Tax-Free Bond Shortage Aids New York-New Jersey Port Selling $400 Million
The Port Authority of New York and New Jersey, which slashed its 10-year capital spending plan by 17 percent, is selling $400 million in revenue bonds amid a shortage of tax-exempt debt from the two states.
The pace of borrowing in New Jersey has dropped by almost 50 percent in the past year, as revenue declined and opened a projected $11.5 billion budget deficit for fiscal 2011 which began this month. The state sold $1.2 billion in tax-exempts last year after averaging $2 billion annually from 2007 to 2009, Bloomberg data and state debt reports show.
The dearth of highly rated tax-free bonds from New Jersey will help attract investors to the authority’s debt, according to Mike Pietronico, chief executive officer of New York-based Miller Tabak Asset Management.
“There’s been so little high-quality supply in the state of New Jersey, that even though this is a dual-exempt bond, New York and New Jersey, I think New Jersey, in and of itself, could absorb it,” said Pietronico, who oversees $275 million in municipal securities. “I expect it to be bid very aggressively by the street.”
New York state investors may be drawn to the sale because it hasn’t issued much debt as it struggles to pass a budget, according to Howard Cure, managing director at Manhattan-based Evercore Wealth Management LLC, which oversees about $1.5 billion.
“They have a lot of debt issuances on hold, particularly the personal-income tax bonds, until they essentially pass a budget,” Cure said. “The fact that there hasn’t been a lot of New York state paper makes this pretty attractive.”
New York Deficit
New York, the nation’s third-most populous state, has operated without a complete budget since the fiscal year began April 1, as lawmakers and Governor David Paterson failed to agree on how to close the deficit in a $135 billion expenditure plan Paterson proposed in January.
Yields on top-rated tax-exempt general obligations due in 10 years are 2.88 percent, the lowest in at least nine-and-a- half years, according to Municipal Market Advisors data. Yields on Build Americas, meanwhile, have risen this month amid waning demand for the taxable securities.
The bonds, which provide issuers with a 35 percent rebate on interest-rate costs, have an uncertain future. An extension of the Build America program, which is set to expire in December, stalled in Congress. The bonds have offered international buyers higher yields than some corporate bonds, coupled with lower default risk.
“The tax-exempt demand right now is greater than BABs,” said Pietronico. “The situation with BABs is a little bit different in a sense that there’s more supply, perhaps more questions about the extension of the program. That combination is keeping that market a little under pressure.”
Tax-exempt borrowing costs, coupled with difficult rules for issuing Build Americas, led the authority to eschew the federally subsidized obligations, spokesman Steven Coleman said.
“Under the BAB rules, we have to carry the bonds on our financial statements at the taxable rate, which limits the amount of bonding capacity we can do,” Coleman said in an e- mail. “The current tax-exempt rate is the lowest in years.”
Yields on 30-year top-rated tax-exempt debt are 4.42 percent, the lowest since February 2008, MMA data show.
The $6.3 billion budget approved in December reduced the authority’s 10-year capital spending plan to $24.5 billion from $29.5 billion as a result of the worst economic slowdown since the Great Depression. A 150-position reduction in the current budget has reduced employment to the lowest level in 40 years, according to preliminary offering documents.
The bulk of tomorrow’s competitive sale, which will refinance debt and fund the capital spending, are backed by system revenue, and will mature in 21 to 30 years, preliminary offering documents show. The bonds are rated Aa2 by Moody’s Investors Service, third-highest, and AA- by Standard & Poor’s and Fitch Ratings, one step lower. All three assigned a stable outlook.
The 89-year-old Port Authority’s facilities include two tunnels and four bridges between New York and New Jersey, five airports, six marine terminals and the Trans-Hudson ferry service, as well as the World Trade Center site, according to the preliminary documents. The authority is able to set tolls and other fees at its facilities.
“The near monopoly over regional transportation infrastructure and the resilient demand for transportation services in the regional economy continue to keep the authority’s finances healthy, despite very large, complex, and growing future capital needs,” according to a July 15 report from Moody’s.
Usage of the authority’s commercial airports is up 0.6 percent this year through April after a 4.8 percent decline in 2009, analysts Maria Matesanz and Kurt Krummenacker wrote in the report, adding that “aviation enterprises provided approximately 58 percent of authority net operating revenues” or 61 percent of net operating income in 2009.
The authority added about $157 million to its reserve balance in 2009, according to Fitch.
“It’s a very solid credit,” Cure said. “Critical transportation links around the metropolitan area, and that the airports have been pretty resilient is all good. The development of the World Trade Center is the biggest challenge.”
Port Authority owns the land on which the World Trade Center was situated and is responsible for building Tower One, formerly called the Freedom Tower, the signature building that will stand 1,776 feet high.
The authority sold $300 million in tax-exempts in October, with bonds due in 2037 priced to yield 4.75 percent, 4 basis points above AAA debt, according to MMA. Those same securities traded yesterday at an average yield of 4.44 percent, 8 basis points above comparable maturity top-rated obligations.
Debt from an authority tax-exempt sale of about $117 million in March, with a coupon of 2 percent, has performed even better with five-year bonds yielding as much as 14 basis points less than AAA debt in trading on July 12.
“It’s just an extremely liquid bond and there should be a good demand,” Pietronico said.
Following are descriptions of pending sales of municipal debt in the U.S.:
MASSACHUSETTS, the state with the second-most net tax- supported debt per person, plans to sell about $293 million in general obligation bonds tomorrow to fund capital projects and refinance existing debt. The tax-exempt securities will be marketed by underwriters led by Citigroup Inc. Massachusetts is rated Aa1 by Moody’s and AA+ by Fitch, second-highest, and AA by S&P, one step lower. Connecticut has the highest tax-supported debt per person, according to Moody’s. (Updated July 21)
SACRAMENTO MUNICIPAL UTILITY DISTRICT, which provides electricity to more than 1 million northern California residents, plans to issue $250 million in tax-exempt securities today for capital-improvement projects. The revenue bonds are rated A1 by Moody’s, A+ by S&P, the fifth-highest for both, and A by Fitch, its sixth-highest grade. The debt will be marketed by a group led by JPMorgan Chase & Co. (updated July 21)
NEW YORK CITY, the third-largest U.S. municipal borrower, plans to sell $800 million in general-obligation bonds as early as next week to refinance debt. The bonds, rated Aa2 by Moody’s and AA by S&P and Fitch, all third-highest, will be marketed by a group led by Barclays Plc. (Updated July 20)
UNIVERSITY OF VIRGINIA, the school started by Thomas Jefferson that in April 2009 held the first sale under the federal Build America Bond program, plans to issue $190 million in Build Americas on July 21 through a competitive sale. Proceeds of the sale will go toward funding capital improvements including the construction of a parking garage, student housing, research buildings and the expansion of the university bookstore and medical facilities. The securities carry top ratings from S&P, Moody’s and Fitch. (Added July 21)
TEXAS TRANSPORTATION COMMISSION, which oversees the department that manages highway, rail, port and rural transit systems in the second-largest U.S. state, plans to sell $1.5 billion in securities including $1.38 billion of Build America Bonds and $116 million in tax-exempt debt on July 26 to pay for highway improvements. Goldman Sachs Group Inc. will lead the marketing of the bonds, which have top ratings from S&P and Moody’s. Alaska is the biggest U.S. state by area. (Added July 21)