Investors Bet Tappan Zee Won’t Upend N.Y. Thruway: Muni Credit

New York Comptroller Thomas DiNapoli says Governor Andrew Cuomo’s effort to construct the biggest project in the 62-year history of the Thruway Authority lacks a financing plan. Investors are betting there will be one.

The agency, which is building a new $3.9 billion Tappan Zee Bridge across the Hudson River, last week borrowed $500 million from Barclays Plc. The authority’s first private placement may “reduce the level of disclosure provided to investors in the municipal market,” DiNapoli’s office said in a letter approving the sale. The comptroller also said the authority has “no definitive financing plan” for the bridge.

The private sale of bond-anticipation notes saved more than $1 million on underwriting costs and allowed the authority to pay the first $125 million bill due this month, said Dan Weiller, a spokesman. The agency says it can’t release a financial plan for the bridge until it knows the size of a federal loan it applied for last year.

Building the bridge, which Cuomo compares in scope to the 19th century construction of the Erie Canal, would double the $3.2 billion debt load of the operator of the longest U.S. toll road. Yet investors are showing confidence in the agency’s finances, as the extra yield on some of its debt dropped by about 7 percent this year.

‘Essential System’

“The authority is an essential system of roadways that has provided ample protection and historically favorable debt coverage,” said Chris Fornal, transportation credit-research analyst at New York-based BlackRock Inc., which manages about $109 billion in munis. “I would anticipate management making the appropriate steps to maintain their historical coverage.”

The Tappan Zee, one of the largest infrastructure projects in the U.S., is a priority for Cuomo. Since Republican Governor George Pataki announced plans to replace the 57-year-old span in 1999, New York has held 430 public meetings and considered 150 concepts, spending $88 million, Cuomo has said.

Construction is expected to start in a few months, a little more than a year after Cuomo issued a request for proposals. The 55-year-old Democrat says that shows how he’s reduced perennial dysfunction in Albany, the state capital.

Narrowing Spread

The Thruway Authority typically finances projects with bonds backed by revenue from cars and trucks. Those securities are rated A+ by Standard & Poor’s, the fifth-highest investment-grade rating.

Since Jan. 1, the difference in the average yield, or spread, between the agency’s revenue bonds callable in 2022 and top-rated debt maturing in nine years has narrowed to about 1.53 percentage points as of Feb. 11 from about 1.65 percentage points, according to data compiled by Bloomberg.

Still, the lack of a financing plan may give some investors pause, said Dan Solender, director at Lord Abbett & Co. in Jersey City, New Jersey, which manages about $19.5 billion, including some Thruway debt.

“It doesn’t stop you, but you’d definitely look for a concession in the yield,” Solender said in a telephone interview. “Doing a private sale may not be the best way to get started.”

The private placement cost $175,000, compared with $1.6 million the authority paid on a public sale of $868 million in short-term notes in June 2011, Kate Gurnett, a DiNapoli spokeswoman, said in an e-mail. The authority is paying 0.19 percent interest on the notes, which are due in July, about the same as the yield for top-rated bonds due in 12 months, data compiled by Bloomberg show.

Negative Watch

To shore up its finances, the agency is planning to save about $20 million in its $978 million budget by firing 234 of its almost 3,000 employees, Executive Director Thomas Madison said in a Feb. 1 radio interview. In his $136.5 billion budget, Cuomo proposed giving the authority $85 million annually, in part by having the state take over the cost of police patrols on the 570-mile (917-kilometer) system.

S&P and Moody’s Investors Service put the authority on a negative watch in June before it sold $1.1 billion in long-term bonds to pay off short-term debt, with S&P citing uncertainty about financing a new Tappan Zee.

Much of the bridge plan, including the authority’s ability to pay off the $500 million sold privately Feb. 7, hinges on the size of a federal loan, which it expects to get, Madison said. The authority applied for $2.9 billion under the Transportation Infrastructure Finance and Innovation Act in September.

“We’re borrowing in anticipation of what we believe will be a long-term, low-interest loan from the federal government that we’re still in the process of negotiating,” Madison said in the radio interview.

Toll Bonds

Cuomo has said most of the construction would be paid for by selling toll-backed bonds. Fees on the Tappan Zee may triple to $14 from the current $5 for cash customers when the new span opens, which is projected for 2016, state officials have said.

If the U.S. loan doesn’t come through by July 31, when the $500 million is due, the state can roll the debt into longer-term bonds. That may threaten its ability to meet a debt-ratio coverage of 1.2, the minimum required by its bond resolution, Joe Pezzimenti, an S&P analyst, said in an interview before the private placement.

“We are waiting to get more details in terms of a plan of finance for the Tappan Zee and what their tolling strategy will be moving forward, which will allow them to address the ongoing capital needs of the rest of the system in addition to replacing the Tappan Zee Bridge,” Pezzimenti said.

Before it's here, it's on the Bloomberg Terminal.