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Bay Area Bridge Agency Sells Most Build Americas Since March

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June 24 (Bloomberg) -- The Bay Area Toll Authority, which is financing the new San Francisco-Oakland Bay Bridge, sold $1.5 billion of Build America Bonds in the largest issue since the Municipal Electric Authority of Georgia sold $2.2 billion in March to pay for nuclear plants.

The offering, rated fifth-highest by Moody’s Investors Service and Standard & Poor’s at A1 and A+, respectively, was scaled back from the scheduled $1.75 billion after a callable option -- giving the issuer the right to redeem before the due date -- was dropped, said Brian Mayhew, the chief financial officer of the authority. Yields were raised to appease concern about outstanding debt, according to an investor.

“The authority has a lot of bonds outstanding already,” said Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., which specializes in the state’s debt. “The underwriter made a good-faith attempt to bring it at lower levels and the market wanted more,” he said, referring to the final yield offered. “Investors got a good price but the authority also did well.”

The $250 million of securities maturing in 2030 priced to yield 6.79 percent, 275 basis points above the 30-year Treasury used as the deal’s benchmark. The $400 million portion due in 2040 was 287.5 basis points more than the benchmark, and the $850 million maturing in 2050 yielded 7.04 percent, 300 basis points above. A basis point is 0.01 percentage point. Bank of America Merrill Lynch managed the group handling the sale.

The $250 million portion was forecast to price 250 basis points above the benchmark, according to Informa Global Markets, a London-based financial analysis company. The 2040 tranche was initially set at $500 million and expected to price 275 basis points above while the 2050 maturity originally stood at $1 billion with a predicted 287.5 basis-point premium.

Toll Increase

The authority, an Oakland-based agency that finances bridge construction using tolls from seven such state-owned structures around San Francisco, is borrowing against levies to finance the $6.3 billion project. The bridge was damaged by an earthquake in 1989. Traffic on Bay Area bridges is forecast to shrink 1 percent this fiscal year and remain the same until fiscal 2012 when a half percent rise is expected, according to the offering documents. Most of the tolls are set to jump to $5 from $4 in July, to help cover the increased borrowing.

“We priced them as tightly as we thought we could and to get the value of what the bonds are worth,” said Mayhew. “There was a callable option that we decided we didn’t need and that was the reduction.”

Previous Issue

The biggest sale of Build America Bonds this year was by Georgia’s municipal electricity authority, which issued the debt to help fund the building of two nuclear reactors. The agency was established in 1975 by the state assembly to end local municipalities’ dependency on private power companies, according to the MEAG website.

BATA last sold Build Americas in October, issuing $1.3 billion maturing in 2049 priced to yield 6.26 percent, or 200 basis points above 30-year Treasuries. The securities traded June 22 at an average yield of 5.97 percent, or 187 basis points above the Treasury. The debt has averaged an 84 basis point spread above the Wells Fargo Build America Bond index since the sale, data compiled by Bloomberg show.

Payments on today’s Build Americas will be subordinate to BATA’s $5.6 billion in outstanding debt, and $2.3 billion in interest-rate swaps, preliminary offering documents show. The authority has authorized the issuance of as much as $4 billion in debt before Dec. 31, and may authorize further borrowing after that, the documents show.

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.

Strategy Backfired

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 New York-based Ambac Financial Group Inc.

Build America Bonds, created last year as part of the economic stimulus program, are the fastest-growing part of the $2.8 trillion municipal market. Issuers are eligible for a 35 percent subsidy on interest rate costs from the U.S. Treasury. About $116 billion of the securities have been sold, Bloomberg data show.

The authority’s offering comes as the future of the program, which is set to expire in December, is still undetermined. A two-year extension is included in a Senate bill awaiting action. Passed by the House of Representatives May 28, the provision would cut federal subsidies to borrowers to 32 percent in 2011 and 30 percent in 2012.

To contact the reporter on this story: Brendan A. McGrail in New York at; Allison Bennett in New York at

To contact the editor responsible for this story: Mark Tannenbaum at

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