The New Jersey Turnpike Authority approved up to $2.53 billion of new-money and refunding bonds Tuesday to help finance capital projects and generate potential debt-service savings.

John O’Hern, the authority’s deputy executive director, said the 148-mile-long New Jersey Turnpike is in the middle of a road-widening project that will “ramp up” construction spending in 2011 and 2012. The authority oversees both the Turnpike and the Garden State Parkway toll roads.

Officials anticipate pricing up to $2 billion of taxable Build America Bonds in mid-November, though that timeframe is tentative, according to Donna Manuelli, the Turnpike’s comptroller for revenue and finance. The agency last sold debt in November 2009.

Depending upon market conditions, that transaction would also include $538.6 million of refunding. Officials are looking to capture at least 3% net present-value savings by refinancing $154.2 million of Series 2004C-1 bonds and $384.3 million of Series 2003A bonds.

Manuelli said the authority will look at different maturities in the Series 2004C-1 and Series 2003A bonds closer to the pricing date to identify potential cost savings.

The authority is looking to take advantage of the BAB program’s 35% federal subsidy on interest costs for issuers. That federal program is set to expire at the end of the year unless Congress extends it, though such a move is likely to include a lower interest-rate subsidy.

“Some maturities make it and some don’t, depending on where the market is,” she said.

Goldman, Sachs & Co. is book-runner for the new-money and refunding deals. Citi is co-senior manager. Wilentz, Goldman, & Spitzer PA is bond counsel. NW Financial is the agency’s financial adviser.

NJTurnpike’s board also approved a resolution to either replace or terminate a swap with AIG Financial Products Corp. The derivative is attached to the authority’s $371 million of Series 1991D variable-rate bonds. In that agreement, the authority pays AIG a fixed rate of 6.19% and receives 65% of the one-month London Interbank Offered Rate, according to the authority’s audited financial statement for the year ending Dec. 31, 2009.

The authority is concerned that AIG might experience another downgrade of its credit rating, which could prompt a termination payment of approximately $100 million, Manuelli said. “However, we believe that we could get better than that,” she said.

Officials are looking to replace AIG with another counterparty with higher credit ratings. Such a move might save the Turnpike the cost of a termination fee.

“The environment is such that the proposals are getting close to cost neutral,” Manuelli said. “And we just wanted to get authority so that we could move forward.”

If officials opted to terminate the swap, the authority would then refinance the variable-rate Series 1991D bonds into fixed-rate debt. Also attached to the bonds is a SIFMA basis swap with Morgan Stanley Capital Services as counterparty. The authority would gain $13 million to $15 million by ending that swap agreement, Manuelli said.

Officials are watching the AIG swap so as not to be “held hostage” by the company’s credit ratings.

“We’re looking at this holistically,” O’Hern said. “If we are given an opportunity to improve the financial footing of the turnpike authority, we will pursue those opportunities.”

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