The New Jersey Turnpike Authority Wednesday will issue $1.5 billion of taxable Build America Bonds following Moody’s Investors Service’s revision of the credit’s outlook to negative from stable.
The Series 2010A bonds will offer two term bonds, with an final maturity of 2035, according to Moody’s.
The bond proceeds will help finance the authority’s $7 billion, 10-year capital program, which includes a $2.5 billion road-widening project on the New Jersey Turnpike.
States and municipalities have achieved lower borrowing costs by issuing BABs as opposed to traditional tax-exempt bonds due to a 35% federal subsidy that borrowers receive. NJTA officials are looking to utilize the BAB program before its scheduled expiration on Dec. 31. Congress appears likely extend the program but many expect it would be with a lower federal subsidy rate.
“There is uncertainty whether the federal government will extend the program,” John O’Hern, the authority’s deputy executive director, wrote in an e-mail. “And even if it is extended, there is a possibility that the subsidy will be less than 35%. Currently, BABs provides the NJTA with the lowest cost of capital to finance its capital program. Therefore, the NJTA will issue BABs before year end.”
Goldman, Sachs & Co. will price the bonds. Citi is co-senior manager. Wilentz, Goldman, & Spitzer PA is bond counsel. NW Financial is the agency’s financial adviser.
While the underwriters will be marketing the sale to international and domestic investors, official anticipate U.S. buyers will purchase a majority of the bonds, said NJTA spokesman Tom Feeney.
Fitch Ratings and Standard & Poor’s rate the transaction A and A-plus, respectively. The outlook is stable. Moody’s, which rates the Series 2010A bonds A3, on Wednesday revised the authority’s outlook to negative.
Moody’s cited the authority’s allocations to New Jersey’s Department of Transportation for non-turnpike projects, along with delayed amortization of the Series 2010A bonds and other BAB deals, as reasons for changing the outlook.
“The authority’s level of autonomy and the siphoning of enterprise revenues for non-turnpike system purposes are areas of increasing credit concern,” according to a Moody’s report.
Tolls on the 148-mile New Jersey Turnpike and the 173-mile Garden State Parkway will increase on Jan. 1, 2012. Officials had planned on using those additional revenues to help finance a now-dead commuter rail tunnel project that would have run under the Hudson River. Gov. Chris Christie terminated that project in late October, saying it was too expensive. The authority would have contributed $1.25 billion through 2018 for the tunnel, but now those toll revenues can be used for other projects.
New Jersey is looking for ways to finance road, tunnel, bridge and mass-transit projects. The New Jersey Transportation Trust Fund Authority, which finances DOT and New Jersey Transit Authority capital needs, will run out of bonding capacity in 2011 as all dedicated revenues will be required to pay down existing bonds.
Diverting toll revenue from the tunnel project to the DOT would help address the state’s transportation financing challenges.
“The state continues to deliberate and evaluate options with respect to the future funding of the state’s transportation needs,” according to the preliminary official statement for the $1.5 billion Series 2010A bonds. “There can be no assurance that the [turnpike] authority will not be requested to make payments in connection with any such purposes.”
On top of the $1.25 billion that would have gone to the rail tunnel, the authority has identified $750 million from 2011 through 2018 that could be used for state roads that feed into the turnpike or the parkway or for “other non-turnpike system purposes,” the POS said.
The authority will also pay $146 million to help support feeder roads, including $101 million in 2010 and 2011 and $45 million through 2019 for a feeder-road project in Elizabeth. It also plans to continue directing $8 million yearly to the DOT for feeder-road maintenance through 2018. That payment agreement with the department began in 2009 and is set to expire on June 30, but officials anticipate extending the contract.
In addition, the Turnpike Authority has made $22 million yearly contract payments to the state. That annual amount will increase to $25.6 million in 2010.
The payments to the DOT and the state are subordinate to the authority’s $6.7 billion of outstanding debt. It must pay operating and debt-service costs before making any allocations for non-turnpike expenditures.
While the turnpike’s liquidity levels could benefit from retaining the revenue that it will direct to the state and the DOT, helping New Jersey finance its transportation needs could strengthen the authority’s importance within the state government.
“While these payments are a significant external transfer of system resources at a time when the authority has a meaningful slate of its own commitments, it reinforces the importance of the authority to the state as a tool of public policy,” a Fitch report sai.
The authority has two credit-liquidity facilities each for $43.7 million that will expire on Feb. 11. Officials are in negotiations with the Bank of Nova Scotia, the provider, to extend the credit enhancements for two years, according to the POS. The credit-liquidity facilities are attached to Series 2009C and D bonds. The authority has no other expirations of credit-liquidity facilities in 2011.
