After a two-week delay due to Hurricane Sandy, New Jersey is planning to sell its $2.6 billion of tax and revenue anticipation notes on Thursday in a negotiated sale, instead of the planned competitive offering.
New Jersey originally planned to auction the notes on Oct. 30, but after it became clear that Sandy would hit, the state postponed the sale and selected JPMorgan to be the deal's sole manager.
The investment bank said it would reach out to investors who understand that the state is a strong credit that has never failed to meet its debt obligations.
"We have more than 30,000 employees and 10 million customers in the tri-State area. This storm hit home for all of us," said Matt Zames, co-chief operating officer of JPMorgan Chase. "JP Morgan wants to be part of the rebuilding process that restores New Jersey's communities and the Jersey Shore. We think investors will want to be there, too."
Michael Pietronico, chief executive officer and senior portfolio manager at Miller Tabak Asset Management, also thinks demand will be there, even after the state has incurred storm costs. "We suspect any yield penalty will be small given the substantial amount of federal aid that is on its way to the Garden State," he said.
The Federal Emergency Management Agency has agreed to an increased reimbursement level at 100% for energy restoration and transportation repair costs from the initial 10-day period of the storm and its aftermath.
"Tourism will suffer with the shore being terribly impacted but the other side of the equation is that rebuilding of the boardwalks and homes will create many new construction jobs for the state," Pietronico said.
Gov. Chris Christie has said the state will benefit from federal aid and help from private insurance companies.
"I think we'll be okay from a budgetary perspective, but if it turns out that there are monies that need to be incurred, I'm going to incur them, and we'll make budget cuts elsewhere to be able to pay for them," Christie said last week.
Richard Larkin, senior vice president and director of credit analysis at Herbert J. Sims & Co., said that financial stress from the storm would not significantly affect New Jersey's credit.
"In the case of the larger entities in the region, I am confident in the belief that credit stress will be temporary, and will not jeopardize repayment of their bonds," he said.
"Until these issuers can access FEMA funds and insurance proceeds, they all have the resources to withstand temporary service disruptions until normalcy can be reached, and while debt loads may rise because of the storm damage, financial operations should remain sound."
Since cost estimates have not been made, credit rating agencies have not assessed the full effect the storm will have on New Jersey's AA-minus credit rating, though they have said it could be pressured.
"Impacts to the state could range from increased short-term expenditures and delays in revenue collections to increased revenue flows to the state from insurance and FEMA proceeds and reconstruction efforts," Standard & Poor's said.
"The state has not modified its cash flows to reflect the impact of Superstorm Sandy, which adds an additional level of risk to the projected cash flows."
Fitch Ratings noted the uncertainty of how the state will cover its expenses given its narrow cash balances prior to receiving FEMA reimbursements, adding that additional cash flow borrowing is possible.
All three credit ratings assigned New Jersey's new notes the second highest short-term credit ratings, citing declining liquidity and optimistic revenue projections.
The ratings — MIG 2 from Moody's Investors Service, SP-1 from Standard & Poor's, and F1 from Fitch — have been lowered from the highest short-term ratings assigned to the state's last Trans sale in Dec. 2011.
"The rating captures the potential for modest reductions in the state's projected ending balance or need for issuance of notes on parity with the current issue," Moody's analysts said.
The agency also cited a strong short-term credit quality based on cash management procedures and New Jersey's history of successful annual cash-flow borrowings.
The state usually issues Trans every year to manage cash flow needs, and in the past has generally done two each year — the first one in July or August after the budget gets passed, and the second towards the end of the year.
In the past two years, however, the state has opted to take out a line of credit in lieu of the first Trans sale.
Proceeds from Thursday's notes sale will pay off a $2.1 billion credit line the state took out earlier this year with Bank of America Merrill Lynch. The remaining $500 million will be used for any cash flow issues going forward this year.
"One of the reasons we've done a line of credit, instead of doing an early Tran sale, is that interest rates on a line of credit are exceedingly favorable now," said Andy Pratt, a spokesman for the N.J. Department of Treasury.
He said that last year, New Jersey paid a .58% interest rate on a line of credit, and a 2.8% interest rate on its Trans.
"We've paid more than $55 million in interest on debt in previous administrations for Trans borrowings. Last year's cost less than $5 million," Pratt said.
