DALLAS - A limited supply of infrastructure bonds in the primary market is linked to issuer uncertainty over federal transportation funding, according to a new report released by Wells Fargo Securities.
"State transportation departments are going to look at their total revenues, including state taxes and grants from the Highway Trust Fund, and may not be able to go forward," said Randy Gerardes, the senior analyst with Well Fargo Securities who authored the report, called, Where's The Infrastructure Volume? "There will be federal money available, but it will be spoken for."
The Highway Trust Fund, which is the source of federal surface transportation grants, is expected to be insolvent as early as July. Without additional revenue in a new highway funding bill to replace the two-year spending law that expires on Sept. 30, the HTF's collection of gasoline tax revenues will not be sufficient for new highway projects beginning in fiscal 2015, the Congressional Budget Office has said.
Federal funding would be made more certain for state and local transportation issuers with a long-term funding bill that provides sufficient revenues, Gerardes said.
"The question is what is the long-term solution?" he asked. "The current bill [Moving Ahead For Progress in the 21st Century] was for only two years when all the previous ones have covered six years. Whatever revenue approach is taken, it needs to be sustainable.
"We feel there's a path here, but it must be fully baked," Gerardes said.
Issuance is down across nearly all infrastructure sectors, with tolls roads and mass transit being the bright spots, Gerardes said in the report.
While transportation volume was down 2.4% in the first quarter of 2014, compared to the previous year's first quarter, the broader municipal market was off 24%.
"We are left with too much cash chasing too few deals," Gerardes said in the report. "This has helped buoy the secondary market and has led to the narrowing of credit spreads."
Transportation issues totaled almost $10 billion in the first quarter of 2014, Gerardes said, and should be close to $50 billion in 2014.
"We are cautiously optimistic that transportation issuance can achieve $50 billion in issuance this year driven by mass transportation and toll roads primarily," the report said.
"I think we'll add another $10 billion in the second quarter, and then hit $15 billion to $20 billion in quarters three and four," Gerardes said. "Traditionally we've seen more activity in the second half. I'm optimistic, but it could be lower if just one or two big issuers don't make it to market or slip into 2015."
It's a mixed market for new transportation infrastructure debt, he said.
"It's a little bit of everything," Gerardes said. "The toll road sector looks good, but airports not so much. A handful of large airports have major capital projects under way, but several have been wrapped up in recent years."
Issuance for toll roads and bridges were up 16% in 2013 from 2012, the report said, while airport issues were down 29% and mass transportation issues were off 14%. Total market issuance was down 12.5% in 2013.
Mass transportation issuance has exceeded airport debt sales since 2011, the report said, as transit ridership grew and major projects at Atlanta and Miami began to wind down.
The aviation sector will be dominated by a handful of airports with significant on-going capital projects, Gerardes said.
Chicago O'Hare Airport is unlikely to go ahead in 2014 with a planned $2 billion sale to fund its Phase 2B capital plan, the report predicted, but Dallas-Fort Worth International Airport is expected to issue $1.2 billion in new money debt and to move forward with a $200 million refunding this year.
Los Angeles International is halfway through a $7.1 billion capital program, with $3.6 billion of work to be completed through fiscal 2017, Gerardes said.
New York Gov. Andrew Cuomo recently announced a $3.6 billion renovation of LaGuardia Airport, but no debt is expected to be issued for the project until 2015, Gerardes said.
"Public private partnerships are a proven funding mechanism but they can take a long time to get to market," he said.
