The New Jersey Turnpike Authority is gearing up to address its problematic auction-rate securities with a $225 million bond sale set to price this month that will refinance some of the debt into variable-rate mode. It also hopes to sell $275 million of notes to buy back more of its $800 million of outstanding ARS.

The transaction comes while officials are moving forward with the state's biggest "shovel-ready" project, a $8.7 billion new passenger rail tunnel that will connect Newark to Manhattan, which received final design approval last week from the federal government and may gain $3 billion of federal funding.

In looking at the refinancing transaction, the authority will not have to terminate or alter a swap agreement on the bonds as the ARS are unhedged. The deal will be comprised of four tranches, with Morgan Stanley pricing Series 2009A and Series 2009C for $87.5 million and $43.7 million, respectively, and Citi pricing Series 2009B and Series 2009D for $50 million and $43.7 million, according to a Moody's Investors Service report.

JPMorgan Chase Bank, NA will provide a letter of credit on the Series 2009A bonds, and the 2009B bonds will carry an LOC from PNC Bank NA, with those enhancements expiring in three years. The Bank of Nova Scotia will offer a two-year LOC on the 2009C and 2009D bonds. Moody's rates the debt Aa1, except for the 2009B bonds that carry the PNC liquidity. Moody's assigns its Aa3 enhanced rating to that series.

Fitch Ratings and Standard & Poor's have yet to release their ratings on the refinancing transaction.

The NJTA carries A and A3 underlying ratings from Fitch and Moody's, respectively, both with a stable outlook. Standard & Poor's rates the authority A with a positive outlook.

Wilentz, Goldman & Spitzer PA is bond counsel for the authority. NW Financial Group is financial adviser. The sale will convert the Series 2003D bonds, which are insured by downgraded Financial Security Assurance Inc., into weekly variable-rate bonds.

The NJTA plans to sell roughly $275 million of short-term notes in order to bid on a portion of some $575 million of additional outstanding ARS, according to Dennis Enright, a principal at NW Financial. Goldman, Sachs & Co. will price the short-term sale. Higher interest rates on auction-rate securities due to market volatility have forced issuers to refinance or buy back their ARS.

The authority on Dec. 1 implemented a toll hike to help generate more revenue for the system and boost debt service coverage to 1.65 times from 1.3 times. Tolls will also increase again in 2012 and officials expect to use a portion of that to help fund the new $8.7 billion passenger rail tunnel, called Access to the Region's Core, or ARC.

Officials are hoping to receive a $3 billion funding commitment from the Federal Transit Administration for the ARC tunnel. Last week, the FTA approved the final design of the new tunnel and "the project is now fully eligible to receive federal funding," according to New Jersey's two U.S. senators, Frank Lautenberg and Robert Menendez. The FTA has yet to announce when it will release its decision on ARC funding.

During an ARC tunnel press conference last week, Menendez, who sits on the House Appropriation Committee, said the project may receive $100 million to $200 million from the anticipated federal stimulus package in addition to an expected allocation in the federal government's fiscal 2009 budget to be enacted next month. The stimulus package will include approximately $1 billion for new-start mass-transit projects such as the ARC, Menendez said.

"Bottom line, we're hoping that out of Washington, before the spring, will be several hundred million to begin the construction to the ARC tunnel," he said.

In other news, Banc of America Securities LLC yesterday priced for retail investors $175 million of school construction bonds for the New Jersey Economic Development Authority.

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