Philadelphia Offers $214.8 Million of Tax-Backed Transit Debt: Muni Credit
Philadelphia’s public transportation system, which serves 1 million commuters each weekday, plans to sell $214.8 million of bonds today secured by federal grants.
The Southeastern Pennsylvania Transportation Authority is borrowing against gasoline-tax revenue it gets from the Federal Transit Administration. Such debt, called capital grant receipts bonds, may be at risk if Congress doesn’t reauthorize money for the Highway Trust Fund, which faces insolvency because of declining fuel taxes. Standard & Poor’s last month rated the debt A+, its fifth-highest grade.
Repayment won’t be a risk, said Tom McFadden, assistant treasurer of the authority, because the amount of federal money received that’s dedicated to the bonds is five times more than debt-service costs and the securities have a reserve fund.
“We’ve got the coverage ratio of over 5-to-1,” McFadden said in a telephone interview. “Even if there is a cut going forward in transportation, we think that we have a substantial cushion there to cover anything.”
The authority has reached its capacity to borrow using debt backed by state funds, which now totals $315 million outstanding. It doesn’t borrow against fare revenue, so is turning to capital-grant bonds for new rail cars and rehabilitation projects.
“This is really the only source we have at this point for new acquisitions,” McFadden said.
Capital-grant bonds sold by the Chicago Transit Authority last year rated A and maturing in June 2028 yielded 4.93 percent at the most recent trade July 14, 133 basis points more than top-rated bonds of the same maturity, data compiled by Bloomberg show. The difference has narrowed since June 17, when it was 168 basis points. A basis point is 0.01 percentage point.
Investors said mass-transit systems are less at risk from funding cuts in Congress because they tend to provide essential services to metropolitan areas. The Federal Aviation Administration is losing $28.6 million in taxes each day after Congress failed to renew its funding because of disagreements over rural airports.
“Because this is a national program affecting large transportation districts, as opposed to the FAA debate over small regional airports, I think this carries a little more weight,” said Howard Cure, director of municipal research for Evercore Wealth Management LLC, which has $2.8 billion in assets, referring to the Philadelphia transit offering.
The mass-transit deal comes as top-rated 10-year tax-exempt yields fell to the lowest of 2011 yesterday at 2.5 percent. U.S. 10-year Treasury yields hovered near their lowest since November of 2.6 percent on reports economic activity is slowing.
Looking for Yield
Investors said the Philadelphia transit debt would be well received because buyers are looking for more yield than top- rated bonds provide, and issuance is low at $125.2 billion year- to-date, about half that sold during the same period in 2010.
“The market’s pretty thirsty right now for yield,” Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York, who manages $560 million of assets, said in a telephone interview. “Should the deal stay uninsured and priced appropriately based on the credit strength, it could be very well received.”
The authority will consider whether to insure the bonds when they are priced, McFadden said. The sale includes serial maturities from 2012 through 2029, according to the offering document.
Duane McAllister, who oversees more than $2 billion in tax- exempts as a portfolio manager at M&I Investment Management in Milwaukee, said early indications showed the bonds priced to yield about 90 basis points more than top-rated securities.
“It may be tighter than that in the early years -- plus 75 to 85 -- and then roughly plus 90 across the rest,” he said.
Following is a description of pending sales of municipal debt:
PUERTO RICO PUBLIC BUILDINGS AUTHORITY will sell $225 million in government-facilities revenue bonds as soon as this week. The federally taxable bonds will repay a line of credit from the Government Development Bank, pay interest on other bonds and help with construction costs for various buildings. Ramirez & Co. Inc. will lead underwriters in the sale. (Added Aug. 4)
VIRGINIA COLLEGE BUILDING AUTHORITY, which sells debt for infrastructure projects at Virginia state universities, plans to issue $274.9 million of bonds as soon as today through competitive bid. The state-appropriation-backed credit is rated Aa1, the second-highest grade from Moody’s Investors Service, and one grade below Virginia’s Aaa rating. The authority is on review for downgrade as Moody’s placed the state on review July 19. (Added Aug. 1)
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