New Jersey is set to issue $1.4 billion in Transportation Trust Fund Authority bonds Oct. 13 and 14, about a week after James Simpson, the state’s transport commissioner, said the infrastructure account is “broke” and suspended 100 projects because of a lack of cash.
The sale, a combination of tax-free refinancing securities and federally taxable Build America Bonds scheduled to mature in December 2027, will raise about $900 million for the trust fund, New Jersey’s primary account for highway and mass transit projects, according to preliminary offering documents. The issue follows Governor Chris Christie’s Oct. 7 cancellation of an $8.7 billion trans-Hudson rail tunnel intended to ease congestion into Manhattan.
New Jersey will pay yields as much as 1 percentage point higher than other U.S. state borrowers because of concern that the fund may become insolvent, said Daniel Solender, who oversees $15 billion as head of municipal bond management at Jersey City-based Lord Abbett & Co.
“The deal will do well if it’s priced cheaply but it’s got a lot against them,” said Mary Talbutt-Glassberg, vice president at Devon, Pennsylvania-based Davidson Trust Co., which manages more than $1 billion for wealthy clients and isn’t participating in the sale. “The headlines are keeping investors away” from New Jersey issues, she said.
U.S. Transportation Secretary Ray LaHood said yesterday he plans to continue discussions with Christie to salvage the project, the largest of its kind in the nation, after the governor agreed to a two-week review of options.
Reduced Build Americas
The Build Americas portion has been reduced to $929 million from $991 million projected when the Trust Fund Authority approved the transaction Sept. 2, according to the preliminary offering document. The bonds are rated Aa3 or fourth-highest investment grade by Moody’s Investors Service, which has assigned a negative outlook on the debt.
Simpson last week suspended design work on about 100 projects paid for by the trust fund on concern that the offering won’t raise enough to cover the costs of completion. Since then, engineering firms have fired a dozen workers and will terminate hundreds more if the suspensions last two weeks or longer, said Joe Fiordaliso, president of the American Council of Engineering Companies of New Jersey.
This will be the last bonding the fund can afford unless revenue from a new source is steered into it, State Treasurer Andrew Sidamon-Eristoff told state lawmakers during a hearing Oct. 4. After this issue, the entire $895 million paid into the fund annually will be needed to cover debt service on about $12 billion in outstanding borrowings through at least 2027, bond documents show.
“The trust has $11 billion in outstanding bonds and that number keeps going up,” Davidson’s Talbutt-Glassberg said. “It’s like a Ponzi scheme.”
About $393 million of the proceeds will repay New Jersey for advances from its general fund that covered the program’s $125 million in ongoing monthly expenses, Sidamon-Eristoff said. About $25 million more will be used to meet interest payments due on the Build Americas, after accounting for the 35 percent federal subsidy through June 15, 2011, according to the preliminary official statement and data presented to the trust fund authority.
The money that’s deposited in the Trust Fund will finance transport expenses in the U.S.’s most-densely populated state through February 2011, according to Sidamon-Eristoff.
New Jersey should benefit from a comparatively quiet week in terms of competing sales volume, Solender said. Issuers are scheduled to offer a total of $9 billion in bonds this week, compared with $13.4 billion last week, according to data compiled by Bloomberg.
“It’s a good time to borrow,” Lord Abbett’s Solender said. “They’re just going to be considerably higher than other comparably rated debt.”
The deal, which relies on a successful refinancing to free up debt-service capacity in the trust fund, is sensitive to changes in interest rates, Sidamon-Eristoff said during his Oct. 4 appearance before lawmakers.
A similar-sized debt sale by the authority in November 2008, with 15-year bonds was priced to yield 5.37 percent, or 56 basis points above comparable maturity top-rated debt, according to data from Municipal Market Advisors, an independent research firm based in Concord, Massachusetts. A basis point is 0.01 of a percentage point.
The securities traded Oct. 7 at an average yield of 3.41 percent, 37 basis points above MMA yields for debt due in 2023.
“Market conditions are changing constantly, but we fully intend to get into the market on a schedule that means we can achieve our goals,” William Quinn, a spokesman for the treasurer, said in a telephone interview Oct. 8.
Following are descriptions of pending sales of municipal debt in the U.S.:
CITY OF CHICAGO will issue $251 million in Midway Airport revenue bonds this week. The debt for the second-busiest airport in Illinois behind O’Hare International will include $88 million in taxable Build America Bonds earmarked for construction. Underwriters led by JPMorgan Chase & Co. will market the securities, which carry ratings of A3 from Moody’s and A- from both Standard & Poor’s and Fitch Ratings, all fourth above non- investment grade. (Updated Oct. 12)
CITY OF LOS ANGELES WASTEWATER SYSTEM, which serves more than 4 million people, will borrow $450.7 million this week, including $186.7 million in taxable Build America Bonds and $80 million in taxable Recovery Zone Economic Development Bonds. The securities will be used to finance construction and improvement of the wastewater collection and treatment system and refinance outstanding debt. Underwriters led by Siebert Brandford Shank & Co. will market the issue to investors, which is rated Aa2 by Moody’s and AA by S&P, both third-highest, one level below the AA+ grade from Fitch. (Updated Oct. 12)
DISTRICT OF COLUMBIA WATER AND SEWER AUTHORITY, which provides water and wastewater services to 600,000 people in Washington, D.C., plans to sell $300 million of Build America Bonds this week. The obligations are backed by revenue from consumer water bills and will be used to preserve and upgrade its water and wastewater systems. Underwriters led by JPMorgan Chase & Co. will market the issue, which is rated Aa3 by Moody’s and AA- by both S&P and Fitch, all fourth-highest. (Added Oct. 12)
CHICAGO BOARD OF EDUCATION, the board that oversees Chicago’s public-school system and its 409,279 students in 2009-2010, will issue $407.1 million in taxable debt this week. The deal includes $257.1 million in Qualified School Construction Bonds and $150 million in Build Americas. The proceeds will pay for construction and renovation that will relieve overcrowding in schools. Underwriters led by Loop Capital Markets will market the QSCB issue. Siebert Brandford Shank & Co. will lead underwriters in marketing the Build Americas. The debt is rated Aa2 by Moody’s, third-highest, AA- by S&P, fourth-highest, one level above Fitch’s A+ rating. (Added Oct. 12)
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