L.A. County Transit Selling Bonds as California Yields Rise: Muni Credit
The Los Angeles County Metropolitan Transportation Authority, the second-largest U.S. transit agency behind New York’s, leads issuers with a $740 million debt sale to expand its rail service from downtown to the suburbs.
Proceeds from the offering, which includes $600 million in Build America Bonds, the agency’s first sale of the taxable securities, will be used to finance the Metro Gold Line Foothill extension to Azusa and phase two of a light rail to Santa Monica, according to preliminary offering documents. The debt carries Standard & Poor’s top rating and an Aa2 from Moody’s Investors Service, third-highest.
County voters passed a measure two years ago increasing the area’s sales tax by 0.5 percentage point for 30 years to fund MTA transportation projects and operations. Los Angeles County, the nation’s most-populous, accounts for one quarter of California’s sales-tax collections, Moody’s said.
“It’s a very clean name with a good credit and will attract quality buyers,” said Kelly Wine, a senior underwriter at Encino, California-based RH Investment Corp., a broker that specializes in California municipal debt. “The fact that it’s backed by a guaranteed revenue stream makes it more attractive.”
The extra yield investors demand to hold California debt rather than AAA bonds rose to 144 basis points yesterday from 134 basis points on Sept. 13, according to data compiled by Bloomberg. The MTA has sought to educate the market as to the difference in quality between its bonds and obligations of the state, Terry Matsumoto, the agency’s chief financial services officer, said in a telephone interview.
Aggressive Outreach
“We’ve been aggressively outreaching to investors,” he said. “Hopefully we get out of this negative sense of California. We’re not the state. We’re Los Angeles.”
California is the lowest-rated U.S. state, according to Standard & Poor’s. Lawmakers agreed on an $87 billion budget on Oct. 9, 100 days after the start of the fiscal year, the longest period ever in which the state operated without a spending plan. S&P ranks the state A-, two levels below Illinois, and fourth- lowest of 10 investment grades. Both are rated A1, fifth- highest, by Moody’s Investors Service.
The transit agency sold $332 million in tax-exempts Oct. 6, 2009, with bonds due in July 2018 priced to yield 2.84 percent, or 39 basis points above top-rated debt, according to a Bloomberg Valuation index. The securities traded last week at an average yield of 2.31 percent, or 24 basis points above AAA rated bonds due in eight years.
San Diego
San Diego County Regional Transportation Commission sold $339 million in Build America Bonds on Oct. 28, also top-rated by S&P, and with a rating of Aa1 from Moody’s, second-highest. The agency’s 38-year obligations priced to yield 5.91 percent, or 185 basis points above 30-year U.S. Treasuries.
“I think we can come in a little tighter than that,” said Matsumoto, who tasked the underwriters with marketing the taxable bonds to international investors in order to boost demand and lower costs.
Build Americas, which provide issuers with a 35 percent federal subsidy on interest costs, are set to expire on Dec. 31. Legislation introduced by Senate Finance Committee Chairman Max Baucus, a Montana Democrat, would extend the program, which was created as part of the economic stimulus package in February 2009, by one year with the subsidy reduced to 32 percent. Previous extension plans passed by the House of Representatives stalled in the Senate. With Congress in recess until later this month, the program remains in limbo.
Midterm Elections
While the offering follows yesterday’s midterm elections, the specific races were not projected to affect pricing, Matsumoto said.
“I don’t think the election one way or the other will affect the outcome” of the sale, Matsumoto said. “We just didn’t want to do it on Election Day, when people might be distracted.”
Los Angeles County’s MTA serves a county-wide population of 10 million over 1,433 square miles (with 3,711 square kilmometers) 73 miles of rail, 78 stations, 2,635 buses that run on compressed natural gas, 513 miles of high-occupancy vehicle lanes and is a funding partner of the 512-mile Metrolink regional rail, according to Moody’s.
The Gold Line Foothill expansion will extend the Metro line 11 miles from Pasadena to Azusa, offering documents show. The Exposition Line light rail will run 15 miles from downtown Los Angeles to Santa Monica. Construction on the project began in 2006, with a “minimum operable segment” scheduled to open next year.
Following are descriptions of pending sales of U.S. municipal debt:
ATLANTA, home to the world’s busiest airport with 88 million passengers a year, plans to sell about $590 million in tax-exempts as soon as tomorrow to help finance a new terminal at Hartsfield-Jackson Atlanta International Airport. About $176 million of the bonds will be backed by a senior lien on general airport revenue, rated A1 by Moody’s and A+ by Fitch, both fifth-highest, with about $414 million secured by a “passenger facility” charge and a subordinate lien on airport revenue, rated A by Fitch, sixth-highest. Underwriters led by JPMorgan Chase & Co. will market the issue. (Updated Nov. 3)
LOVE FIELD AIRPORT MODERNIZATION CORP., the local government entity that oversees the development of the Dallas airport plans to sell $310 million of tax-exempt debt tomorrow to help finance an expansion project. The bonds are rated BBB by S&P, second-lowest of 10 investment grades, and are backed by “facilities payments” from discount airline Southwest Airlines Co. Underwriters led by Goldman Sachs Group Inc. will market the sale. (Updated Nov. 3)
RUTGERS, the state university of New Jersey, tomorrow is selling $508 million in bonds, including $391 million in Build Americas, the school’s first issue of the taxable debt. The borrowing will help finance the construction of living and dining facilities, and is rated Aa2 by Moody’s and AA by S&P, both third-highest. Underwriters led by Morgan Stanley will market the issue. (Added UPDATED Nov. 2)
HARVARD, the oldest and richest U.S. university, plans to sell $730 million in tax-exempt bonds and $300 million in traditional taxables as early as next week through the Massachusetts Development Finance Agency. Harvard will use the bonds to refinance long-term debt and fund construction for the University’s Fogg Art Museum, according to a Moody’s report. The revenue-backed bonds are top rated by Moody’s. (Added Nov. 2)
NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY, which funds the capital needs of the water and sewer system in the most-populous U.S. city, plans to sell $500 million of Build America Bonds as soon as next week. The securities are rated second-highest by S&P and Fitch, AA+, and third-highest by Moody’s, Aa2. They will be marketed by a group led by Samuel A. Ramirez & Co. (Added Nov. 2)
To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Alexandra Harris in New York at aharris48@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.
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