N.Y. Thruway Pays Least as Tappan Zee Loan Prepared: Muni CreditFreeman Klopott and Brian Chappatta
Investors are driving the New York State Thruway Authority’s borrowing costs to a 14-month low relative to benchmark debt in a bet that the agency will be able to finance the largest project in its 63-year history.
The operator of the longest U.S. toll road, which is building a $3.9 billion replacement for the Tappan Zee Bridge across the Hudson River, plans to borrow $875 million this month, according to Standard & Poor’s. It needs the funds as it awaits approval of a federal loan that’s already taken a year to process and is holding up the spending plan for the structure.
Building the span is a priority for Governor Andrew Cuomo, who compares it in scope to the 19th-century construction of the Erie Canal. It would double the agency’s $3.7 billion debt load. Yet the extra yield on some of the longest-maturing Thruway bonds is close to the smallest since they were issued in 2012, data compiled by Bloomberg show.
“The Thruway Authority has good market access,” said Howard Cure, head of municipal research at New York-based Evercore Wealth Management LLC, which oversees about $4.7 billion, including Thruway debt. “People aren’t that concerned about such an essential-purpose project.”
The Tappan Zee is one of the nation’s largest public-works projects and the federal Transportation Infrastructure Finance and Innovation Act loan of more than $1 billion that Cuomo requested would be the biggest awarded by the U.S. Transportation Department.
The 55-year-old Democrat is banking on the low-cost funds to keep cash tolls from almost tripling on the replacement to the 57-year-old bridge. Cuomo has said the majority of the financing will be through toll-backed bonds. The authority is waiting to find out the size of the loan before determining how much it’ll need to borrow through the $3.7 trillion municipal market.
The 3-mile-long Tappan Zee, which connects Rockland and Westchester counties about 20 miles north of New York, was designed to last 50 years. It carries 138,000 vehicles each day, 40 percent more than intended.
The $875 million of notes that the authority’s board of directors plans to sell in a private placement will repay $500 million in debt due Sept. 30 and also finance construction, Joe Pezzimenti, an S&P analyst, wrote in an Aug. 30 report. The authority had planned to use the federal loan to pay off the $500 million bought by Barclays Plc in February.
“The project is currently undergoing a creditworthiness analysis at the U.S. DOT,” Nancy Singer, a Federal Highway Administration spokeswoman in Washington, said by e-mail. “We are aware of the situation and are working with the state of New York.”
Transportation Secretary Anthony Foxx said at a U.S. Senate hearing in July that the project is “of national significance” and he expects it to move forward. If it does, New York will be asked to submit a formal application and then negotiate terms, a process that can take longer than three months, according to the agency’s website.
The authority “remains committed to ensuring our long-term financial health and maintaining our current credit rating,” Dan Weiller, an authority spokesman, said by e-mail. “We are in almost constant contact with USDOT,” he said.
Matt Wing, a Cuomo spokesman, said by phone that he referred to the Thruway Authority for comment.
As the authority grapples with how it’ll pay for the bridge, Thruway bonds maturing in January 2042 traded Sept. 3 at an average yield of 4.96 percent, Bloomberg data show. The debt has an A+ grade from S&P, fifth highest. It yielded about 0.38 percentage point more than benchmark munis, close to the smallest spread since the bonds’ June 2012 issue.
Agency debt hasn’t been exempt from the biggest losses in the municipal market since 1999.
The average price on the bonds due in 2042 fell below 100 cents on the dollar on Aug. 19 for the first time since they were issued, Bloomberg data show. The securities have since rallied to as high as about 102 cents on the dollar, the data show.
“The credit sells extremely well in-state,” said Clark Wagner, who oversees $1.5 billion as director of fixed income at First Investors Management Co. For individual investors looking to buy bonds, as prices fall below par, “the credit aspect isn’t as important as the dollar price.”
The authority expects to have the loan and complete its financing plan in October, according to Pezzimenti. The agency’s credit rating may fall depending on spending on the bridge and capital costs needed to maintain its 570-mile (917-kilometer) toll road, Pezzimenti said.
The delayed loan shows municipalities “can’t always assume there will be a timely response from Washington,” Cure said. “It gets more problematic the more it gets pushed out.”
By 2016, the agency will be near the bottom limit of the debt-coverage ratio required by bond covenants, according to projections in budget documents that didn’t include the cost of a new bridge. Last year, it scrapped a plan to raise tolls on trucks by 45 percent, replacing the more than $80 million the increase would have earned with state funds pushed through the legislature by Cuomo.
“They will have to take further action before the bridge is done,” Pezzimenti said by phone. The rating company is concerned the authority won’t be able to maintain its rating “without implementing some revenue enhancements or lower costs,” he said.
The authority may benefit from dwindling muni debt throughout New York. The state and its localities issued about $19 billion this year through last week, compared with about $30 billion over the same period in 2012, Bloomberg data show. Last year, New York issuers sold more securities than any other state.
The drop in sales has helped buoy New York munis, which have lost 4.8 percent this year, compared with a 5.3 percent decline for the broad market, S&P data show.
Municipal issuers from Virginia to California are set to sell $4.8 billion in long-term debt next week. Localities plan to issue about $1.5 billion this week, which was shortened by the Labor Day holiday.
At 3.11 percent, yields on benchmark 10-year munis are the highest since April 2011. The interest rate compares with 2.89 percent for similar-maturity Treasuries.
The ratio of the yields, a gauge of relative value, is about 108 percent, compared with an average of 93 percent since 2001. The higher the figure, the cheaper munis are compared with federal securities.