New York MTA Shrinks Build America Bond Sale 16% as Yield Premium Jumps
The Metropolitan Transportation Authority, which runs New York City’s subways, buses and commuter trains, shrank a $555 million taxable debt offering by 16 percent as it struggled with a deficit and as investors sought to avoid risk.
The MTA issue of $467.7 million in federally subsidized Build America Bonds represented about 10 percent of the $4.6 billion that states and municipalities brought to market this week, according to data compiled by Bloomberg. That was the lowest total for a non-holiday week since April 9, Bloomberg data show.
The MTA, grappling with an $800 million deficit, paid 2.75 percentage points more than yields on 30-year Treasuries, according to Bloomberg data. Four months earlier, the so-called spread on the MTA’s 29-year Build Americas was 2.1 percentage points.
“Any issue with a hint of a credit component is struggling,” said Dan Close, a portfolio manager of the $650 million Nuveen Build America Bond Fund based in Chicago. Top- rated credits “are getting placed fairly easily. Investors are demanding more yield for the non-gilt-edge credits.”
The MTA sales on June 30 and in February, backed by transportation revenue, were rated A, the fifth-lowest investment grade, by Standard & Poor’s. In March, bonds backed by dedicated state levies such as fuel taxes, rated three steps higher at AA by S&P, sold for 1.5 percentage points above comparable Treasuries.
“We’ve been very hesitant about the MTA,” said Howard Cure, managing director at New York-based Evercore Wealth Management LLC, which oversees about $1.5 billion. “They still rely on the state for additional support, and the state is not in a position to offer any of that.”
The MTA resorted to service cuts to balance its budget after New York state withheld already appropriated funds in December to help bridge the state’s own projected deficit, Moody’s Investors Service said. Moody’s rates the MTA’s securities A2, fifth-lowest, with a negative outlook.
Aaron Donovan, a spokesman for the authority, declined to comment on this week’s sale.
The MTA, which carries 8.5 million people on an average weekday, will save $93 million through its latest service cuts, 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.
Since Feb. 15, the average Build America yield spread above 30-year Treasuries has widened about 47 basis points, to about 2 percentage points. A basis point is 0.01 percentage point.
Tax-exempt municipal bonds underperformed U.S. Treasuries in the first half of the year as default speculation drove state and local government yields to the highest level relative to federal bonds in 13 months.
Build America securities yielded 5.89 percent on average on June 30, according to a Wells Fargo index. Benchmark 30-year Treasuries yielded about 3.89 percent. Investors sought the perceived safety of Treasuries amid concern this week that the economic recovery may be slowing.
Yields on top-rated tax-exempts maturing in 10 years fell yesterday for an eighth straight day, the longest streak since April 2009, according to Concord, Massachusetts-based Municipal Market Advisors. Borrowing costs on the debt dropped 3 basis points to 3.04 percent, the lowest since March 23, MMA data show.
“It’s fear,” said Matt Dalton, chief executive officer of Belle Haven Investments Inc. in White Plains, New York. “Fear drives money into fixed income. Yields will stay in this range, if not continue to grind lower because of the outlook of the economy and equities overall, which is pretty bleak.”
Following are descriptions of pending sales of municipal debt in the U.S.:
U.S. VIRGIN ISLANDS, whose rum shipments to the mainland in 2009 reached 8 million “proof gallons,” a measure for calculating federal excise tax, plans to offer about $396 million of tax-exempt debt through its public finance authority as soon as next week. About $308 million of the issue is senior obligations rated BBB+ by Fitch, third-lowest. The remaining subordinate bonds are rated BBB, second-lowest. Underwriters led by Jefferies & Co. will market the securities. (Added June 30)
MISSISSIPPI DEVELOPMENT BANK, created in 1986 by the state legislature to issue bonds on behalf of local governments and counties, plans to offer about $165 million in tax-exempt municipal bonds as early as next week to refinance existing debt. The bonds, rated AA by S&P and Fitch, third-highest, will be marketed by a group led by Morgan Stanley. (Added July 1)
MONROE COUNTY, New York, with about 735,000 residents on the shore of Lake Ontario, will issue $85 million in tax-free municipal bonds through a competitive sale July 7. The debt, rated BBB+ by S&P, third-lowest, and A2 by Moody’s, fifth- lowest, will be used for public projects including bridges, highways and parks. (Added July 2)