New Jersey Turnpike Authority’s biggest tax-exempt borrowing since 2000 is poised to benefit from the lowest relative borrowing costs in almost four years for municipal securities rated below AAA.
The agency oversees the 148-mile (238-kilometer) highway and the 173-mile Garden State Parkway, which handle about 1.6 million vehicles daily combined. It plans to issue $1.4 billion of debt today with an A+ rank from Standard & Poor’s, four steps below the top. The yield spread investors demand on similarly graded munis is the narrowest since May 2009, data compiled by Bloomberg show.
The bonds will help finance a $3 billion road-widening project that will double traffic capacity in central New Jersey while adding lanes for traffic bound for the Jersey Shore. Governor Chris Christie, a Republican seeking re-election in November, is counting on beach-bound tourism to propel the “Jersey Comeback” he says is boosting the economy of the 11th- most-populous state.
“New Jersey Turnpike has benefitted from the tightening in all areas of the muni bond market,” said Matt Dalton, who helps manage $1.5 billion of munis at Belle Haven Investments Inc. in White Plains, New York. “There’s been a lot of focus on single- A. It’s where a lot of buyers have gone to find that little bit of extra yield.”
Even after yields on 20-year general obligations rose last week to an 11-month high of 4 percent, the interest rate remains below the average of 5.89 percent since 1961 after setting a generational low in December, Bond Buyer data shows.
Investors looking to boost returns have been buying lower- rated munis such as obligations of the New Jersey Turnpike agency and Illinois, graded two steps weaker by S&P at A-.
The New Jersey sale will offer higher relative yields than other debt sold in the state with better credit, while also providing the security of an essential service, said Robert Amodeo, who manages $30 billion of munis at Western Asset Management in New York. The turnpike is the main roadway in the state, connecting New York City and Philadelphia.
“It’s a primary north-south artery in a state with really no comparative high-speed competition,” Amodeo said.
Traffic on the Turnpike has fallen since the 18-month recession that began in 2007. After peaking at 252 million vehicles in 2006, it dropped to about 225 million last year, according to bond documents.
Yet investors can take comfort in toll increases in 2008 and 2012 that helped increase revenue to $992 million last year from $533 million six years earlier. Turnpike officials expect revenue to rise further in the next decade as the economy improves and ridership grows.
The extra yield investors demand to buy A- munis due in 10 years compared with benchmark debt fell to 0.8 percentage point last week, the narrowest spread since May 2009, Bloomberg data show.
At the same time, Turnpike bonds maturing in January 2035 traded yesterday with an average yield of 3.16 percent, or 0.2 percentage point above benchmark munis, Bloomberg data show. The difference was 0.3 percentage point a year ago.
While A- bonds have rallied, the $3.7 trillion municipal market is seeing mutual-fund outflows as investors sell or avoid buying to make April 15 tax payments, said Daniel Solender, who helps manage $19.5 billion of munis at Lord Abbett & Co. in Jersey City, New Jersey.
Investors withdrew assets from the funds the past two weeks, Lipper US Fund Flows data show. That may require the authority to add yield above a single-A muni index to complete the sale, Solender, Amodeo and Dalton said.
The authority has $8.1 billion of debt, according to Moody’s Investors Service. It must also make yearly payments to the state to help finance road and bridge work outside of the Turnpike system. The authority will pay $324 million annually this year and in the next two years and $162 million in 2016, according to bond documents.
Officials don’t anticipate more toll increases are needed to help finance its 10-year, $7 billion capital program.
Based on financial projections in the authority’s plan, which goes out to 2020, the system “will have enough revenue at current toll rates to cover operating costs and debt service and meet all of our other obligations,” a spokesman, Tom Feeney, said in an e-mail.
This is the largest tax-exempt borrowing for the authority since 2000, according to Feeney and Bloomberg data. Its last sale above $1 billion was a taxable deal in 2010 using Build America Bonds.
“There’ll be some appetite for it,” Dalton said. “Money managers have room for the name, in most instances.”
The turnpike is selling into a wave of $9.6 billion of munis offers this week, the year’s busiest calendar. Munis are the cheapest in almost six months relative to Treasuries.
At 2.03 percent, yields on benchmark 10-year munis are about 107 percent of those on federal debt, the highest percentage since Sept. 26, data compiled by Bloomberg show. The ratio, a measure of relative value between the two asset classes, compares with an average of about 92 percent since 2001.
Munis have lost 0.7 percent this month, compared with a decline of 0.3 percent in Treasuries, Bank of America Merrill Lynch data show. Local borrowings lost value in March the past four years.
Even as muni yields are close to the highest since April, investors aren’t signaling concern about credit quality.
It costs the annual equivalent of about $153,000 to protect $10 million of munis for 10 years through credit-default swaps, close to the lowest since mid-2011, according to Markit Group Ltd. index data compiled by Bloomberg.
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