Transportation systems throughout the U.S. are looking to address a backlog of needed capital projects, yet at the same time volatility in the municipal bond market and a changing investor base have made financing transportation infrastructure more challenging.
Transportation leaders and public finance experts weighed in last week on the issue of funding roads, bridges, and mass transit systems at The Bond Buyer's Metro Finance Conference in Manhattan.
Needed projects to keep roadways and bridges safe and expand services and capacity are coming up against a tight credit market where many traditional bond investors are stepping away from the municipal market. At the same time, many public transportation systems are experiencing a ridership boom as motorists are choosing to use mass transit instead of driving in an effort to save money on gas.
New Jersey Transportation Commissioner Kris Kolluri said that ridership on the New Jersey Transit Authority has increased by 5% over the past two years. That's good news for the environment and decreases congestion on roadways, yet puts a strain on the NJTA's system to absorb that additional capacity.
"Clearly practitioners like me are focused on the need for liquidity in the credit markets because we obviously rely on credit markets to fund our capital needs, but in many ways what we're seeing here exacerbates the systemic problem that we have in the entire infrastructure network throughout the country," Kolluri said during his presentation.
"For over two decades the U.S. and states in particular have under-invested in the infrastructure that we own and that we operate, and all of a sudden when there's a surge in demand you confront the kind of challenges that [New York's Metropolitan Transportation Authority] and NJTransit and other transportation agencies are experiencing," Kolluri said.
At the same time, the market has not been helpful to issuers even as the yield on 30-year, triple-A rated general obligation bonds increased 136 basis points between Sept. 12 and Oct. 16, according to Municipal Market Data. In addition, the ratio of 30-year triple-A GOs to 30-year Treasuries was 140.0% Thursday.
Historically, those rates would attract investors looking for yield, but that has not been the case in the past few weeks, according to Mary DiMartino, executive director at JPMorgan.
"We've seen many buyers in [the fixed-rate] market retreat," DiMartino said before an audience of municipal bankers and issuers. "Large broker-dealers have decreased, many [tender-option bond] investors are de-leveraging and putting fixed-rate bonds into the secondary market, and we have fewer crossover buyers coming into the municipal market."
DiMartino also said that insurance companies, "one of the largest buyers of municipals," are also stepping away from municipal securities. While retail investors are still looking at municipal bonds, those investors are still keen on enhanced debt, yet more issuers are selling their debt without insurance.
"Which then leaves intermediate long-term buyers which probably have little cash flow, which really puts pressure on the system," DiMartino said. "And so we are looking as an industry to find new ways to bring back bond buyers into the municipal market, looking for incentives, and some of the talk that goes on currently in Washington, D.C., with legislation we hope will move in the direction to bring more buyers into the municipal market because we need them."
DiMartino suggested that issuers consider selling debt in smaller tranches as opposed to larger deals in one series, be flexible at market, and prepare themselves to lock into wider spreads. In addition, she stressed that states and municipalities that haven't already done so will need to take a more proactive strategy when borrowing in order to grab investor attention.
"What we're saying to those issuers is, 'Get out front and center. Have a public investor Web site. Make yourselves available to talk about what your plans are and how you're addressing your current challenges,' " she said. "All of that becomes incredibly important in this market as issuers are going to have to be able to sell their own story directly to investors."