Bloomberg News

Transport Debt Outperformance May Buoy Chicago Sale: Muni Credit

October 26, 2011

Oct. 26 (Bloomberg) -- Chicago Transit Authority plans to sell $560 million of tax-free debt, the most in the history of the second-largest U.S. public transit system, as transportation bonds outpace the municipal market by the most in 12 years.

Transport securities have earned 9.2 percent this year, beating the 7.9 percent gain for the broader $2.9 trillion municipal market, according to Standard & Poor’s indexes that track price change and interest payments. The bonds’ return exceeded that of the broader muni market by as much as 3.05 percentage points last week, the most since the data begin in 1999. Transit is tied with hospital as well as water and sewer as the best-performing part of the muni market this year.

Investors are favoring “solid revenue structures” such as sales taxes and fares, which back transit bonds, over general- obligation credits, said Duane McAllister at M&I Investment Management in Milwaukee. Bonds financing an essential service help shield investors from political debates related to bridging local-government budget deficits, he said.

“In an environment where clearly investors are looking to add excess yield, transportation is a safe yield sector,” McAllister, a portfolio manager who helps oversee about $2 billion of municipal debt, said in a telephone interview.

Yields Increase

The CTA sale comes as U.S. subway ridership is on the rise. Usage of so-called heavy rail systems rose 3.8 percent for the first half of 2011 over the same period of last year, the biggest half-year gain since 2008, according to the American Public Transportation Association. Ridership rose 1.5 percent for all of 2010.

Chicago Transit, which began operating in 1947 and serves 40 suburbs and the third-biggest U.S. city, joins the Pennsylvania Turnpike Commission in offering transport debt this week. Municipal issuance is set to total $7.6 billion, putting sales on a pace to reach $32 billion for October, the most this year, according to data compiled by Bloomberg.

The sales wave has helped boost muni rates. Top-rated 10- year bonds yielded 2.4 percent yesterday, according to Bloomberg Valuation indexes. The rate touched about 2 percent last month, the lowest since at least January 2009, when the index begins.

“This is a good time to be in the market,” Karen Walker, chief financial officer and treasurer of Chicago Transit, said by phone. “There’s a general expectation that interest rates will rise, so we’re just hedging that interest-rate risk.”

Budget Plan

About $456 million of the debt from the Chicago system, which carries 1.6 million riders on an average weekday, is backed by sales-tax revenue from six counties. It gets a AA rating from S&P, the third-highest grade.

Forrest Claypool, the authority’s president, last week released a $1.24 billion budget for 2012 that closes a $277 million deficit with management cuts and proposed labor concessions, according to the agency’s website. The plan doesn’t include fare increases or service reductions.

New York’s Metropolitan Transportation Authority, the largest U.S. mass-transit agency, may boost fares by 7.5 percent in 2013 and again in 2015 to address a projected $247 million budget deficit next year. Fitch Ratings last month dropped the MTA to A, its sixth-highest grade, from A+ partly because of increasing operating costs.

Investors are demanding less extra yield to hold the Chicago authority’s debt. A tax-exempt Chicago Transit bond backed by federal receipts and maturing in June 2021 traded Oct. 19 with an average yield of 3.87 percent. That’s 85 basis points above an AA+ benchmark of 10-year transportation bonds, down from a difference of 145 basis points on Feb. 14, according to Bloomberg data.

Insurance Option

Chicago Transit has brought bigger sales to market using the taxable Build America Bonds program, which expired on Dec. 31, Walker said. Build Americas gave issuers a 35 percent federal subsidy on interest costs.

Assured Guaranty Municipal Corp. may insure part of the latest CTA deal if it would lower the authority’s borrowing costs, Walker said. The insurer is rated AA+, S&P’s second- highest grade.

Fewer issuers are using enhancement after the three main rating companies in 2008 downgraded the insurance providers because of their exposure to mortgage-backed securities and collateralized debt obligations.

States and localities included such protection on about 6 percent of municipal sales in the past 12 months, down from close to 50 percent five years ago, Alan Schankel, director of fixed-income research for Janney Montgomery Scott LLC in Philadelphia, wrote in a report this month.

Following are descriptions of pending sales of municipal debt:

CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY and Arizona Health Facilities Authority, which finance hospital construction in their states, plans to sell as soon as Oct. 27 a combined $476 million of revenue debt on behalf of Catholic Healthcare West, the fifth-largest health-care system in the U.S. Proceeds will finance capital projects and refund debt. The transaction is rated A2, Moody’s Investors Service’s sixth- highest grade. JPMorgan Chase & Co. is senior manager of the deal. (Added Oct. 26)

WASHINGTON SUBURBAN SANITARY DISTRICT, Maryland, plans to sell $300 million of public-improvement bonds as soon as next week through competitive bid. The district provides water and sewerage systems for 1.8 million people in Montgomery and Prince George’s counties. The bonds will be used to construct and repair water supply and sewage disposal facilities, and are backed by the district’s general obligation. (Added Oct. 26)

NORTH TEXAS TOLLWAY AUTHORITY, which covers four counties, plans to sell $674 million of revenue bonds as soon as next week, according to a preliminary official statement. The bonds will help finance a 27.6-mile toll road in Fort Worth. A $78 million tranche is taxable. JPMorgan Chase & Co. will lead the deal. (Updated Oct. 26)

--Editors: Mark Tannenbaum, Jerry Hart

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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