New York’s Metropolitan Transportation Authority plans to issue up to $750 million of taxable Build America Bonds next week to fund capital needs in 2011.
The authority’s staff announced the borrowing at a finance committee meeting Monday. The MTA wants to take advantage of the BAB program before it expires at the end of the month, joining other issuers rushing to market with the stimulus bonds.
“We had been hopeful that there would be some effort in Congress to renew the program, or extend it in some way,” said MTA finance director Patrick McCoy. “It appears that that is not going to happen and so we’ve taken a look at market rates that would enable us to get into the market before the end of the year and issue these bonds.”
The tax package compromise worked out between Republicans, the Obama administration, and some Democrats did not include an extension of the BAB program, which was created as part of the federal stimulus effort.
The $750 million would cover about 45% of the MTA’s estimated $1.65 billion of new-money borrowing for 2011 capital spending. The deal is contingent on market conditions and would likely price around Dec. 22 and close Dec. 28 or 29. The debt would be issued using the MTA’s transportation revenue bond credit, which is backed by diverse revenue streams that include subway and bus fares.
McCoy said that in the current market the authority would expect to pay a true interest cost of 5.25% on a tax-exempt basis but a rate of 4.65% with BABs, which receive a 35% federal interest subsidy. The 2011 proposed budget assumes interest rate costs of 5.45% on bond issuance.
“There’s some significant savings that can be realized to prefund part of 2011 new money needs for capital,” McCoy said. “We’re obviously watching the market very closely and would not execute the transaction if we couldn’t secure the savings that I’ve just discussed.”
Issuers have sold $174.3 billion of BABs since the program was created last year, including $110.1 billion this year, according to Thomson Reuters. Uncertainty about the future of program led to a BABs issuance of $14.2 billion last month as issuers rushed to finish deals.
“You’d expect that given the sunsetting of the legislation, issuers that were considering doing BABs or wanted to take advantage of BABs would try to get their deals done, and you’re running out of time,” said Evan Rourke, portfolio manager at Eaton Vance. “Given the calendar and the time of year, they’re going to wind up paying a little bit of a concession to get the deal done and they’re going to have to entice buyers a little more than they might have if they had more time.”
The finance committee approved the debt issuance, which is subject to approval by the full board on Wednesday.
Also Monday, the finance committee approved a revised slate of underwriters at its monthly meeting. Last month, the committee tabled the initial selection after some board members questioned whether the senior manager pool was large enough.
The revised slate recommended by MTA staff and its financial adviser, Lamont Financial Services Corp., chose 10 firms as senior managers and 16 firms as co-managers. The new pool did not add any additional firms from those recommended last month. Rather, it moved three firms — Jefferies & Co., Morgan Stanley, and Wells Fargo — to the senior manager designation from co-manager. The other firms selected to be senior managers were Bank of America Merrill Lynch, Goldman, Sachs & Co., Ramirez & Co., Siebert Brandford Shank & Co., Citi, Barclays Capital Inc., and JPMorgan.
Senior managers will rotate as book-runner. The underwriting firms were selected from responses to a June request for proposals. Also chosen were variable-rate remarketing agents and dealers and eligible swap counter parties.
MTA staff again recommended that Goldman Sachs be designated as senior manager on the inaugural issuance of a new bond credit secured by a the payroll mobility tax, a tax on employers in the 12 counties served by the authority.
The selections are subject to approval by the full board on Wednesday, when it will also vote on its 2011 budget.