New York's MTA Borrows $600 Million as Deficit Curtails Subway, Bus Lines

New York’s Metropolitan Transportation Authority, which eliminated two subway lines and cut bus service to save money, plans to sell $600 million in bonds as it grapples with an $800 million spending gap.

The largest U.S. transit system’s yield premium has surged 24 percent since April 1 while subsidy payments were delayed as the state operated without a budget, and a payroll tax and dedicated real-estate levies produced less revenue than forecast.

The MTA, which carries 8.5 million people on an average weekday, will issue $555 million in taxable Build America Bonds for transit and commuter projects and $45 million in tax-exempts backed by transportation revenue. Barclays Plc will lead underwriters marketing the securities, rated A by Standard & Poor’s, sixth-highest, and A+ by Fitch Ratings, one level higher.

“The MTA’s credit is normally pretty widely accepted,” said Terry O’Grady, senior vice president of municipal trading at FMS Bonds Inc. in North Miami Beach, Florida. Even amid the budget issues, “as far as market demand, I think it’ll be fairly strong,” he said.

The MTA will save $93 million through the latest service cuts, spokesman Aaron Donovan said. The agency eliminated the V and W subways and dropped 15 percent of its bus lines, amounting to more than three dozen routes.

Build America Bonds

MTA’s most recent Build America issue was a $443 million sale in March. The taxable securities due in 2040 were traded April 1 at an average yield of 6.1 percent, or 141 basis points above 30-year Treasuries. The so-called spread widened to 175 basis points yesterday, with the bonds trading at an average yield of 5.8 percent, according to Municipal Securities Rulemaking Board data. A basis point is 0.01 percentage point.

In the same period, the Chicago Transit Authority, the second-largest transportation system in the U.S., rated AA or third-highest by S&P, saw its risk premium on Build America Bonds over benchmark Treasuries widen 61 basis points, to 211 basis points yesterday.

Top-rated tax-exempts maturing in 10 years fell for a fifth consecutive day yesterday, according to a survey by Concord, Massachusetts-based Municipal Market Advisors. The debt dropped 3 basis points to 3.11 percent, down from a six-week high of 3.2 percent touched June 15.

Fitch has a negative outlook on the MTA bonds, meaning their rating may be lowered, reflecting certain dedicated payroll-tax revenue that, as of May 31, was 25 percent less than forecast in February and because of the delayed state budget, analysts Chad Lewis and Emari Wydick said in a June 17 report.

Investor Interest

The MTA’s active approach to solving its budget issues may boost investor interest, said Justin Hoogendoorn, a managing director with BMO Capital Markets’ Fixed-Income Group in Chicago.

“They’ll have to fund the right level, maybe a few basis points higher than their last sale,” Hoogendoorn said. “But they’ve always been a reliable credit. They shouldn’t have too much trouble.”

Following are descriptions of pending sales of municipal debt in the U.S.:

DELAWARE RIVER PORT AUTHORITY, the regional transportation agency that owns and operates four bridges linking Pennsylvania and New Jersey, plans to offer $320 million in Build America Bonds on July 1 to finance capital improvements. The bonds, rated seventh-highest by Moody’s, at A3, and S&P, at A-, will be used for capital-improvement projects and to refinance debt. Citigroup Inc. will lead a group of underwriters in marketing the securities. (Added June 29)

LOS ANGELES COMMUNITY COLLEGE DISTRICT, the nation’s largest two-year system, with about 141,000 students, is scheduled to offer $125 million in taxable bonds tomorrow. The district is rated second highest at Aa1 by Moody’s. Citigroup will lead marketing of the securities, which will be used for improvements on the district’s nine campuses, including a green- technology student union at Los Angeles City College and a performing-arts center at Los Angeles Valley College. (Updated June 29)

MASSACHUSETTS WATER POLLUTION ABATEMENT TRUST, a state agency that provides low-cost loans for local water and sewer projects, will sell about $498 million of top-rated municipal bonds today to refinance debt and pay for water-treatment and drinking-water projects. The bulk of the sale will be $330 million of federally subsidized Build Americas. Underwriters led by Goldman Sachs Group Inc. will market the issue. (Updated June 29)

NEW YORK LIBERTY DEVELOPMENT CORP., a state arm created to finance loans for lower Manhattan construction, will sell $650 million in tax-exempt municipal bonds tomorrow to refinance debt from the Bank of America Tower project at One Bryant Park. Bank of America Merrill Lynch and JPMorgan Chase & Co. will underwrite the securities, which are top-rated by Fitch and Moody’s. (Updated June 29)

To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Justin Doom in New York at jdoom@bloomberg.net.

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