New Jersey Prepares $750M Transportation Package

New Jersey officials are working on a $750 million new-money New Jersey Transportation Trust Fund Authority bond sale that includes $250 million of capital appreciation bonds.

Merrill Lynch & Co. will kick off the tax-exempt deal on Wednesday with a one-day retail order period before institutional pricing. Citi and M.R. Beal & Co. will serve as co-senior managers. Those two banks are in New Jersey's co-managing underwriting pool, but as the state's senior underwriting pool has lost two of its five firms - Bear, Stearns & Co and UBS Securities LLC - Treasury Department officials are considering banks within the larger, co-managing group to help structure bond deals.

"They are two firms who have worked hard and were given an opportunity to be part of the senior manager pool in this particular case," said Nancy Feldman, the state's public finance director. "Until we have the ability to complete a new pool, we will look to the current senior managers as well as co-managers who are working hard to help the state of New Jersey and consider whether they should have the opportunity to be in a senior manager position."

Also working on the upcoming NJTTFA deal is McManimon & Scotland LLC as bond counsel and A.C. Advisory Inc. is the financial adviser. While Financial Security Assurance Inc. and Ambac Assurance Corp. insured all of the authority's Series 2007A bonds, which total $1.17 billion, current plans do not include enhancing this year's borrowing.

"The bonds are not currently anticipated to be insured, however, we will continue to review this as the pricing process proceeds," Treasury spokesman, Tom Vincz said via e-mail.

The authority typically sells $1.2 billion or more of debt each year, but officials are now considering selling smaller tranches of NJTTFA bonds to adjust to market demand.

The Series 2008A bonds include $500 million of current interest bonds that will mature annually from 2023 through 2038 and includes a $100 million term bond maturing in 2028, according to the preliminary official statement.

The transaction also includes $250 million of CABs maturing from 2023 through 2037. Motor-fuel tax revenue, petroleum product tax receipts, and motor vehicles fees, along with other dedicated revenue streams back the bonds.

Moody's Investors Service rates the deal A1 while Fitch Ratings and Standard & Poor's rate the sale A-plus, and AA-minus, respectively. The authority has roughly $9 billion of bonds outstanding.

Pre-marketing of the bonds has already begun and the authority will adjust maturities at pricing, if need be, according to Vincz. CABs typically attract interest from institutional investors, yet many recent deals have benefitted on the shorter end of the curve with heavy retail demand.

"Selling capital appreciation bonds, that should be a challenge in this market," said Matt Fabian, managing director at Municipal Market Advisors. "Hopefully, they'll have done enough presale. [NJTTFA] is a solid credit so it should be able to attract some demand, but capital appreciation bonds are a difficult structure in this environment."

Yet other market analysts said that CABs could sell even in this unstable municipal market, depending on how the bonds are priced.

"Yes, the majority of demand right now is retail, but it's not exclusively retail," said George Friedlander, managing director and fixed-income strategist at Citi. "The bond funds went from a very severe period of outflows but it seems to have abated and they were part of the buying when the market rallied because they had put more cash aside for outflows than they ended up needing. But, the casualty companies some of them have continued to buy and for the right yield there are some crossovers around."

In looking at the authority's derivatives, the NJTTFA has five outstanding floating-to-fixed-rate swap agreements with Goldman Sachs Mitsui Marine Derivative Products LP.

Because officials refinanced the bonds attached to the swaps into fixed-rate mode to exit the auction-rate market, the authority could either enter into five reverse swap agreements to offset the Goldman swaps, or terminate those agreements. The authority would have to pay $11.6 million, as of Oct. 23, to end all five swaps, according to Moody's.

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Transportation industry
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