New York’s Metropolitan Transportation Authority plans to repeat a novel approach to accessing low rates at a time when liquidity costs makes traditional variable-rate financing pricey.
Today the MTA will remarket $150 million of mandatory tender bonds it issued last year on its Triborough Bridge and Tunnel Authority senior-lien credit.
Barclays Capital is lead managing the remarketing. Goldman, Sachs & Co. is financial adviser. Nixon Peabody LLP is bond counsel.
Though the 2009 bonds were sold with a 29-year maturity, the MTA planned from the outset to either refund or remarket the bonds on or before the mandatory tender date of Jan. 20, 2010. One difference in the remarketing, compared to the original deal, is that the new mandatory tender date is Nov. 15, 2012 — nearly three years from now, compared to slightly less than 12 months in the original deal.
Like the 2009 issue, the remarketed bonds are being issued as variable-rate debt with a single rate reset on the mandatory tender date.
The 2009 bonds sold on Feb. 11, 2009, priced to yield 0.65% with a 2% coupon on the mandatory tender date, three basis points above the Municipal Market Data index for fixed-rate one-year double-A rated general obligation bonds.
The Securities Industry and Financial Markets Association municipal swap index, which market participants use as a benchmark for variable rates, was low when the MTA went to market last year and is even lower now. On Jan. 6, SIFMA was at 0.15%, the lowest rate ever on the index, which has data going back to 1989.
Even if short-term interest rates are low, the cost of the letter of credit that would allows investors to put back the bonds has been high. When MTA finance director Patrick McCoy looked at rates a year ago, providers were asking for well over 100 basis points, he said at the time. For this issue, McCoy said in an e-mail that he didn’t look at LOC costs.
Recently, variable-rate issuance has fallen sharply while fixed-rate issuance has risen. In 2008, issuers sold $262.63 billion of fixed-rate debt and $116.35 billion of putable variable-rate debt, according to Thomson Reuters. Last year, fixed-rate issuance rose to $362.1 billion while putable variable-rate issuance fell to $32.32 billion.
McCoy said that refunding the bonds as fixed rate would cost approximately 5%. Last year, board member Doreen Frasca questioned whether the cost of issuance and remarketing risk might negate the savings of issuing the bonds as mandatory tender. McCoy said in an e-mail that he did not have an estimate of the cost of issuing bonds this way.
Structuring a transaction so that it has to be refinanced later on poses market risk, said Matt Fabian, managing director of Municipal Market Advisors.
“The risk is that in November 2012, the market looks like it did in 2008 and then it becomes extremely expensive for them to refinance,” Fabian said. But for a large issuer like the MTA with a large debt portfolio — approximately $29.29 billion outstanding — trying new things to manage borrowing costs doesn’t pose the same risks it might for a smaller issuer, he said.
“It’s not a bad idea to sort of dabble, to have a diverse portfolio where they have things like this, where they are taking some market risk for current savings,” he said.
Moody’s Investors Service rates the TBTA senior lien Aa2 with negative outlook. Standard & Poor’s rate the bonds AA-minus with a stable outlook and Fitch Ratings has the bonds at AA with a negative outlook.
