Pimco Bets on Hudson Yards as Yield Penalty Falls: Muni Credit
Pacific Investment Management Co. is betting that Manhattanites like Annie Zhou will help pay down $3 billion of debt that is transforming a former West Side industrial area into a neighborhood with shops and offices.
The tax-exempt bonds were sold starting in 2006 to extend subway access to the Hudson Yards area west of Midtown, as well as build parks and walkways. Zhou, a 28-year-old graduate student, bought a condo three years ago in a complex whose revenue helps pay off securities sold by the Hudson Yards Infrastructure Corp.
The yield penalty over AAA bonds on 35-year authority debt graded five steps lower has tumbled almost 70 percent since their issue in October, according to data compiled by Bloomberg. Investors such as Pimco, the world’s biggest bond fund manager, are drawn by the extra yield and by confidence in the district’s prospects, even as subway service has been delayed six months.
“It is in an area that we think will grow and develop,” said Joe Deane, who helps manage $55 billion as head of municipal investments, including Hudson Yards bonds, in New York at Pimco. “There seems to be a tremendous commitment on the city’s part behind the project.”
The district, named for the rail yards on the site, runs from west of Times Square to the Hudson River and encompasses about 45 square blocks. The area may generate about $37 billion of revenue through 2050 from redevelopment to accommodate high- rise residences, office buildings, retail space and parks, according to a 2011 Cushman & Wakefield study.
Zhou, a former marketing associate at Neuberger Berman Group LLC, bought into Moinian Group’s Atelier at West 42 Street and 11th Avenue, where a two-bedroom unit is being offered for $2.1 million on real estate website StreetEasy.com.
Investors demand about one percentage point of extra yield on similarly rated tax-exempts due in 30 years over AAAs, down from a peak of 1.4 points in 2011, data compiled by Bloomberg show.
A Hudson Yards bond without insurance and due February 2047 traded June 5 with an average yield of 3.66 percent, or 0.46 percentage points above benchmark 30-year munis, data compiled by Bloomberg show. That spread has narrowed from 1.44 percentage points when the bonds were issued in October.
“There’s been a lot of demand for credit in this range,” said Daniel Solender, who helps manage $16 billion of municipals at Lord Abbett & Co., including Hudson Yards bonds. “And then within New York there’s limited amount of bonds available, so there’s a lot of in-state demand,” he said in an interview from Jersey City, New Jersey.
The debt is secured by payments from developers in lieu of real-estate taxes and revenue generated from the site. The city has also pledged to repay interest costs on the bonds if the development fails to create sufficient revenue.
Volatility of New York real-estate and competition from other parts of the city and New Jersey were among challenges for the development, Moody’s Investors Service analysts wrote in a Sept. 29 report.
New York will pay $153.1 million toward debt service for the bonds in the year beginning July 1, up from $108.3 million this year, according to the city’s fiscal 2013 executive budget. The city will pay interest on the bonds through 2018, Michael Rinaldi, a Fitch Ratings analyst, said in an October report.
Ann Weisbrod, president of the Hudson Yards agency, which the city established in 2005, referred questions on the payments to the Office of Management and Budget. Ray Orlando, spokesman at the bureau, confirmed the amounts.
Area residents interviewed this week cited the distance to the subway as a drawback.
Service on the extended No. 7 train, which currently ends at Times Square, will begin in June 2014, according to the Metropolitan Transportation Authority website. A new terminus is set for 34th Street and 11th Avenue. The scheduled opening is six months later than earlier estimates.
The delay will probably have a limited impact on the development because residential and hotel construction has surpassed projections, Karl Jacob, an S&P analyst, said in an interview.
Since 2006, about 5,900 residential units have been built, while developers have constructed 12 new hotels providing 2,900 new rooms in the area, more than double the forecast in 2006, he said.
James Lebenthal, founder of Lebenthal & Co. in New York, described the bonds in a May 11 interview on Bloomberg Radio as the “poster child for public finance” because the borrowing will help foster residential and commercial growth.
“It is a bond for investors who are willing to take a risk on the continued development in the only way that New York City can grow, and that is either up higher and higher or out into this flatlands area,” he said in a separate interview.
Following are pending sales:
The DORMITORY AUTHORITY OF THE STATE OF NEW YORK plans to sell $1.8 billion of bonds backed by personal-income tax revenue as soon as next week, according to data compiled by Bloomberg. Proceeds will refund debt. (Updated June 7)
DETROIT plans to sell $575 million of debt secured by sewer revenue as soon as next week, data compiled by Bloomberg show. Proceeds will help finance upgrades to the city’s wastewater treatment system, refinance debt and end swap agreements, according to offering documents. The swap termination fees total about $288 million, according to Fitch Ratings. Fitch last month cut the system’s senior lien bonds to A-, seventh-highest, from A. (Updated June 7)
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