Superstorm Sandy’s Record Damages Reach Bond Market: Muni Credit
From New Jersey coastal towns where the storm hit Oct. 29 to the area’s transit network, investors are tallying the costs. The New York vicinity’s public-transportation infrastructure, including the city’s 108-year-old subway system, may suffer $10 billion in physical losses from a storm such as Sandy, and the transit tab may reach eight times that amount when including the economic impact, according to a 2011 state study. That compares with a $100 billion loss for Hurricane Katrina in 2005.
Federal aid probably won’t pay the entire bill, possibly necessitating bond issuance and fare increases, said Richard Little, an infrastructure specialist at the University of Southern California. For potential borrowers, financing needs would come at an opportune time, with municipal interest rates close to the lowest in a generation.
“They could do a short-term borrowing to get some working capital and roll it into a larger offering later,” said John Hallacy, muni research head at Bank of America Merrill Lynch in New York. “They’d be paying favorable short-term rates.”
Sandy slammed into New Jersey with hurricane-force winds. The storm has killed at least 75 people in the U.S. and left millions along the East Coast without power.
In New Jersey, the hurricane ravaged shore towns, some of which may borrow to finance reconstruction, said Peter Hayes, head of muni debt at New York-based BlackRock Inc. The company oversees $106 billion of local borrowings. NJ Transit, the nation’s biggest statewide public-transit service, had 25 percent of rail cars damaged.
In New York, the storm flooded subway tunnels and shut the transit system for most of three days.
The tab may total from $54 billion to $84 billion for New York’s transportation system, including parts of the subway that were submerged, according to Klaus Jacob, a special research scientist at Columbia University’s Lamont-Doherty Earth Observatory and co-author of the 2011 study on the effect of a storm surge on New York transit.
“The essence of that report unfortunately came true,” he said in an interview. Based on initial reports, he said Sandy was close to the 100-year storm the study factored in.
New York and its localities are picking up recovery costs until federal authorities reimburse them, according to Governor Andrew Cuomo. While the U.S. would typically cover as much as 75 percent of local recovery costs, because the region has been declared a major disaster zone it has a chance to tap as much as 100 percent, Cuomo said.
The Federal Emergency Management Agency will reimburse New York 100 percent for the cost of emergency transportation, U.S. Senator Charles Schumer at a briefing yesterday in Manhattan. At the same time, he said this week that FEMA has only $7.2 billion in its disaster relief fund.
“There’s obviously going to be some federal disaster relief because of the national significance of getting New York up and operating,” said Little, a senior fellow at the Los Angeles-based Sol Price School of Public Policy. “There is no way they’re going to recover this at the fare box.”
Robert Foran, the New York Metropolitan Transportation Authority’s chief financial officer, said yesterday he doesn’t expect to have to borrow because of Sandy.
“At this point we’re not anticipating any external borrowing to cover this,” he said on a conference call with reporters. “We fully expect that the operating and capital costs that we would incur will largely be reimbursed either from FEMA or from our insurance.”
The MTA has about $31.9 billion of debt among its different credits, according to Pat McCoy, finance director at the agency. On Oct. 15 the authority unveiled fare increases designed to bring in $450 million in annual revenue to help offset costs such as health care and debt service.
States and local issuers have sold about $298 billion of fixed-rate, long-term debt this year, up 46 percent from the same period of 2011, data compiled by Bloomberg show. It would be the steepest annual jump since at least 2003, fueled in part as cities and towns retire higher-cost debt with yields close to the lowest since 1967.
Hallacy predicted repairs would come in phases, with initial work to get the subway line operating safely followed by improvements, some of which may have been under consideration before the storm. Work may eventually include steps to bolster the system against future storms, he said.
A “Sandy surcharge” could also be used to attract outside investors to help finance the bill, said Little.
“Politically I see that as problematic,” he said. “Every time they raise fares in the city, there is strong political opposition. But you wouldn’t see private investors put up money without some way to recover their investment.”
In trading yesterday, the interest rate on AAA tax-exempts maturing in 30 years fell about 0.1 percentage point to 2.85 percent, touching the lowest since July 31, data compiled by Bloomberg show.
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