Bridgegate No Toll on Port Authority as Yields Fall: Muni Credit

Jun 17, 2014 8:08 am ET

(For more credit-market news, click on TOP CM. For Municipal Credit Markets column alerts, see SALT MUNCREDIT.)

June 17 (Bloomberg) -- Bridgegate doesn’t bother Port Authority of New York & New Jersey’s investors, who get to vote today on the bistate agency’s finances as it offers bonds for the first time since January.

The scandal involving lane closings at the George Washington Bridge by allies of New Jersey Governor Chris Christie has spawned federal investigations and pledges by elected officials to fix the 93-year-old agency, which runs much of the area’s transportation infrastructure.

It hasn’t led investors to penalize the agency, with the extra yield they demand on some debt falling to the lowest this year, even after four senior officials, including Chairman David Samson and Deputy Executive Director Bill Baroni, resigned. Both were appointees of Christie, a Republican who won a second term in November.

“The market is certainly conscious of the scandal and the problems created by management instability,” said Bart Mosley, co-president of Trident Municipal Research in New York. “But the credit still trades in line with its credit rating.”

Moody’s Investors Service grades the authority’s debt Aa3, its fourth-highest rating. Standard & Poor’s and Fitch Ratings assign a comparable AA- grade.

Probe Alert

The agency plans to auction $400 million of tax-free bonds backed by tolls, fares, rents and other revenue from operations. Port Authority runs the region’s three major airports, four bridges, a bus terminal, commuter rail, two tunnels, ports and the World Trade Center in Lower Manhattan.

It’s the first sale since a $1 billion borrowing in January by the authority, whose chairman is appointed by New Jersey’s governor and executive director by New York’s governor.

Last week, the agency disclosed in bond-offering statements that it was being probed by the U.S. Securities and Exchange Commission. A person familiar with the matter said the SEC was investigating whether the authority improperly used tax-exempt debt to finance the $1 billion renovation of the Pulaski Skyway, an 82-year-old roadway that connects Newark and Kearny to Jersey City and isn’t operated by the Port Authority.

Matt Dalton, who oversees $2.1 billion of munis as chief executive of Belle Haven Investments in White Plains, New York, said the investigation hasn’t undermined demand for Port Authority debt. The SEC has historically settled lawsuits against state and local issuers without fines.

Spreads Shrink

Federally taxable authority bonds maturing in October 2062 traded yesterday to yield 4.47 percent on average, or 1.07 percentage points more than benchmark debt, according to data compiled by Bloomberg.

That compares with a spread of 1.4 percentage points on Jan. 8, the day that an e-mail from Christie’s deputy chief of staff was published disclosing that she wrote to a Christie appointee at the authority that it was “time for some traffic problems.”

Lawyers for Christie, 51, said in an internal report that he wasn’t aware of the lane-closing plot.

Investors are looking past the management changes, political abuse and patronage because of the strength of the authority’s finances, said Jamie Iselin, head of munis at New York-based Neuberger Berman, which oversees about $9 billion in local debt.

The agency generated $1.6 billion in net operating revenue in 2013, up $188 million from the previous year, Fitch said.

Direction Approved

“The things related to governance become a greater negative if financially or operationally the credit was going in the wrong direction, which is clearly not the case here,” Iselin said.

Investors would have more concern if the agency were smaller and had a less diverse source of revenue, said Iselin.

The debt benefits because it’s exempt from state income tax in New York and New Jersey, investors said. New York and New Jersey have the nation’s eighth- and sixth-highest individual income tax rates, respectively, according to the Tax Foundation.

“The convoluted management structure has always made it a difficult credit to fully get comfortable with,” Mosely said. “But that has always been offset by the natural demand for New York and New Jersey tax-exemption and the high profile of the underlying projects.”

Agency’s Expectation

Elizabeth McCarthy, Port Authority’s chief financial officer, declined to be interviewed. In an e-mail, she said the agency expects “significant investor interest in this sale.”

The agency’s finances will be strained by its growing capital needs, the completion and operation of the World Trade Center site and annual $400 million subsidies to its commuter railroad. The authority approved a $27.6 billion 10-year capital plan in February.

The agency’s “significant” borrowing needs means S&P doesn’t expect to raise the authority’s rating in the next two years, the company said in a release for today’s bond sale.

Moody’s based its rating in part on the authority’s “near monopoly control” over critical transportation infrastructure in the area.

“The recent negative controversy surrounding corporate governance does not provide a significant rating driver as the authority was able to pass a much postponed capital plan and needed rate increases are already approved and programmed,” the company said in a release.

--With assistance from Brian Chappatta in New York.