The gilt-edged New Jersey Environmental Infrastructure Trust Tuesday will sell $130 million of tax-exempt debt by competitive bid to help finance water infrastructure needs throughout the state.
The bond sale is a pooled borrowing for 55 local governments and five private water companies. The debt will be repaid from borrowers’ payments to the trust, with most municipalities pledging their general obligation credit to the bonds.
The transaction includes $121.4 million of Series 2010B bonds that offer serial maturities from 2012 through 2030 and $7.7 million of Series 2010C bonds that also mature annually from 2012 to 2030.
Public Financial Management Inc. is the trust’s financial adviser. McCarter & English LLP is bond counsel on the deal.
Officials opted not to use taxable Build America Bonds for the new-money deal as BAB proceeds must be used within a set period of time and some drinking water and sewer projects can hit snags that slow down construction, according to Maryclaire D’Andrea, acting executive director at the NJEIT.
“We have so many projects [and since] you have to use a certain amount of the BAB proceeds within a certain time frame and if we have projects — because of weather or because of size, whatever — that didn’t progress as they should have, we might have run into trouble,” D’Andrea said. “So we wanted to avoid that.”
BAB issuers receive a 35% subsidy from the federal government on interest costs. The stimulus program is set to expire at the end of 2010 unless Congress extends it.
D’Andrea also pointed out that if Washington were to not allocate the subsidy in future years, or reduce the allocation, the trust would need to go back to its local government borrowers to offset that potential shortfall.
“If we didn’t get the credit from the Internal Revenue Service, we would have no source of coming up with the difference because the trust itself has no revenue,” D’Andrea said. “So we would have to go to the borrowers for the difference.”
In addition, as a triple-A issuer, the NJEIT tends to grab low rates in the tax-exempt market, making the 35% subsidy on a taxable deal less attractive .
John Mousseau, portfolio manager at Cumberland Advisors, said the credit should do well given that it is triple-A, the borrowers in the pool are good credits, and the capital projects are for essential services.
On the other hand, recent upticks in yields on the long end of the interest-rate curve may force the trust to take on slightly higher rates than it would have in the recent past.
“I think they’ll do pretty well relative to the market,” Mousseau said. “They won’t sell at the kind of yield levels they would have sold at a few weeks ago just because the whole long end of the market has moved up pretty decently in yield.”
According to Municipal Market Data scales, the yield on a 30-year triple-A GO bond has spiked 31 basis points this month, from 3.86% on Oct. 29 to 4.17% on Nov. 10.
Mousseau believes the change on the long end will benefit bondholders as the market works through the issue of whether the BAB program will continue in 2011 or if the subsidy rate may change if lawmakers extend the program.
“Anytime you get yield spikes that are partly driven because of legislative conditions, it’s almost always a buy because the stuff corrects after this,” he said. “It’s a lot different than yields being spiked up or down because of a sudden drop or a sudden rise in unemployment, or a sudden drop or a sudden rise in inflation or in some other economic driver.”
The NJEIT has $1.3 billion of outstanding debt. It has more than 300 borrowers in its program, with the top three obligors — rated Aa3 or higher by Moody’s Investors Service — accounting for 16% of total loans. More than 90% of its borrowers supply a direct or indirect general obligation pledge to the trust’s total debt.
The agency provides low-interest loans financed from bond sales, called trust loans, and state and federal zero-interest loans, called fund loans. Both trust loans and fund loans are pledged to the repayment of the trust’s outstanding bonds.
“By pledging all loan repayments to debt service, NJEIT’s master trust program structure significantly over-collateralizes the environmental infrastructure bonds,” Fitch Ratings said in a report on the credit.
The trust has never had a borrower default, according to Moody’s. In a worst-case scenario, repayment of bonds could withstand a large portion of participants defaulting.
“Stress tests indicate that borrowers representing 45% of the loans could default on loan repayments over the life of the bonds and debt service on the bonds would be met,” Moody’s said in a report.
In addition, New Jersey has the ability to re-direct state-aid allocations to the NJEIT in the event of a local government defaulting on a payment.
The Series 2010B bonds will help finance water infrastructure projects for 55 different municipalities. Galloway Township, located just north of Atlantic City, will receive $849,000 of bond proceeds and is a new borrower to the trust.
Newark, a frequent participant in the trust, will borrow $10 million to replace water mains and rehabilitate its sewer system.
The Borough of Sayreville in central New Jersey will receive $8 million of bond proceeds to help construct a new water-treatment plan as the existing facility is about 50 years old.
Trenton, the state capital, will receive $6.8 million of bond proceeds to install a cover on the city’s water reservoir. D’Angela said more local governments will be looking to enclose their drinking-water reserves to comply with a federal requirement from the Environmental Protection Agency that will begin next year.
“There’s been a mandate by the EPA that finished water reservoirs … must be covered,” she said, adding that the Trenton project has a total price tag of $13 million. “It’s a whole city block and that’s not even the biggest in the state. So you’ll see a lot of that soon.”
Drinking-water reserves must begin progress on construction of covers in 2011, according to D’Angela said. She said many local governments are also investing in solar projects.
The Series 2010C bonds will help finance capital projects at four different private water companies.
D’Angela will soon return to her position as the trust’s assistant executive director and chief financial officer as David Zimmer will begin as the new executive director on Nov. 24.
Zimmer is managing partner of Princeton Structured Finance Analytics Group LLC, a financial consulting firm located in Princeton. He was also executive vice president of marketing for Exigen Mortgage Asset Management in Dallas and has been a senior vice president with Prudential Securities Inc. in New York and Philadelphia.