Build America Cutback Threat Makes Pennsylvania Turnpike Raise Borrowings
Pennsylvania Turnpike Selling $600 Million in Build Americas
Brian Branch Price/Bloomberg
Build America Bonds are the fastest-growing part of the $2.8 trillion municipal market.
Build America Bonds are the fastest-growing part of the $2.8 trillion municipal market. Photographer: Brian Branch Price/Bloomberg
Pennsylvania Turnpike Commission, which runs a tollroad stretching from New Jersey to Ohio, is selling $600 million in Build America Bonds today in a bet that Congress will cut or reduce the federally subsidized program.
The operator of the country’s oldest state turnpike is borrowing to cover two years of project financing to lock in the 35 percent interest subsidy, said Nikolaus Grieshaber, the commission’s chief financial officer. The issue is the week’s largest offering and the agency’s first sale of the taxable securities since June 2009.
Issuance of Build America bonds may surge after Labor Day, as states and municipalities seek lower borrowing costs, said Alan Schankel, director of fixed-income research for Philadelphia-based Janney Montgomery Scott LLC.
“We had been doing our financing annually,” said Grieshaber. This week, “we’re taking full advantage of the 35 percent by doing it for two years,” he said in an interview.
About $3.1 billion in issuance is scheduled for this week, the lowest total for a full trading week since the $2.9 billion offered the week prior to Labor Day last year, according to data compiled by Bloomberg. Getting the deal priced before the holiday was important to the commission, Grieshaber said.
“This is a good time to offer this debt,” he said. “Hopefully participants will be focused on this deal and provide us with low borrowing costs.”
Tax-Exempt Sales
The only offerings larger than $200 million this week are the tax-exempt sales by Tennessee School Bond Authority, which totals $227 million, and Texas’s Harris County Flood Control District, which is borrowing $205 million, Bloomberg data show.
The Turnpike debt is rated Aa3 by Moody’s Investors Service, fourth-highest, and A+ by Fitch Ratings, one level lower. About 156 million vehicles each year use the tollroad, which opened in 1940 and now extends 514 miles across the state, according to its website.
In July the commission approved a new fare schedule with electronic E-ZPass customers receiving a 3 percent toll increase and cash-paying customers facing a 10 percent rise. Revenue is forecast to climb by $35 million in 2011. The new rates begin Jan. 2, 2011, according to a July 15 press release.
The Turnpike sold $275 million in 30-year BABs in June 2009 priced to yield 6.11 percent, or about 165 basis points above 30-year Treasuries. The securities traded on Aug. 27 at 5.17 percent, 148 basis points above the benchmark. A basis point is 0.01 percentage point.
Wider Spread
The Turnpike’s bonds have outperformed the market, according to the Wells Fargo Build America Bond index. The so- called spread between the average yield of the index and 30-year Treasuries has widened about 22 basis points since the start of the year to 196 basis points on Aug. 27.
Build America Bonds are the fastest-growing part of the $2.8 trillion municipal market. Issuers have sold about $130 billion of the securities since the program was created last year as part of President Barack Obama’s economic-stimulus package. A bill was introduced in the U.S. House of Representatives July 28 to extend the program, which is set to expire Dec. 31, by two years.
“If the program is not extended, there will be a mass issuance of supply come to market,” said Kevin Woods, portfolio manager at Asset Preservation Advisors, an Atlanta-based firm that invests $1.5 billion in municipal bonds. Issuance might double to $260 billion by year’s end, he said.
Following are descriptions of pending sales of municipal debt in the U.S.:
STATE OF NEW YORK MORTGAGE AGENCY, which provides low- interest fixed-rate mortgages and financial assistance to help low- and moderate-income families become homeowners, plans to issue about $152.9 million in tax-exempts today. The mortgage- revenue bonds, rated highest by Moody’s, at Aaa, will be marketed by a group led by Morgan Stanley. (Updated Aug. 31)
NORTH CAROLINA EASTERN MUNICIPAL POWER AGENCY, a wholesale power supplier to 32 cities and towns, plans to sell about $170 million in tax-exempt bonds today to refinance existing debt. The offering, rated by A- by Standard & Poor’s and Fitch, the fourth-lowest investment grade, will be marketed by underwriters led by Citigroup Inc. (Added Aug. 31)
To contact the reporter on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net
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