New York Thruway Authority bonds are slumping the most in at least a year as the operator of the longest U.S. toll road faces a potential downgrade and prepares to finance the biggest project in its 62-year history.
The yield penalty on some agency debt has climbed by about 50 percent in the past year as traffic on its 570 miles of roadway has stalled at pre-recession levels. Authority officials are developing a financial plan for a new $5.2 billion Tappan Zee Bridge across the Hudson River, a priority of Governor Andrew Cuomo, who likens the replacement of the 56-year-old span to the 19th century construction of the Erie Canal.
“The Thruway Authority is a strong credit, but it does have a bit of this mismatch with revenues and spending that it needs to solve,” said Peter Hayes, a managing director at New York-based BlackRock Inc., which oversees about $105 billion of municipals and holds the agency’s bonds. “The big albatross is the Tappan Zee Bridge project, how that's going to get solved and what the size of it will be, and they haven't completely figured that out.”
New York may join New Jersey and Pennsylvania in raising tolls to cover debt payments. By next year, the Thruway Authority’s debt-ratio coverage may fall below 1.2, a minimum level required by its bond resolution, assuming it issues enough debt to fund its four-year capital plan, according to a June 2011 offering statement. The ratio was about 1.77 last year, according to the authority’s website.
Allowing a decline below the minimum level may trigger a downgrade on its $2.2 billion in general-revenue debt from the current A+ level, potentially forcing the authority to raise tolls even before it sell bonds to finance the new bridge, according to Standard & Poor’s. The move could rekindle the political opposition that stymied past efforts to build a new span. The S&P grade is its fifth highest.
“We do need to maintain a very specific debt-coverage ratio, and our financial plan will take that into consideration,” Tom Madison, the authority’s chief executive officer, said in a May 9 interview in Albany, the capital. “We will work to ensure that the appropriate ratio is maintained.”
The authority in the next two months plans to sell more than $1 billion in revenue-backed bonds, according to its website. By then, it will have developed a capital spending program through 2015 and a financial plan for the bridge, Madison said.
Yields on Thruway Authority bonds due in January 2024 and rated A+ were about 1.28 percentage points above top-grade tax- exempts on May 23, up from a spread of about 0.82 percentage point at the end of April 2011, according to Bloomberg BVAL data.
Traffic levels on U.S. roads in 2011 were more than 2 percent below their 2007 peak even as toll-road debt grew by 24 percent from 2005 to 2010, according to the Federal Highway Administration and a February Moody’s Investors Service report.
“These expenditures will require a steady stream of toll rate increases -- a challenging political process given the struggling economy,” Moody’s analysts said.
New Jersey raised its tolls in January by 53 percent to 11.4 cents per-mile on the 148-mile (238-kilometer) turnpike to fund capital improvements and pay debt. On Jan. 1, Pennsylvania’s turnpike tolls rose 10 percent to 8.4 cents per mile for cash customers to help fund debt service.
The Thruway Authority’s annual debt-service payments grew to $191.2 million in 2010, a 76 percent increase from 2005, according to a June 2011 offering statement. Traffic levels fell about 1 percent last year, almost 2 percent below the 2007 peak, according to an April 30 financial report.
The three-mile-long Tappan Zee, which connects Rockland and Westchester counties 20 miles north of New York City as part of the Thruway system, carries 138,000 vehicles a day, 40 percent more than its original design intended.
New York has applied for a $2 billion federal Transportation Infrastructure Finance and Innovation Act loan. The request is more than the program has available, and the state suggested in its application the loan could be spread out over several years.
In 2005, the authority raised tolls 25 percent for passenger vehicles, the first increase since 1988. When its debt-coverage ratio dipped to 1.58 times in 2008 from more than 2 in 2005, the authority raised tolls 10 percent for cash customers. Tolls went up 5 percent in 2009 and the same amount in 2010.
Rates are still lower than in New Jersey or Pennsylvania. At 4.7 cents per-mile, it costs $17.65 to travel the almost 400 miles from the Harriman barrier toll, about 50 miles north of New York City, to Buffalo.
The bond resolution requires a ratio of at least 1.2, and the governing board’s guideline is 1.5.
“If things go as forecasted, and to keep the rating where it is, they’ll either have to increase revenue, cut costs deeply, or a combination,” Joe Pezzimenti, an S&P analyst in New York, said in an interview. “Some action needs to be taken.”
Following are descriptions of coming sales:
VIRGINIA TRANSPORTATION BOARD plans to borrow $600 million of revenue debt as soon as this month via competitive bid. Proceeds will help finance capital projects, according to documents from the board’s April 18 meeting. (Updated May 25)
LOS ANGELES COUNTY is set to issue $1.1 billion of tax- and revenue-anticipation notes that will mature in one year, according to sale documents. Note proceeds will help the county pay expenditures in the fiscal year that begins July 1. Wells Fargo Securities is the underwriter. (Added May 25)
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