With many Atlantic City attractions closed or limited, and traffic off by nearly a fifth, recent rate hikes will help the South Jersey Transportation Authority pay down its more than $300 million bond sale slated for next week, according to analysts.
The SJTA is slated to issue $299.8 million in series 2020A senior transportation system tax-exempt revenue bonds to finance select road projects on the Atlantic City Expressway from its 2021-2030 capital program.
The negotiated deal, led by Citi, will include $25.2 million in series 2020A subordinated bonds to fund the design and development of the SJTA’s Glassboro-Camden Light Rail Line project, and $47.9 million in federally taxable 2020B senior transportation system revenue refunding bonds to reap debt savings on bonds issued in 2012.
The SJTA hiked tolls 37%, effective Sept. 13, and set annual toll rates increases beginning in 2022, based on the change in the consumer price index, but with a 3% annual cap.
The hikes will help the SJTA offset an 18% drop in traffic revenue through September compared to 2019 due largely to the closure of many leisure activities in Atlantic City during the COVID-19 pandemic, said Fitch Ratings analyst Jennie Mu.
“These toll rate increases give the authority excess revenues to meet those obligations in the capital plan,” she said. “The toll rate increase does provide the authority with a lot of financial flexibility to maintain their stable coverage profile and achieve these projects in the 10-year plan.”
The senior bonds are rated Baa2 by Moody’s Investors Service and BBB-plus by S&P Global Ratings and Fitch. The subordinate bonds are rated Baa3 by Moody’s, BBB by S&P and BBB-minus by Fitch. S&P assesses the credit outlook as negative, while Moody's and Fitch see it as stable.
“The South Jersey Transportation Authority is issuing bonds in order to advance its long-term capital plan,” SJTA CFO Karen David said in a statement. “Certain current outstanding bonds will be refunded to achieve savings for the authority in this favorable interest rate climate.”
Post-issuance, the SJTA will have roughly $722.43 million in outstanding debt, according to S&P. This includes $617.59 million in senior-lien expressway revenue bonds, $72.26 million in senior-lien airport revenue bonds, and $32.58 million in subordinate-lien debt.
Phoenix Advisors, LLC is municipal advisor on the deal. Chiesa Shahinian & Giantomasi PC is bond counsel.
Mu noted traffic levels on the Atlantic City Expressway recovered “significantly” in recent months after suffering severe declines early in the COVID-19 pandemic. The expressway is expected to generate sufficient toll revenues to provide financial cushion to support the capital plan and subsidies to the SJTA-owned Atlantic City International Airport, which has been operating at a deficit, she said.
Traffic levels are expected to remain lower in the near term, followed by a recovery as health restrictions ease and Atlantic City’s economy opens up more, S&P credit analyst Scott Shad said. A recent analysis showed a 2020 25% drop in toll transactions will likely be the low point, with recover moderately through 2025, to just 0.3% below 2019 levels.
The hikes help solidify the SJTA’s capital plan, which, following the bond deal, will be financed in the near-term through pay-as-you-go financing and grants, he said. The proposed 10-year capital plan totals $697 million including $236 million for the Atlantic City Expressway to be funded partly by the bond proceeds. The SJTA is also targeting $236 million in capital improvements for Atlantic City International Airport.
“Their debt capacity is strong, within a range of 10 to 15 times given their system net revenues and their CIP on a look-forward basis is relatively manageable supported by expected indexed annual toll-rate increases,” Shad said. “There is definitely more clarity with how they will fund the CIP going forward.”
