MTA Finances Weakening From Bad to Worse With Sandy: Muni Credit
As if the flooded tunnels and crippled subways left by superstorm Sandy weren’t enough, New York’s Metropolitan Transportation Authority may see the penalty on its debt increase in a sale this week.
The biggest U.S. mass transit system, which normally serves 8.5 million weekday riders through subways, buses and commuter trains, plans to issue $870 million of bonds for capital projects and refinancing. Since the storm hit Oct. 29, the extra yield investors demand on some agency debt is three times the average of the previous four weeks, according to calculations by Bloomberg using Municipal Securities Rulemaking Board data for trades of all sizes.
Bond buyers will want more of a cushion given the potential cost of the hurricane on top of the MTA’s projected deficits, said Howard Cure at Evercore Wealth Management LLC in New York.
“We were never that enthralled with the MTA prior to Sandy,” said Cure, director of muni research at Evercore, which oversees $3.7 billion. “They have an antiquated capital system that needs a lot of work.”
In a gauge of demand for the agency’s debt, the Triborough Bridge & Tunnel Authority, part of the MTA, priced about $129 million of tax-exempts today. Standard & Poor’s rates the Triborough securities AA-, two steps higher than the MTA’s transportation-revenue bonds.
The Triborough issue received $585 million of orders, including $153 million from individual buyers, and was able to lower yield spreads during the sale, Aaron Donovan, an MTA spokesman, said in an e-mail.
“TBTA received strong support from both retail and institutional investors one week after superstorm Sandy hit,” he said. “Demand was strong, with bonds in every maturity oversubscribed for.
Ten-year debt priced to yield 2.06 percent, or about 0.36 percentage point above benchmark 10-year tax-exempts, data compiled by Bloomberg show. That level is down from a spread of 0.48 percentage point on a July sale, though up from 0.28 percentage point in a May issue, the data show.
Pat McCoy, finance director for the MTA, said the agency doesn’t expect increased borrowing costs in this week’s MTA sale, which was planned before the storm.
“What we anticipate is strong demand,” McCoy told reporters during a conference call last week.
The hurricane killed about 40 people in the most-populous U.S. city, while flooding subway stations and tunnels below the East River, suspending service.
Officials shut the MTA Oct. 28 as the storm approached. Fourteen of 23 subway lines resumed partial operations Nov. 1, with more service returning each day.
The system loses $18 million in fare revenue daily when all of its buses, subways and commuter lines aren’t running, according to MTA Chairman Joseph Lhota. As of yesterday, at least one subway line remained fully suspended.
The region’s public-transportation infrastructure, including the city’s 108-year-old subway system, could suffer $10 billion in physical losses from a storm such as Sandy, according to a 2011 state study. While MTA officials said they anticipate that Federal Emergency Management Agency funds and insurance will pay for the bulk of repairs, the storm pummeled a transit system already searching for extra revenue beyond fares.
The MTA is appealing a court ruling barring a payroll-tax levy that would generate $1.26 billion in revenue this year. The agency projects deficits totaling $493 million through 2016, according to bond documents.
An MTA transportation-revenue bond repaid from fares and maturing in 2037 has traded since Oct. 29 with an average yield spread of 0.44 percentage point above AAA munis, up from an average of 0.14 percentage point in October before the storm, data compiled by Bloomberg show.
The interest rate on AAA tax-exempts due in 10 years rose about 0.03 percentage point today to 1.7 percent, data compiled by Bloomberg show.
Bondholders will temporarily ask for more yield on MTA securities following the hurricane given the system’s stresses, said Peter Hayes, head of muni debt at New York-based BlackRock Inc., which oversees about $105 billion of local bonds.
The transit provider will work on filling budget deficits while bringing the system back to full service and possibly crafting a plan to keep subways and buses running during such extreme weather, Hayes said.
“Maybe this is the tailwind they need to help pass through higher fare increases,” he said.
A proposed fare-and-toll increase is set to begin in March and generate about $450 million annually.
While the MTA has $1.3 billion of unrestricted cash to help cover storm costs, it may face a rating downgrade if the impact is felt over a longer period, Joe Pezzimenti, an S&P analyst, wrote in a report yesterday.
“The biggest financial issue facing MTA will be bridging the gap between now and when it receives FEMA reimbursements and insurance proceeds,” Pezzimenti said in the report. “The ratings could face stress if the agency experiences material erosion in its liquidity position.”
The MTA board is set to receive a budget update Nov. 20, including estimates on lost revenue and storm damage, according to Pezzimenti.
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