Bonds News

WRAPUP-NY's MTA, California join Build America bond wagon

(Recasts, updates with S&P’s rating on California bonds)

NEW YORK, April 14 (Reuters) - The Build America bond wagon now stretches from California to the New York island of Manhattan.

New York’s Metropolitan Transportation Authority, the state of California and the University of Virginia have joined a rising number of issuers eager to sell Build America Bonds which carry interest rates that are partly subsidized by the U.S. government.

The Build America Bonds are part of the stimulus plan Congress approved for recession-hit U.S. states. The debt should be less costly than tax-exempt debt because of the federal interest subsidy of 35 percent.

In keeping with the “ribbon of highway” that Woody Guthrie sang about in his 1930s Dust Bowl anthem “This Land Is Your Land,” the New Jersey Turnpike Authority also intends to sell Build America Bonds.

The Metropolitan Transportation Authority, which runs New York City’s buses, subways and commuter railroads, plans to sell $200 million of the new Build America Bonds this month, the agency said on Monday.

On Tuesday, JPMorgan Securities JPM.N said the University of Virginia Rector and Visitors, which serves as the university's board, will sell $250 million of this new muni debt next week.

And this week could see Michigan’s Milan Area School District offer $50 million of the new debt. One of the first issues hit the market last month -- a $3.65 million offering by Wisconsin’s Stevens Point, which was privately placed.


Judging by the exceptional demand that New Jersey’s Turnpike Authority is seeing for its first offering of Build America Bonds, investors who traditionally buy taxable corporate bonds are keen on this new category of municipal bond.

Buying the taxable muni debt will allow investors to diversify portfolios. This type of debt offers the security of a semi-sovereign credit.

The Turnpike Authority in New Jersey responded to a surge in interest on Monday by saying it may increase next week’s sale of tax-exempt and taxable debt to more than $1 billion from $650 million.

New Jersey’s Turnpike Authority expects to save as much as 90 basis points by issuing the debt instead of conventional municipal bonds, according to its financial advisor.

Originally, the New Jersey Turnpike planned to sell about $250 million of the Build America Bonds. On Thursday, it will decide exactly how much of each debt category to sell.


California, whose credit was cut to A2 last month by Moody’s Investors Service due to its ongoing financial problems, is expected to sell its first Build America Bonds next week, as part of a $4 billion taxable issue.

Standard & Poor’s Ratings Services on Tuesday assigned its A long-term rating to the California issue, which it expects to include $3.5 billion in Build America Bonds.

A spokesman for California State Treasurer Bill Lockyer said no decision had been made yet on how much of the debt the state will sell.

New York’s cash-strapped Metropolitan Transportation Authority also is rated A2 by Moody’s, but the agency says it might cut the rating unless the state boosts funding.

The MTA’s preliminary offering statement noted that in addition to its planned offering of $200 million of Build America Bonds, it will also sell $450 million of dedicated tax fund bonds, which are tax-exempt. Both of these sales will be underwritten by JP Morgan and M.R. Beal & Company.

The two New York MTA bond sales are expected to be delivered "on or about April 30," the authority said in its statement, which can be viewed on the web site:


The debt of New Jersey's Turnpike, one of the nation's busiest north-south corridors, is rated A by Moody's Investors Service and Fitch Ratings. That is the same rating given to corporate giants such as AT&T T.N, one of the 30 stocks in the blue-chip Dow Jones industrial average, and the Turnpike's Build America Bonds likely will pay similar yields, according to Dennis Enright of NW Financial Group, the Authority's financial adviser.

A 10-year intermediate AT&T bond currently yields about 5.7 percent, according to data from Tradeweb.

In contrast, one of the last corporate giants still rated triple-A or AAA, health-care and consumer products titan Johnson & Johnson JNJ.N, pays just 4 percent on its intermediate bonds. J&J is a component of the Dow Jones industrial average .DJI.

Enright’s estimate that the New Jersey Turnpike will save about 90 basis points or 0.9 percent is based on the unusually high yields that tax-free debt now pay when compared with Treasuries, a credit spread of 350 to 400 basis points, and the 35 percent federal subsidy. (Reporting by Joan Gralla in New York, with additional reporting by Karen Pierog in Chicago, Jim Christie in San Francisco and Lisa Lambert in Washington, D.C.; Editing by Jan Paschal)