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N.J. Turnpike Authority To Sell $250M of BABs

The New Jersey Turnpike Authority the week of April 20 will sell $650 million of long-term revenue debt, including $250 million of taxable Build America Bonds, the first new-money sale for the authority since 2005 and the largest sale to date of the new class of securities.

Morgan Stanley will kick off a one-day retail order period on April 20 followed by institutional pricing the next day. Eleven other underwriters will fill out the banking syndicate. Wilentz, Goldman & Spitzer PA is bond counsel and NW Financial Group is financial adviser.

The NJTA, which has $4.8 billion of outstanding debt, carries A and A3 underlying ratings from Fitch Ratings and Moody's Investors Service, respectively, both with a stable outlook. Standard & Poor's rates the credit A with a positive outlook.

The authority had planned a spring new-money sale to roll over $160 million of notes that mature May 1 and begin borrowing for its $7 billion, 10-year capital program. Dennis Enright, a principal at NW Financial, said the NJTA decided to include taxable BABs in the transaction once officials calculated they may save 90 basis points by selling the BABs.

"On the long end of the yield curve, U.S. Treasury bonds are trading way below municipal bonds on interest rates. So, even when you add whatever the credit spreads are going to be to do a municipal credit, net of the 35% payment from the feds, it's a lower interest rate than the muni rate," Enright said.

"But when we do taxables of this type, you pretty much have to give up your call option - you can't get a normal muni call option so you have to have a pretty big savings to be giving up the call option," he said. "And right now, we think the savings might be as much as 90 basis points, so that's pretty big. We have to look at it as we get closer, but if that kind of a benefit is there we'll probably maximize the use."

Instead of a standard 10-year par call protection that many municipal bonds offer, the NJTA plans to use a make-whole redemption.

"You can have a call, but it's called a make-whole call, which has no real economics," Enright said. "You can take it out if you want, but you're not going to save any money, and that's probably what we'll do."

The preliminary official statement outlines the make-whole redemption on the Series 2009F BABs.

"The Series 2009F bonds are subject to redemption prior to maturity by written direction of the authority, in whole or in part, on any business day, at the 'make-whole redemption price,'" the POS says.

"The make-whole redemption price is the greater of 100% of the principal amount of the Series 2009F bonds to be redeemed and the sum of the present value of the remaining scheduled payments of the principal and interest to the maturity date of the Series 2009F bonds to be redeemed, not including any portion of those payments of the interest accrued and unpaid as of the date on which the Series 2009F bonds are to be redeemed, discounted to the date on which the Series 2009F bonds are to be redeemed on a semiannual basis, assuming a 360-day year consisting of twelve 30-day months, at the adjusted treasury rate ... plus [an amount of basis points to be determined at pricing], plus, in each case, accrued and unpaid interest on the Series 2009 bonds to be redeemed on the redemption date," the POS says.

The authority plans to receive a cash subsidy from the U.S. Treasury Department, which is 35% of the interest payable on the Series 2009F BABs. That federal payment will go towards debt service payments on the revenue bonds.

The POS states that the deal will include Series 2009F bonds for $250 million that will mature in 2039 and Series 2009E bonds for $400 million. Of the Series 2009Es, $75 million will mature in 2028 and $325 million will mature in a 2040 term bond. Enright said the authority will offer the 2028 maturities to retail investors.

Officials may increase the deal size depending on market conditions and Enright said the underwriters are reaching out to investors in both the tax-exempt and taxable markets to spark interest.

"We have a maximum of $1 billion that we can go to that was authorized," Enright said. "It could be in either series, it doesn't matter, but the maximum is $1 billion."

Along with the federal subsidy, toll revenues from the New Jersey Turnpike and the Garden State Parkway will pay down the bonds. The authority anticipates receiving $949.6 million and $988.6 million of revenue from the two roadways in 2009 and 2010, respectively, according to the POS.

The NJTA expects that amount to increase to $1.47 billion in 2012 as the authority will implement a toll hike Jan. 1, 2012. At that time, cost of the average Turnpike trip will increase by 90 cents to $2.60 and the average Parkway trip will increase by 25 cents to 75 cents.

The authority last sold $95.8 million of new-money debt in 2005. Last year, the authority approved the $7 billion, 10-year capital plan, which requires increased borrowing. Improvements include road widening and bridge repairs.

In addition, the authority will contribute $1.25 billion to a new $7.6 billion passenger-rail tunnel that will run from Newark to Manhattan's Pennsylvania Station.

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