San Francisco’s Bay Area Rapid Transit District rode the best rally in top-grade municipal debt since 2008 to earn historically low relative borrowing costs after settling its longest strike in 16 years.
The nation’s fifth-busiest heavy-rail system sold $240 million in bonds this week for projects protecting against earthquakes. Investors accepted yields below those on benchmark bonds for the securities, which carry the highest credit ratings, data compiled by Bloomberg show.
A year after voters agreed to boost levies on the state’s highest earners, BART drew buyers seeking tax-free income while also betting the commuter-rail system will benefit from strength in the local economy. Bolstered by technology companies such as Twitter Inc., San Francisco has earned its highest credit grade in more than a decade.
“With BART settling their strike, labor won’t be an issue for some time, and the economy in San Francisco is booming from the tech industry,” said Dan Heckman, a fixed-income strategist in Kansas City, Missouri, at U.S. Bank Wealth Management, which oversees $112 billion.
“They’re a very attractive issuer that’s able to get very good investor demand in a high-income-tax state,” he said.
Investors are favoring top-grade city and state debt on bets that a growing economy will lead the Federal Reserve to curb its monthly bond buying, causing interest rates to rise, especially on securities with weaker ratings.
While the $3.7 trillion municipal market has lost 2.6 percent this year, AAA obligations have dropped 1.4 percent, Bank of America Merrill Lynch data show. It would be the first time in five years for AAAs to beat the market.
BART train operators and other employees struck for four days beginning Oct. 18, following a walkout of similar length in July amid disputes over pay and employee contributions to health care and pensions. The stoppages were the longest since a six-day strike in 1997.
The Oakland-based system, which serves San Francisco and the neighboring counties of Alameda and Contra Costa, has seen average weekday trips rise about 10 percent since 2008, to 392,293, bond documents show. New York City Transit’s heavy-rail network handles about 8.7 million riders, followed by systems in Washington, Chicago and Boston, according to data from the American Public Transportation Association.
Voters in 2004 decided to dedicate property-tax revenue to pay for the earthquake-protection work. The general obligations BART issued this week carry a Moody’s Investors Service rating two steps above the system’s revenue debt.
In this week’s sale, BART sold 10-year tax-exempt bonds to yield 2.61 percent, compared with about 2.68 percent on benchmark munis, Bloomberg data show. That was a change from sales in 2005 and 2007, when buyers demanded yields above those on similar-maturity benchmarks.
Investors submitted orders for about six times the amount of bonds offered, Alicia Trost, a BART spokeswoman, said in an e-mail.
BART’s fiscal outlook was buoyed by the end of the strike, Jennifer Hansen, a Standard & Poor’s analyst, wrote in assigning a AAA rating to the debt.
“We view the fact that they have a four-year contract as a strength,” she said in an interview. “They’ve had contentious negotiations.”
Moody’s said that salary concessions could divert money from maintaining and improving the 104-mile (167-kilometer) network. Deterioration of tracks and cars “would weaken the overall viability of the system,” Moody’s Andrew Nowicki wrote in an Oct. 21 note.
After the tentative settlement, which included raises and increased employee contributions toward health insurance and pensions, Nowicki offered a more upbeat assessment.
“The conclusion of the BART strike is positive as passenger fares are an important source of revenue,” he wrote in an e-mail.
The contract will raise wages about 15 percent over four years, costing BART $67 million, Trost said.
Of the agency’s $672 million in revenue this year, 56 percent comes from fares and 30 percent from sales taxes in the service area, according to BART’s budget. The strike cost the agency $4 million, bond documents show.
“Since you have an unlimited tax G.O., the strike was not a concern unless it was prolonged,” said Michael Johnson, managing director in Solana Beach, California, of Gurtin Fixed Income Management LLC, which manages $7.5 billion.
The borrowing will help bolster tunnels, bridges and overhead tracks. The project will include strengthening the steel-and-concrete Transbay Tube connecting San Francisco and Oakland.
BART was out of service for just hours when the 1989 Loma Prieta quake partially collapsed the Bay Bridge and a freeway in Oakland. The epicenter of that magnitude-6.9 quake was about 70 miles south of Oakland, according to bond documents.
There is a 63 percent chance that one or more quakes of magnitude 6.7 or higher will strike the area before 2038, according to a study cited in the documents.
In the municipal market this week, localities nationwide are selling about $6 billion in long-term debt, up from $4.9 billion last week. They’re borrowing with benchmark yields close to the lowest since June.
The ratio of the interest rates, a gauge of relative value, is about 103 percent. It compares with an average of 94 percent since 2001. The higher the number, the cheaper munis are compared with federal securities.
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