart from the tale of turnaround of the Chesapeake Bay Bridge-Tunnel.
When $100 million worth of bonds for the 20-mile system of bridges and tunnels went into default in the early '70s, it became the biggest money-losing bond project of modern times--a dubious distinction since being eclipsed by other defaults, including the new $2.25 billion champion, WPPSS. At one point, the bonds--bearing an interest rate of 5 3/4 percent--traded for as little as $17 to $20 for $100 of value.
But in 1977, the light began to glimmer softly at the end of the tunnel. Since then the system has been steadily paying back interest, and now James K. Brookshire Jr., the man who oversees the bridge's operations, has high hopes for a profitable future.
"It's kind of nice to look ahead," he said, "and see the day that we'll be back even."
An engineering marvel envisioned as a major commercial and vacation route crossing the mouth of the Atlantic to link Virginia's Eastern Shore to Norfolk and points south, the roadway opened with fanfare in 1964. But in the late 1960s, a series of miscalculations and disasters--including three ship accidents that knocked the bridge out of service--took a heavy toll on the road.
In July 1970, with traffic far below projections and toll revenue inadequate, the system--20 miles from toll plaza to toll plaza and 17.6 miles from shore to shore--defaulted when it failed to make an interest payment on its Series C bonds. At its worst point, the system was 4 1/2 years, or nine payments, behind on the interest it owed.
The turnaround began in 1977. For three years, the system managed two payments each year. In 1980, 1981 and 1982, with the help of two toll increases, the system began to catch up, making three annual payments a year. Last year, it made four payments and is now only four payments in arrears. "We hope to make four payments this year again," said Brookshire, who is executive director of the Chesapeake Bay Bridge Tunnel District. "If we make four, at the beginning of the next year we would be behind two."
The bonds, which totaled $200 million, were sold in 1960, when prospects for the system appeared bright. In addition to the Series C bonds, which accounted for half of the issue, there was $70 million in Series A bonds paying 4 7/8 percent interest, and $30 million in Series B bonds paying 5.5 percent, all tax free.
The system was obligated to pay interest coupons first on the lower-rate bonds, and it never missed an installment on those. In 1970, the system also began to redeem those bonds. About $45.77 million of the Series A Bonds and $20 million of the Series B remain outstanding. Of the Series B bonds, approximately $20 million worth have not yet been repurchased. The Series C bonds mature in the year 2000, and the system hopes to redeem them by then, Brookshire said.
With the turnaround, the bonds have become a more marketable commodity and better investment. Last year, with double coupons, the bonds paid 11.5 percent interest--a return equivalent to better than 14 percent on an investment of $77 per $100 in value (about the level at which the bonds have traded recently).
"There's not an enormous volume involved. It moves up and down with the market and does better when they make more interest payments," said a bond trader familiar with the issue. "It's a fairly classic kind of come-back situation."
Several factors contributed to the initial crisis. For one thing, while the span was under construction, Interstate 95 was completed to the west, shifting a large share of Maine-to-Florida traffic that had been expected to use the bridge-tunnel system.
In addition, the bridge--really two one-mile tunnels, about 12 miles of low-level bridges and two major spans--was knocked out three times when ships toppled parts of the system into the sea. In December 1967, a coal barge struck the bridge's roadbed, closing the span for two weeks. In January 1970, a Navy attack cargo ship--the Yancey--rammed into the bridge, dragging anchor in a gale. That accident knocked 375 feet of a trestle into the ocean and shut the bridge down for 42 days. In 1972, the system again closed for two weeks when a runaway barge shattered another section of the bridge .
"Things were about to get back to normal, and then in 1974 the energy crisis put a damper on everybody's driving," Brookshire noted.
Toll increases have been a major factor in the system's financial improvement in recent years; the fee was raised in 1980 from $7 to $8 and again in 1982 to $9. The system has been helped, too, by adoption of federal laws limiting areas where ships can anchor and imposing other requirements to keep ships out to sea in a gale.
The end of the gas crisis, new protection against buffeting by ships and the recovering economy have all contributed to increased business, according to Brookshire. Traffic in 1983 was up 2.8 percent over 1982, making it the system's second best year, only slightly below the 1978 record when 1.8 million vehicles used the system. This year could prove even better, if January and February are any test.
"We're extremely pleased to be getting close to the time we can catch up on all our back interest and get out of default," Brookshire said.
"My only regret is that we did go into default."