The New Jersey Turnpike Authority Thursday will competitively sell $335 million of short-term debt to help the agency purchase its own auction-rate securities and finance road-widening projects.

Proceeds of the 2008 one-year notes will be used to buy $175 million of Series 2003 D3, D4, D7, and D8 auction-rate securities at upcoming auction dates. NW Financial Group is the Turnpike Authority's financial adviser and Wilentz, Goldman & Spitzer PA is bond counsel. The Series 2008 notes will not be insured or carry a letter of credit, according to Dennis Enright, a principal at NW Financial.

Moody's Investors Service assigns its MIG-1 rating to the transaction. Fitch Ratings and Standard & Poor's do not rate the note sale.

Of the $335 million of notes, Series 2008A for $160 million will support new infrastructure projects while the $175 million Series 2008B will enable the authority to buy its own auction-rate debt.

Purchasing its own auction-rate bonds will allow the authority to convert the debt into a variable-rate mode at a future date. That plan could help the Turnpike address the increased interest rates that have forced it to pay an additional $3 million of interest costs since early February when the auction-rate securities began to fail at market, according to Enright.

"Our original plan was to use these proceeds to pay off the $175 million of 2003Ds that were insured by [XL Capital Assurance Inc.], but due to a variety of legal, tax, and swap related reasons, what we've had to do is decide instead to buy them at the auctions and then convert them later," Enright said.

Series 2003 D3, D4, D7, and D8 are insured by XLCA. The D3 and D7 ARS reset every week while D4 and D8 reset every 35 days. Morgan Stanley is the broker-dealer for the D3 and D4 bonds and UBS Securities LLC is the broker-dealer for the D7 and D8 bonds, according to NJTA's 2006 financial report.

The D3 and D4 tranches currently hold interest rates of 4.70% and 5.04% as of May 5 and April 28, respectively. The highest rate for D3 was 5.46% on Feb. 25 and D4 priced at 5.45% on Feb. 19, its highest rate. The D3 tranche will price again on May 12 and D4's next reset date is June 2. The D7 and D8 series currently hold interest rates of 4.72% and 5.01%, as of May 5 and April 29, respectively. The highest D7 priced was at 5.46% on Feb. 25 and D8 reset at 5.45% on Feb. 19, its highest rate. The D7 series will next reset on May 12 and D8 will price again on June 3.

Attached to the auction-rate securities are floating-to-fixed-rate swap agreements, with the security's broker-dealer serving as counterparty on the corresponding swap transaction. Under the agreements, the turnpike pays a fixed rate of 3.03% while the counterparty pays 63% of one-month of the London Interbank Offered Rate plus 20 basis points. The swap agreements extend through the final maturity of the Series D bonds, which is 2024.

The remaining $160 million of note proceeds will help support infrastructure upgrades, including an overall $2 billion road-widening project to expand the turnpike to 12 lanes from six lanes in the center of the state. Those new lanes are set to open in 2013.

The one-year notes will mature in February and May 2009, with the authority anticipating selling long-term debt to pay down the short-term debt before it matures.

In late March, the U.S. Treasury Department announced that it would allow municipal issuers to bid on their own auction-rate debt. That decision gave state and local governments more options in dealing with the failure of the auction-rate market. Along with purchasing its own auction-rate securities, issuers can refund auction-rate bonds into fixed-rate debt or convert the securities into variable-rate mode.

The Turnpike is also working on a second deal to convert another $225 million of auction-rate debt into variable-rate bonds. The transaction involves Series 2003 D1, D2, D5, D6, and D9 auction-rate securities, which are insured by Financial Security Assurance, into variable-rate mode. NW Financial is financial adviser and Wilentz, Goldman & Spitzer is bond counsel. Enright said the deal could price within three to four weeks, with a plan to enhance the debt with a standby purchase agreement from JPMorgan.

"We have JPMorgan that ought to give us a liquidity facility for that deal and we're just going through the process of getting the offering documents, the legal documents finalized," Enright said.

Series 2003 D1 and D5 reset every week while the remaining securities price every 35 days. Morgan Stanley is broker-dealer on the D1 and D2 bonds, UBS Securities is broker dealer for the D5 and D6 bonds and Citi is on the D9 tranche. Each broker-deal also serves as counterparty on a floating-to-fixed rate swap attached to the bonds, with the authority paying 3.03% and the bank paying 63% of one-month of Libor plus 20 basis points.

The D1 and D2 tranches last priced on May 1 and April 14 at 4.87% and 4.75%, respectively. The bonds held interest rates as high as 5.46% on Feb. 28, for the D1 bonds, and 5.25% for the D2 bonds. The D1 series will price again on May 8 and D2 will next reset on May 19. Current rates for D5, D6, and D9 are 4.94%, 5.06%, and 4.78%, as of April 30, April 24, and April 17, respectively. Highest rates for those bonds include a reset of 5.46% on Feb. 27 for D5, 5.46% on Feb. 14 for D6, and 5% on March 13 for D9. The D5 tranche will price again on May 7 and D6 and D9 will reset on May 29 and May 22, respectively.


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