Deal in Focus

Crossing the Delaware Has a Price

The Delaware River Port ­Authority plans to issue roughly $715 million of new-money and refunding debt in late February to finance capital projects and replace fixed-rate debt with variable-rate bonds under terms of a swap option that will be exercised Jan. 1.

The transaction will include $310 million of new-money bonds for rehabilitation and upgrades to the DRPA’s four bridges that connect Pennsylvania to southern New Jersey over the Delaware River. The light-rail Port Authority Transit Corp., or PATCO, line that runs from Camden, N.J., to Philadelphia will also get proceeds for improvements.

The authority will use $405 million to refinance fixed-rate bonds as floating-rate debt. The refunding will fulfill a swaption calling for a floating-to-fixed-rate derivative with a notional amount of $403 million for the variable-rate bonds.

The DRPA anticipates pricing the bonds in late February or early March and is currently reviewing underwriting proposals.

Under the swaption to be exercised by UBS Securities LLC, the bank will pay the authority 66% of the one-month London Interbank Offered Rate and the authority will pay UBS an effective fixed rate of 5.738%. The authority entered into the swaption contract in 2001 and received an up-front payment of $16,478 from UBS, according to DRPA’s annual financial report dated Dec. 31, 2008.

Officials are evaluating six different letter-of-credit proposals for the variable-rate transaction that will be done under the authority’s senior-lien indenture. The plan is to use a combination of such enhancement from different LOC providers, according to John Hanson, the DRPA’s chief financial officer.

“We have more LOC capacity than we can use,” Hanson said.

The authority has $808 million of senior revenue bonds outstanding. ­Standard & Poor’s rates the credit A-minus with a stable outlook after upgrading the senior bonds by one notch in mid-July. Moody’s Investors Service rates the senior debt A3.

Using new and existing LOCs will add to the authority’s liquidity expenses. LOC costs and remarketing fees will increase to $10.7 million in fiscal 2010 from $3.2 million in fiscal 2009, according to the DRPS’s Dec. 7, 2010, budget briefing.

“Right now we have about $360 million worth of variable-rate debt and we’re going to be adding about $405 million,” Hanson said. “So, we’re going to have a lot more variable-rate debt. But then the LOC costs — from what we’ve experienced on the $360 million — have nearly doubled and so and we’re expecting that for the second half.

“Those [LOCs] need to be renewed in July of 2010 as well. So, it’s a function of increasing LOC costs and more than doubling the amount of debt that’s covered by LOCs.”

In looking at the authority’s $351 million of subordinate port-district project bonds, Moody’s and Standard & Poor’s rate the DRPA’s subordinate debt Baa3 and BBB-minus, respectively.

Unlike for the senior revenue bonds, the authority is having a hard time finding sufficient LOC capacity on its subordinate debt. It will pay UBS approximately $39.7 million by the end of December to terminate a swaption set to begin Jan. 1 and associated with subordinate fixed-rate debt. That derivative has a notional amount of $108 million.

“We’ve made a decision that it would not be easy to hedge that,” Hanson said. “We probably would not get LOC capacity for the subordinated debt and so it’s our plan to cash settle and terminate by year end.”

The authority’s board last week approved a 10-month postponement on a planned bridge toll increase originally set for Sept. 1, 2010. Motorists currently pay $4 to access the bridges and will pay $5 beginning in July 2011. A 10% fare hike on the PATCO system will take effect in September.

Officials are able to wait on additional toll revenue after scaling back the DRPA’s fiscal 2010 capital budget to $142 million from earlier projections of $200 million. The agency’s five-year capital plan is just under $1 billion. The board approved the the authority’s capital and operating budget last week.

Standard & Poor’s analyst Laura ­Macdonald said the DRPA’s low investment-grade ratings can withstand a delay in additional toll revenue.

“I wouldn’t expect the debt service levels to change that much,” she said. “They’ve had good historic coverage.”

The postponement of the $1 bridge-toll hike came after the authority increased such fees by $1 in September 2008. Its ability to slim down its capital plan — and anticipated borrowing — helped facilitate the postponement.

“There was some concern for the economy, and certainly that was a key role,” said John Matheussen, DRPA’s chief executive officer. “However, we worked very, very hard to be able to do that. We couldn’t just irresponsibly say 'well, we’re not going to do the projects that need to be done at the port authority.’ ”

“We realized that our capital expenditure would be roughly about $142 million to $150 million over the course of 2010,” he said. “So then we worked hard with that number because we knew that would allow us then to not have to borrow as much money as we would need for 2010 and 2011. That means that we would have to take less money from the toll payers in order to accomplish that slightly reduced budget, and our debt service would be lower.”

Delaying the toll increase also required using $8 million of subordinate PortDistrict Project bond proceeds to lower debt service costs on those same bonds.

“So we’re using the proceeds of the PDP bonds to relieve debt service associated with the PDP bonds,” Hanson said.

The authority anticipates issuing new-money debt again in 2011 or as late as 2012 to help finance bridge and PATCO infrastructure needs. That bond sale will rely on the planned July 2011 bridge toll increase.

“We’ll probably be back in the bond market in 2011 when the toll increase hits,” Hanson said. “But we have the ability to actually bond against that toll increase six months prior. So if we need to, we can be back in the bond market January 2011, but chances are we won’t have to be in that fast.”

A PATCO expansion costing roughly $1.5 billion will increase capacity and accessibility in southern New Jersey and Philadelphia. In New Jersey, a second rail line will run through Gloucester County, from Camden to Glassboro and stop at Rowan University. That development is estimated to cost about $1 billion.

In Philadelphia, the expansion will bring PATCO service to the city’s waterfront via Market Street. The new line will cost roughly $500 million. Officials anticipate the new lines in Philadelphia and southern New Jersey to be operational in 2016 or 2017.

The planned bond sales would finance preliminary design costs. To pay for PATCO’s new rail lines, the authority is considering federal funds through the Federal Transit Administration’s New Starts program, the New Jersey Transportation Trust Fund Authority, and possible future DRPA revenue, according to Matheussen.

Hanson stressed the need for additional funding to support PATCO’s large-scale development.

“The capital plan that we have right now, the nearly $1 billion in DRPA spending, fully utilizes the toll increases that we have,” Hanson said. “So right now, there is no funding source at the DRPA beyond the studies that we already have in the capital budget for PATCO expansion.”

The DRPA manages the Benjamin Franklin, Walt Whitman, Commodore Barry and Betsy Ross bridges as well as the PATCO line. It also oversees the Philadelphia Cruise Terminal and the RiverLink Ferry line, which runs from Philadelphia to Camden.



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