N.J. Agency Sets $265 Million for Atlantic City Expressway, Airport

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The South Jersey Transportation Authority - which operates the Atlantic City Expressway and the Atlantic City International Airport - will sell roughly $265 million of debt beginning this week.

The deal will include Build America Bonds and proceeds will be used for roadway and airport projects and to refinance enough outstanding bonds to enable the authority to update its bond resolution.

Merrill Lynch & Co. will price $177 of taxable and tax-exempt fixed-rate bonds Wednesday after holding a retail order period tomorrow. That portion of the deal also will include $18.9 million of subordinate debt that will be insured by Assured Guaranty. Merrill is also book-runner on $88 million of variable-rate bonds set to price the first week of August. Citi is co-senior manager on both bond sales.

Cozen O'Connor is bond counsel and Acacia Financial Group Inc. is financial adviser.

Moody's Investors Service rates the senior bonds A3 and the $18.9 million of 2009 subordinate bonds Baa1. Fitch Ratings assigns its BBB-plus rating to the senior bonds and a BBB-minus underlying rating to the subordinate component.

Standard & Poor's rates the senior bonds A-minus and the subordinate series BBB. The agency raised the authority's senior rating to A-minus from BBB-plus citing positive financial performance due to a 50% toll increase officials implemented in November.

All three rating agencies give the SJTA a stable outlook. The authority will have more than $500 million of outstanding debt with this transaction.

The transaction will include serial maturities and term bonds, with maturities going out to 30 years, according to finance director Kathleen Sharman.

Some of the proceeds will be used to help finance infrastructure projects at the Atlantic City International Airport. About $93 million of taxable BABs will help support widening the Atlantic City Expressway and airport improvements, among other projects.

The variable-rate bonds will refund 2007 notes and also generate new money. Bank of America and Wachovia Bank will provide letters of credit.

The floating-rate sale involves two swaptions being exercised by the banks under which the authority will pay the banks a fixed rate of 4.70% and will receive 75% of the one-month London Interbank Offered Rate. In 2005, the SJTA received a total up-front payment of $7.6 million from the two banks. Wachovia and Bank of America will also pay the authority another $2.2 million on or before Nov. 1.

The authority originally planned to sell the bonds last month but needed more time to pull together the deal, including getting Assured Guarantee as insurer on the subordinate bonds.

"There was a delay in getting the bond insurance and also the structured ratings on the variable-rate debt, but we feel that we've got everything lined up there now," Sharman said.

The delay in pricing, and closing the deal after Aug. 3, will allow the authority to current refund a portion of bonds sold in 1999 as opposed to advance refunding them, she said.

The state also has requested a higher annual payment from the authority and that required officials to update the preliminary official statement to reflect that. The SJTA pays New Jersey $2.5 million each year, but in the fiscal 2010 budget, the state asked for $8 million.

"We have a mechanism by which we make payments to the state annually and they just asked for a little bit more." Sharman said. "We needed to update the book for that as well."

In return for the higher payment, the SJTA anticipates receiving a $4 million grant from the Casino Reinvestment Development Authority to help support the authority's capital plans. The CRDA will need to weigh in on that $4 million grant.

"There is no expectation that SJTA will make additional payments to the state now or in the future," according to a Moody's report. "But SJTA's history of providing subsidy payments to the state makes this an ongoing credit concern that has been factored into the rating."

The authority will change its bond resolution so it can issue BABs and in the future include in its capital spending potential Transportation Infrastructure Finance and Innovation Act funds on a subordinate basis, according to Moody's.

"We're not really refinancing [the 1999 bonds] for savings," Sharman said. "We're just financing a small portion so that we can get to 51% of the outstanding bonds. We updated the resolution a little bit to be able to provide for TIFIA financing that we may consider doing in the future."

In addition, altering the resolution allows the authority to redesignate its pledged projects and to redesignate all or a portion of its bonds as airport bonds, which would allow those bond proceeds, which may include toll revenue debt, to be used to help finance airport projects.

In the SJTA's 10-year $858 million capital plan, it plans to spend $335 million on airport projects and another $522 million on expressway improvements, according to the POS.

Moody's cited the resolution change in its report, but indicated that redesignation will require financial stress tests.

"The new indenture allows for projects to be re-designated between pledged and general projects depending on their level of financial self-sufficiency," Moody's said. "While this provision could potentially allow for erosion of bondholder security in the future, this concern is mitigated by the requirement to satisfy the additional bonds test at the time the projects are moved."

The SJTA last sold debt in 2006 when it issued $50.3 million of bonds. The Series 2006A bonds have one maturity, in 2035, and yielded 4.63% with a 4.5% coupon.

John Mousseau, portfolio manager at Cumberland Advisors, said that in the past, the authority has traded cheaply considering that it manages the Atlantic City Expressway, a major asset and revenue generator in southern New Jersey.

"It's one of those credits [that] for whatever reason, it comes cheap and it stays cheap as opposed to coming cheap and kind of trading up and seasoning a little bit like most bonds," Mousseau said. "And it's always been that way. I don't know why. I think sometimes South Jersey credits don't get the respect that they should sometimes [get] in the market."

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