State and local governments are rushing to take advantage of borrowing rates that were unthinkable less than a year ago.
The plunge in interest costs has defied predictions by banking analyst Meredith Whitney of “hundreds of billions of dollars” of defaults in the $2.9 trillion municipal-bond market. The decline has tracked the rally in U.S. Treasuries that pushed 30-year yields to 2.9 percent, about the lowest since January 2009, and is helping the Port Authority of New York & New Jersey sell a record $1 billion of 40-year bonds to fund World Trade Center reconstruction this week.
The taxable issue by the agency, which also oversees bridges, tunnels and airports, carries the longest maturity since it paid 6.28 percent on an offering of 100-year tax-exempt debt in 1994, according to data compiled by Bloomberg. The sale leads about $7 billion of municipal offers this week.
“Demand is strong,” said Peter Hayes, a managing director at New York-based BlackRock Inc., which owns $98.2 billion of municipal bonds, including tax-exempt and taxable Port Authority debt. “From an issuer’s perspective it’s a great time to borrow as much as they can out long.”
Whitney, on a Dec. 19 “60 Minutes” broadcast, predicted “hundreds of billions of dollars” of municipal defaults within 12 months. The total so far this year is about $1 billion, according to Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida. That compares with $3.6 billion in 2010.
Yields on 20-year municipal general-obligation securities rated Aa2 fell to 3.85 percent Sept. 22, from 5.41 percent on Jan. 20, according to Bond Buyer index data. The rate fell as low as 2.98 percent in 1962, when John F. Kennedy was president.
Decline in Defaults
The decline in defaults, along with plunging yields, has enabled municipal issuers from California to Massachusetts to borrow this month at costs of a third to half of what they paid in the past two years. States and cities are selling about $23 billion from Sept. 12 through Sept. 30, the biggest three-week total since December, according to Bloomberg data.
The Port Authority’s 40-year bonds are rated Aa2, Moody’s Investors Service’s third-highest grade. The proceeds will be used for construction at the 16-acre site in Lower Manhattan that includes One World Trade Center, a transportation hub and vehicle-security center, according to the preliminary offering document.
The authority is set to pay about the same premium it did a year ago on a 30-year bond even though investors won’t be repaid for an additional decade. In October, it sold $850 million of 30-year taxable debt with a 5.65 percent yield, or 176 basis points above that day’s index of 30-year Treasuries. A basis point is 0.01 percentage point.
Preliminary pricing for the $1 billion sale includes a spread of 175 to 185 basis points above the benchmark, said Peter Demirali, who manages $350 million of taxable municipals at New Jersey-based Cumberland Advisors.
United Parcel Service Inc., the package-delivery company whose shipments make it an economic bellwether, in November sold an AA- rated 30-year bond at 4.97 percent, 85 basis points above the 30-year Treasury.
Tolls and fares brought in $1.07 billion of the Port Authority’s $3.63 billion in gross operating revenue in 2010, according to the annual report. The agency boosted bridge and tunnel tolls this month for drivers paying cash to $12, from $8. The increase will help back the agency’s revenue bond issue.
“From a bond investor perspective, you like to see a willingness in a tough economic environment to raise tolls -- that’s a good thing,” Howard Cure, director of municipal-credit research in New York for Evercore Wealth Management LLC, which manages $2.9 billion of municipal securities, said in a telephone interview.
The deal’s risks include a worsening economy depressing traffic and leasing of the trade center buildings, Cure said.
The authority still has to find renters for about one-third of the 104-story One World Trade Center, which has Conde Nast Publications Ltd., publisher of Vogue, as anchor tenant.
Moody’s, which has a negative outlook on the authority’s debt, on Sept. 23 cited “slow economic recovery” and the agency’s “very large, complex, and growing future capital needs,” including construction at the World Trade Center.
Stretching the sale to 40 years adds borrowing costs for the agency, Hayes said.
“Normally, if this were a 30-year, this debt might be a little bit tighter,” he said. “I think for the extra 10 years the spread is probably slightly wider than it would be.”
The 5.65 percent yield in the October 2010 sale priced 40 basis points above the 5.25 percent yield of that day’s index of 26-year corporate securities rated Aa3, according to Bank of America Merrill Lynch indexes, which include price changes and interest income. The bonds were 7 basis points below the index of 28-year taxable Build America Bonds, according to a Wells Fargo index.
The debt traded Sept. 22, the most recent transaction, with an average yield of 5.47 percent, or 88 basis points above the Bank of America benchmark and 78 basis points above the Wells Fargo index, according to data compiled by Bloomberg.
Following is a description of a pending sale of municipal debt:
NEW YORK CITY , the most populous U.S. city, is to borrow $818 million of tax-exempt and taxable bonds as soon as tomorrow. The transaction will finance capital projects and convert $168 million of variable-rate bonds into fixed-rate debt. The city is rated AA, Fitch Rating’s third-highest grade. Siebert Brandford Shank & Co. LLC will lead a syndicate of banks marketing the sale. (Updated Sept. 26)