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San Francisco Bridge Agency Plans $4 Billion of Bonds

The western span of the San Francisco-Oakland Bay Bridge extends to Treasure Island from San Francisco, California, U.S., as seen in this aerial photo. Photographer: Chip Chipman/Bloomberg
The western span of the San Francisco-Oakland Bay Bridge extends to Treasure Island from San Francisco, California, U.S., as seen in this aerial photo. Photographer: Chip Chipman/Bloomberg

April 28 (Bloomberg) -- The agency financing construction of the new San Francisco-Oakland Bay Bridge may sell as much as $4 billion of bonds this year to take advantage of federal debt subsidies before they’re scaled back or expire.

The Bay Area Toll Authority, the Oakland-based agency that finances bridge construction using tolls from seven state-owned spans around San Francisco, approved issuing a combination of tax-exempt securities and taxable Build America Bonds today.

Build America issues have eased borrowing costs on $98 billion in state and local government debt in the past year, becoming the fastest-growing part of the $2.8 trillion municipal market, according to data compiled by Bloomberg. The U.S. Treasury pays issuers 35 percent of the interest through the program, which was created under the economic stimulus plan and is set to expire at the end of this year.

“There’s a lot of money at stake,” said Brian Mayhew, the chief financial officer of the authority. “We will try to be opportune on both” taxable and non-taxable issues.

Congress is moving to keep the program in place while cutting back the amount local governments receive. Last month, the U.S. House of Representatives approved extending the program until 2013 while lowering the Treasury’s share of the interest bill, in phases, to 30 percent.

Increase in Sales

Analysts at firms including Barclays Capital anticipated that the expiration of the current program would spur an increase in sales this year as cities, towns and agencies seek to capture the higher subsidies. The flood of Build America bonds helped push down yields on tax-exempt notes sold by municipalities by reducing the supply.

Mayhew said the agency may move to sell the taxable bonds soon to get ahead of other borrowers, including California, which may seek to raise money toward the end of the year.

“One of the reasons to get to the market relatively soon is to beat the state of California out of the gate,” he said. “We don’t really know if there’s a market saturation here, so interest rates could shoot up if we meet it.”

A $1.3 billion, 40-year Build America Bond issued by the toll authority in November traded for an average yield of 6.04 percent yesterday, about 1.47 percentage points more than 30-year Treasury bonds.

The difference, or spread, is down from 2 percentage points when the bonds were first sold to investors, according to Bloomberg data. The bonds were rated Aa3 by Moody’s Investors Service and AA by Standard & Poor’s, according to the official statement, the fourth- and third-highest steps respectively.

By comparison, a 30-year California state Build America Bond traded for an average yield of 6.85 percent yesterday.

Tolls Increase Set

The Bay Area Toll Authority is borrowing against toll money to finance the $6.3 billion construction of a new span on the bridge stretching between Oakland and San Francisco, which was damaged during an earthquake in 1989. Through August, about $3.8 billion had been spent, according to bond documents.

The agency also oversees seismic projects on other bridges. Most tolls are set to jump to $5 from $4 in July, to help cover the increased debt.

The reliance on fixed-rate debt to finance its projects marks a shift for the toll authority, which in 2006 and 2007 sold $2 billion of floating-rate bonds coupled with interest-rate swaps intended to guard against a rise in borrowing costs.

That strategy backfired amid the credit crisis. In July, the toll authority paid $105 million to back out of $1.07 billion of swaps with Ambac Financial Services LLC.

Mayhew said the Build America program allowed him to borrow at a rate just above 4 percent, once the subsidies are factored in.

“It worked much better than the federal government ever envisioned it,” Mayhew said.

To contact the reporter on this story: William Selway in San Francisco at wselway@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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