With a planned $85.7 million offering Wednesday, the Port Authority of New York and New Jersey will stick with its strategy of doing smaller but more frequent competitive deals, given that the market remains challenging for bigger bond issues.
"We used to do somewhere between $300 million to $500 million at a time," said Port Authority treasurer Ann Marie Mulligan. "For the time being, we plan to do smaller issues. We've been watching the competitive sales since the latter part of last year and it's starting to pick up in principal amount."
Many issuers turned to negotiated transactions as smaller investors took center stage after cash-strapped institutional buyers were forced to withdraw from the muni market due to the credit crisis. But the Port Authority has stuck to its guns when it comes to selling its bonds through open bidding. As a result it has had to offer downsized offerings and sell more frequently to meet its needs.
The authority priced $100 million of fixed-rate new-money bonds on March 11 with maturities out to 2029. Citi won the deal out of six bidders. The 20-year maturities yielded 5.1% with a 5% coupon, 48 basis points higher than Municipal Market Data's triple-A general obligation scale. On the short end, one-year bonds yielded 1.1% on a 5% coupon, 53 basis points above MMD.
"The last deal we thought was very well received," Mulligan said.
Even under normal conditions, more bonds are sold through negotiation than competitively, even though many argue that issuers get a better deal by taking bids. But as the credit market seized up last fall, competitive deals nearly fell off the map: only 8.7% of bond deals in October and 6.4% of deals in November sold competitively. As recently as July, 20.2% of deals were done competitively.
With the market in turmoil, issuers turned to negotiation with underwriters in order to be able to market their bonds more effectively to retail buyers. Earlier this month, New York State abandoned its tradition of selling GOs competitively, pricing $454.7 million through negotiation to capture retail.
Even though competitive transactions have been picking up - as of last week, 14% of bond deals marketed in March had been priced competitively - they remain challenging.
Demand from institutional buyers is less certain and banks are less able to carry unsold bonds because of volatility and hedging problems, said Matt Fabian, managing director of Municipal Market Advisors.
"Competitive sales work well when an issue is easy to sell, and when it's more difficult to sell, negotiated can be more effective," Fabian said.
In a competitive sale, dealers establish demand for the bonds before they bid by lining up likely buyers.
"In this market, the demand side is difficult to verify. As an underwriter you have more risk of carrying unsold bonds," Fabian said. "The bigger banks have trouble with their balance sheets so it makes them more reluctant to commit scarce balance sheet to something that could produce losses."
Smaller and more frequent borrowings are just a few of the steps the Port Authority has taken to avoid a repeat of a taxable $300 million note deal that failed to attract any bids in December. In January, the authority raised its maximum allowable interest rate on debt issuance to 12% from 8%.
Mulligan said they have begun issuing their notices of sale a week earlier than usual.
"We are checking with different advisers, with banks and talking to them after the notices are out to make sure that they're aware of it," she said.
The authority plans to keep its principal amounts in the $100 million range for the next few issues, which haven't been scheduled yet, she said.
"As we monitor the markets and see if the principal amounts are increasing, then we'll talk to different investment banks, get their feedback and see about ratcheting up the principal amounts," she said.
Wednesday's fixed-rate deal, the authority's consolidated bonds 155th Series, has maturities out to 2019 and refunds variable-rate demand bonds, which the authority calls versatile structure obligations, Series 2.
The refunding will terminate a swap that was valued at negative $21 million for the authority at the end of last year. The swap, which has a notional amount of $83 million, gave the authority a synthetic fixed rate of 6.32% while the authority received the Securities Industry and Financial Markets Association municipal swap index.
Mulligan said she expects there will be a termination payment but that the amount wouldn't be known until pricing.
More frequent issues also come with costs, but Mulligan said that is "a fact of doing business."
John Mousseau, portfolio manager at Cumberland Advisors Inc., said the market could be ripe for Wednesday's deal.
"If they came today, they'd get a heck of good reception because there really hasn't been any New Jersey paper to speak of in a while," Mousseau said. "You've had enough cheap deals coming around the country that you could actually be a New Jersey resident, buy them, pay the New Jersey tax, and still come out ahead; you're kind of in that environment anyway. That might force them to be a little cheaper."
Moody's Investors Service rates the authority's consolidated bonds Aa3. Standard & Poor's and Fitch Ratings both assign AA-minus ratings. The authority has approximately $11.2 billion of debt outstanding.
The bi-state authority operates four airports in the metropolitan region, commuter rail, bridges, tunnels, maritime ports, and a bus terminal in Manhattan, and owns the World Trade Center site.
Last week the Port Authority signed its first lease for the Freedom Tower, which is under construction and now known as One World Trade Center.
The redevelopment of the World Trade Center site is partially being financed through Liberty bonds, which were authorized by Congress following the terrorist attacks of Sept. 11, 2001. The authorization for those bonds expires at the end of the year.
The Port Authority was allocated $701 million of Liberty bonds to be issued by the New York City Industrial Development Agency for the $3.1 billion One World Trade Center. Silverstein Properties Inc., which holds a lease to the site, was allocated $2.59 billion of bonds to build towers 2, 3, and 4. Those bonds are to be sold through the Liberty Development Corp., a subsidiary of the Empire State Development Corp. It's not clear when those bonds could be sold.
The bond proceeds will only partially cover the approximately $6 billion cost of towers 2, 3, and 4, and Silverstein has reportedly had difficulty securing financing. Silverstein Properties has asked the Port Authority for help with the financing for those buildings.
Port Authority executive director Christopher Ward last week declined to comment on the ongoing negotiations between the authority and the developer, as did a spokesman for the developer. According to news reports citing anonymous sources, Silverstein has asked the Port Authority to act as a guarantor to loans to at least one of the towers.
Silverstein Properties, owned by Larry Silverstein, financed the construction of the 52-story 7 World Trade Center, with $475 million of Liberty bonds sold through the IDA in 2005.
Port Authority spokesman Steve Coleman said the authority is seeking an extension of the Liberty bond authorization.
Warner Johnston, spokesman for the Liberty Development Corp., said the issuer "stands ready to issue when Silverstein finalizes his financing plan."
