Thruway Bonds for Tappan Zee Bridge Hit Sweet Spot: Muni Credit

The New York State Thruway Authority sold $1.6 billion of bonds to replace the Tappan Zee Bridge, as the agency prepares to double its debt load to finance the biggest project in its 63-year history.

This week’s borrowing for the $4 billion span across the Hudson River garnered enough demand that it priced a day earlier than planned, data compiled by Bloomberg show. The securities will be repaid in 2019 with a federal loan. The operator of 570 miles (917 kilometers) of toll roads is selling after Moody’s Investors Service cut its rating to the sixth-highest level last month on concern that the agency may not raise tolls fast enough to cover costs.

Bond buyers want munis maturing within six years as bets mount that a strengthening economy will drive up yields on longer-dated debt, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

“We couldn’t think of a better part of the yield curve to do it if you’re looking to generate some interest,” said Pietronico, who helps manage $950 million of munis in New York. “We’re fighting investors every day to get those same bonds.”

Canal Comparison

New York Governor Andrew Cuomo, a 56-year-old Democrat, has made building the structure a priority, comparing it in scope with the 19th century construction of the Erie Canal. Situated about 20 miles north of Manhattan, it’s among the nation’s largest public-works projects.

Debt rated one step below the agency’s A2 grade priced yesterday to yield 2.2 percent, according to three people familiar with the sale who requested anonymity before final levels are released.

That yield is about 0.29 percentage point above benchmark munis, data compiled by Bloomberg show. In comparison, the spread on an index of revenue debt with a similar rating and maturity was about 0.51 percentage point.

The 58-year-old, 3-mile-long Tappan Zee, which connects Rockland and Westchester counties, was designed to last 50 years. It carries 138,000 vehicles daily, 40 percent more than intended, at a cost of $5 cash for a regular passenger vehicle, collected in only one direction.

“It’s way over capacity,” said Howard Cure, director of municipal research in New York at Evercore Wealth Management LLC, which oversees $4.7 billion.

2019 Payoff

This week’s bonds will be paid off in 2019, one year after the bridge’s expected completion, using a federal Transportation Infrastructure Finance and Innovation Act Loan, according to bond documents. The $1.6 billion loan is a record for the program, which began in 1998.

State and local debt maturing in three to seven years has earned about 0.9 percent this year, compared with a 2.8 percent loss for the entire market, according to Bank of America Merrill Lynch data. That maturity range is set to beat the market for the first time since 2010.

Bond proceeds will finance construction and pay off about $700 million in private borrowing that’s due this month. This week’s offering is the first of about $4.5 billion of junior debt the authority plans to sell to finance construction, according to bond documents. A portion of the issue has insurance.

Even with increased demand for shorter maturities, the sale’s size and its scheduling during the busiest week for New York issuance in at least 10 years means the authority faces higher yields, said Pietronico and Daniel Solender, director of munis at Lord Abbett & Co. in Jersey City, New Jersey.

State Wave

Already this week, New York City sold $800 million of general obligations and a separate agency issued about $2 billion of revenue bonds to refinance Long Island Power Authority debt.

The Thruway Authority’s projected borrowing will more than double its $3.9 billion debt burden.

The $1.6 billion in junior revenue bonds were rated A- by Standard & Poor’s, one step below the senior obligations. The ratings reflect the conclusion that the authority will rely on “frequent rate increases” to maintain debt-service coverage ratios above levels required by bond covenants, Joseph Pezzimenti, an S&P analyst, said in a Dec. 3 report.

The Thruway Authority plans to create a task force “to look at possible additional sources of revenue and consider overall toll rates as well as potential discounts for commuters and local residents,” Tom Madison, executive director of the agency, said in an e-mail.

Toll Forecast

The authority will have to start raising tolls starting in 2015 to close a projected $67.2 million revenue gap, which will grow to $415 million by 2019 without them, according to a traffic and revenue report by New York-based Jacobs Civil Consultants Inc.

“It’s a question of how fast they can raise tolls and if it hurts demand while they’re doing it,” Solender said.

In the municipal market this week, states and cities plan to sell about $13 billion of long-term debt, the biggest wave in three years, Bloomberg data show. The binge has pushed yields to a three-month high.

Benchmark 10-year munis yield 3.05 percent, the highest since Sept. 12, compared with 2.85 percent on similar-maturity Treasuries.

The ratio of the interest rates, a gauge of relative value, is about 107 percent, compared with a five-year average of 102 percent. The higher the figure, the cheaper munis are compared with federal securities.

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net; Freeman Klopott in Albany at fklopott@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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