Responding to difficulties accessing the credit market with competitive deals, the Port Authority of New York and New Jersey yesterday raised its maximum allowable interest rate on debt issuance to 12% from 8%.
The agency also said it plans to go to market with smaller deals but with greater frequency than it has in the past and, in a departure from its traditional practice, could consider negotiated deals.
The board yesterday amended a bond and notes resolution approved in 2007 that set an 8% maximum rate on deals.
Port Authority treasurer Anne Marie Mulligan said they don't want to issue debt at the higher rates but wanted the flexibility to do so "just in case this is what the market rate is going to be when we do issue debt."
In December, a Port Authority competitive deal for $300 million of taxable notes failed to garner any bids.
"We don't want to be approaching the market again and not be able to issue debt since we would have funding needs for the capital program," she said.
Last year, the Port Authority marketed its bonds four times in deals ranging from $350 million to $500 million, according to Thomson Reuters. Chief financial officer A. Paul Blanco said that they were considering reducing deals to between $50 million and $125 million.
"We would be expecting to do smaller principle amounts to our issues, recognizing that the market doesn't have the capacity to absorb larger competitive issues at this time," Mulligan said.
The Port Authority has also readied a request for proposals for underwriters as a precautionary measure if it decides to start doing negotiated deals, though it has no plan to issue the RFP at this time.
"If we see that the market is not coming back for competitive issues and the only way to access the market would be through a negotiated sale, we would be prepared if it became necessary to go to the board for authorization to do that and issue an RFP," Mulligan said.
The authority plans to go to market around the end of the first quarter with a competitive deal but has enough cash on hand that it could wait until June if it had trouble with market access and needed to go negotiated, she said.
The authority has budgeted for an average 6% rate on its tax-exempt debt, which includes debt subject to the alternative minimum tax, and 7% for its taxable debt.
An interest rate increase of 1% on the authority's planned $1.5 billion of debt issuance this year would raise annual debt service costs by $15 million, Mulligan said. Through most of the 1990s, the Port Authority's maximum interest rate was 12%, but it was lowered to 8% in 1999.
While all bond issuance fell by 8.8% last year compared to 2007, competitive deals saw the most dramatic fall off, according to Thomson. Competitive bond deals fell 26.9% in 2008 compared to 2007 while negotiated deals fell 5% and private placements fell 15.4%.
Speaking generally about the competitive sector, Adela Cepeda, president of the financial advisory firm A.C. Advisory Inc., said that in the fourth quarter of 2008 her clients who had done competitive deals in the past were opting to do negotiated instead.
"In the fourth quarter, the competitive mode of financing was not the way to go," Cepeda said. "There were just no buyers of almost any kind of municipal debt with the exception of retail and very limited case by case type of institutional buyers for different paper in very precise yields."
The Port Authority is "smart in reducing the size and increasing the frequency of their deals because investors might not have an appetite for a $300 million offering but might be comfortable bidding on a $50 million deal," said Richard Tortora, president of Capital Markets Advisors LLC, a financial advisory firm with clients that do competitive deals. "These are times none of us have ever seen before and you have to be creative and you have to be willing to do things or consider options that in the past you dismissed."
