The Port Authority of New York and New Jersey is looking to reserves to provide self-liquidity for its commercial paper program, officials said Tuesday.
The credit crunch has made liquidity expensive, even for highly rated issuers like the port. The authority — rated in the double-A category — expects the costs of new standby revolving credit facilities could increase nearly nine times from what it currently pays.
“What we’re doing to mitigate the exposure for the fees is pursuing self-liquidity, using the Port Authority’s portfolio to provide the liquidity for the commercial paper program,” said Treasurer Anne Marie Mulligan. “Since our investments are cash and highly liquid U.S. government securities, we find that we should be able to do this. It’s extremely manageable.”
The German bank Helaba Landesbank Hessen-Thüringen has been providing liquidity for the Port Authority under a five-year agreement that expires on Dec. 31. That agreement costs the agency 12 basis points, about $600,000 annually, to support its $500 million program. Today, it would have to seek multiple liquidity providers and terms would be for two or three years, meaning they would have to be renewed, Mulligan said.
Those would cost between 90 basis points and 120 basis points, resulting in annual costs north of $5 million, she said.
The board on Tuesday authorized a five-year extension of the commercial paper program though the question of self-liquidity will be resolved in the near future.
“If we can receive the highest investment-grade rating for our commercial paper program with the Port Authority providing self-liquidity, that’s what we would pursue,” Mulligan said. “If not, then we would immediately issue [a request for proposals] to provide liquidity to the program.”
The Port Authority would use its consolidated bond reserve fund, valued at $1.1 billion at the end of 2009, to provide self-liquidity. That fund is separate from its general bond reserve fund from which it pays debt service on its senior lien bonds.
Fitch Ratings analyst Michael McDermott said that self-liquidity has been a more frequent topic of discussion since bank liquidity rates increased over the last two years.
“Some issuers that are highly rated may decide that the cost of entering into liquidity agreements may not be worth it given their cash position and their lack of maybe immediate needs for that cash,” he said. “There are some entities that do this, usually the ones that have a fairly strong cash position because the criteria say you need to have 1.25 times liquid investments relative to the commercial paper or variable-rate bonds outstanding.”
Commercial paper proceeds are used to finance capital projects. When the program hits its limit, the authority sells bonds to pay off the commercial paper and begins the process again. The port has sold $11.78 billion of new-money bonds since 2000, according to Thomson Reuters.
Another wrinkle in the current state of the liquidity market is that many providers have exited the business, suffered downgrades, or are not issuing new credit facilities, leaving a smaller number offering them.
“The issue with commercial paper is the limit fund managers have with the liquidity providers,” Craig Mauermann, vice president and fund manager at M&I Investment Management, said in an e-mail. “The problem today of too few liquidity providers was caused by the massive amount of consolidation in the industry during 2008 and early 2009 … You have a situation where the remaining top liquidity providers are all nearly at maximum percentage levels in fund portfolios so even if a manager likes a liquidity provider, he or she cannot buy more.”
Nationally issuers sold $481.6 million of commercial paper in 2009 compared to $2.98 billion in 2008, according to Thomson Reuters.
The authority operates four airports in the metropolitan region, along with commuter rail, bridges, tunnels, maritime ports, and a bus terminal in Manhattan. It also owns the World Trade Center site.
The recession has taken a toll on the authority. Use of its bridges, tunnels, and PATH commuter rail declined in the first quarter of 2010. Airport traffic and cargo volume rose compared to a year earlier but port activity remained below first-quarter results a year earlier.