Finance officials at the Port Authority of New York and New Jersey will launch a new variable-rate bond program with a $100 million issue scheduled for late October or early November, a port authority official said yesterday.
To date, the Port Authority has sold $250 million in privately placed variable-rate debt and $200 million in variable-rate commercial paper. But the new issue will mark the first public sale of variable-rate debt in the authority's history.
Goldman, Sachs & Co. will underwrite the entire floating-rate issue and has structured a deal with a maturity of 35 years, according to Bruce Bohlen, the authority's assistant treasurer. The authority has yet to choose a bank to provide the liquidity facility needed for variable-rate securities.
Mr. Bohlen said the bonding plan received approval from the 12-member Port Authority commission in June, as well as separate approvals from New York Gov. Mario M. Cuomo and New Jersey Gov. Jim Florio.
The variable-rate issue is an attempt by the Port Authority to take advantage of the steepness of the yield curve, which offers issuers of variable-rate debt low interest rates compared to longer maturing, fixed-rate securities. Issuers achieve this yield reduction because variable-rate securities are reset or repriced at a spread above short-term interest rates.
The Port Authority has named the security "a versatile structured obligation," also known in the market as a "multi-modal" bond. Through its underwriter, the authority can reset the interest rates it pays on these securities on a daily, weekly, or even quarterly basis, depending on market conditions, Mr. Bohlen said.
"Given where interest rates are, it's prudent for us to have a larger variable-rate program, said Mr. Bohlen. The variable-rate securities can be sold by the Port Authority for a yield of 2.5% to 3% compared to about 6.25% on fixed-rate debt, he noted.
And with market speculation predicting another reduction in short-term interest rates by the Federal Reserve Board, the Port Authority is not the only New York-based municipal issuer headed toward the variable-rate market, city sources said.
The New York City Water Finance Authority may issue about $100 million of variable-rate securities during a $200 million to $300 million bond deal scheduled for early October, the sources said. The New York City deal would also mark the first variable-rate issue for the Water Finance Authority.
The Port Authority's long-term debt, also known as the consolidated bonds of the Port Authority of New York and New Jersey, is rated AA-minus by Standard & Poor's Corp., A1 by Moody's Investors Service, and AA-minus by Fitch Investors Service Inc.
Port Authority finance officials began work on the variable-rate program early this year, and began floating the idea past officials at the three rating agencies in March. The officials had to work around the 1952 resolution that allowed the Port Authority to issue debt.
Mr. Bohlen said the resolution made it legally difficult to issue variable-rate debt that can be put, or sold back, to investors at any time. Most variable-rate securities have this put feature. As a result, the authority needed to develop a new bond that subordinated the variable-rate debt to the authority's revenue bonds.
Mr. Bohlen said he expects the credit agencies to rate the new bonds no more than one notch below the authority's current bond credit rating. If the agencies came back with a rating falling below that level, Port Authority Treasurer John E. Haupert has said he would pull the deal.
Officials from Standard & Poor's and Moody's did not return telephone calls on the status of the new bond rating. Andrea Bozzo, a senior vice president at Fitch, said the Port Authority has not approached Fitch for a rating.
