By Jeremy R. Cooke
Jan. 6 (Bloomberg) -- New York’s Metropolitan Transportation Authority, the largest mass-transit agency in the U.S., will be one of the first issuers to sell Build America Bonds in a year when such taxable offerings may push municipal issuance to a record $450 billion.
The “generous” 35 percent Treasury rebate on Build America interest costs may entice state and local borrowers to sell as much as $150 billion of the bonds in 2010, more than twice as much as last year, Municipal Market Advisors forecast this week. The MTA, operator of subways, buses, rail lines and river crossings, plans to sell $350 million of so-called BABs as soon as today.
The initial authorization to issue bonds created by the February 2009 economic stimulus expires at the end of this year. Build America sales have exceeded $64 billion in less than eight months after they began, data compiled by Bloomberg show.
“Because of the generous BAB subsidy, we are forecasting record municipal borrowing” this year, Matt Fabian, senior analyst at the Concord, Massachusetts-based research firm, said in a Jan. 4 report. “Many of the uncertainties in the municipal market for 2010 involve questions of how long the BAB program is extended and at what terms. Re-authorization for at least another two years is a near-certainty.”
Record Forecast
Fabian cited “gimmick financings to balance near-term budget gaps,” refinancing of tax-exempt debt from the past 10 years, more state endowment-supported public school bonds in Texas, and borrowing by California, the largest municipal issuer, as responsible for the record forecast.
The MTA postponed borrowing last month as officials recrafted a budget, resorting to service cuts and the phase-out of student discounts, after a drop in state aid and higher labor costs.
Banks led by New York-based JPMorgan Chase & Co. are to underwrite an offering of transportation revenue bonds, rated A2, or sixth-highest investment grade, by Moody’s Investors Service and comparable A rankings from Standard & Poor’s and Fitch Ratings.
Moody’s cut its outlook on the bonds, one of several types sold by the transportation agency, to negative from stable last month on concern that leaders in Albany may further reduce state-transit funding.
Revenue from the MTA’s bus, subway and commuter-rail networks, state and local government subsidies, dedicated taxes and operating surpluses from its toll bridges and tunnels, have been earmarked to pay off the debt.
Revenue Bonds
Transportation revenue bonds make up almost half of the MTA’s total $27.2 billion debt load, according to agency documents distributed last month.
Build America Bonds issued by the authority with a November 2039 maturity traded yesterday at an average yield of 6.2 percent, 159 basis points more than benchmark 30-year U.S. bonds, Bloomberg data show. When they were issued, the so-called spread to Treasuries was 180 basis points. A basis point is 0.01 percentage point.
Investors have been demanding 26 basis points more than comparable corporate bonds for the MTA securities, and the spread has ranged from 12 basis points to 37 basis points, based on a daily research note yesterday from JPMorgan strategists.
Yields on top-rated, tax-exempt bonds due in 30 years slid 2 basis points to 4.51 percent yesterday, a three-month low, according to a daily survey by Municipal Market Advisors.
The degree to which traditional long-term municipals perform better than Treasuries this year may diminish Build America sales, Fabian said, since it would narrow the cost advantage for the new alternative for public-works borrowing.
A taxable interest rate of 6.22 percent would translate to about 4.04 percent for the issuer after accounting for the 35 percent federal subsidy.
Following are descriptions of additional pending sales of municipal bonds in the U.S.
ILLINOIS, the state whose credit rating was cut twice in early December, plans to sell $3.47 billion in taxable general- obligation bonds this week to cover public employee pension fund contributions for fiscal 2010 and help address its budget gap. The notes will mature from 2011 through 2015 in equal amounts. Underwriters led by JPMorgan Chase, Goldman Sachs Group Inc. and Chicago-based Loop Capital Markets LLC will sell the debt to investors. Illinois was cut to A2 from A1 by Moody’s and to A+ from AA- by S&P. Fitch rates the fifth most-populous state A. (Updated Jan. 5)
NEW JERSEY TRANSPORTATION TRUST FUND AUTHORITY plans to borrow about $850 million this week to finance road, bridge, rail and bus projects in the most densely populated state. The offering, through banks led by Barclays Plc, will include a mix of zero-coupon, tax-exempt securities and taxable Build America Bonds, said Moody’s. Orders from retail buyers will be taken today, with institutional sales tomorrow, said Tom Vincz, a state treasury spokesman. The debt, backed by state appropriations, is rated A1 by Moody’s, A+ by Fitch and AA- by S&P. (Updated Jan. 6)
OHIO, the seventh most-populous state, will issue as much as $280 million of tax-exempt general obligation bonds as soon as today in a refinancing to provide savings for the current two-year budget. Underwriters led by BofA Merrill Lynch are handling the transaction, part of a plan to shift $736 million in debt payments to future fiscal years from the biennium ending June 30, 2011, without extending final maturities. The debt being refunded originally covered projects for schools, higher education and infrastructure. The state is rated AA+ by S&P, Aa2 by Moody’s and AA by Fitch. (Updated Jan. 6)
MARYLAND ECONOMIC DEVELOPMENT CORP., which issues tax- exempt bonds to encourage business in the state, plans to sell almost $260 million in debt this week as part of a marine- terminal concession with Ports America Chesapeake. The money raised will fund state transportation projects and an expansion of Seagirt Marine Terminal to make it big enough to handle some of the world’s largest cargo vessels. The Port of Baltimore’s container facility will be leased for 50 years to Ports America, controlled by Highstar Capital, a New York-based private-equity firm. The debt, secured by terminal revenue, received a provisional Baa3 rating from Moody’s. A group of underwriters led by Goldman Sachs will market the debt to investors. (Updated Jan. 5)
MIAMI-DADE COUNTY, the most populous county in the U.S. Southeast, will sell $600 million of bonds backed by revenue from Miami International Airport, the largest U.S. gateway to Latin America, the week of Jan. 11. As much as 30 percent of the issue will be taxable Build America Bonds. Sales to individual investors will occur Jan. 12, with sales to institutions the following day. Proceeds will be used to repay $375 million of commercial paper, with the rest used on the airport’s $6 billion expansion. Underwriting will be led by Citigroup Inc. S&P rates the bonds A-. (Added Dec. 17)
LOWER COLORADO RIVER AUTHORITY, which manages electricity generation and water use in the region around Texas’s Colorado River, intends to offer about $426 million of tax-exempt bonds as soon as this month through Barclays to refinance debt. They will mature from 2010 through 2020, according to preliminary offering documents. The bonds are rated A+ by Fitch, A1 by Moody’s and A by S&P. (Updated Dec. 30)
NEW JERSEY’S HIGHER EDUCATION STUDENT ASSISTANCE AUTHORITY plans to sell $338 million of fixed-rate, tax-exempt bonds backed by student loan revenue the week of Jan. 11. The proceeds will allow the authority to buy back and retire auction-rate securities and to fund loans that allow education borrowers to consolidate multiple borrowings into one regular payment. Banks led by BofA Merrill Lynch will handle the offering. Ratings on the deal are AA from S&P and Aa2 from Moody’s, and maturities will range from 2011 through 2037. (Updated Dec. 18)
PORT OF HOUSTON AUTHORITY, overseer of the busiest shipping port in the U.S. by foreign tonnage, plans to sell as much as $327.2 million of tax-exempt bonds backed by property taxes collected in Harris County, Texas. Underwriters led by BofA Merrill Lynch will handle the deal as soon as this month. The transaction will refinance debt that the port can buy back, either through call options or investor tenders. Interest on all except $40.5 million of the bonds can be excluded from calculations of the federal alternative minimum tax. The obligations that may be refinanced were issued in 1997, 1998, 2001, 2002, 2005, 2006 and 2008, preliminary sale documents show. (Updated Jan. 6)
To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net.
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