The New York State Thruway Authority yesterday introduced a high-priced new credit that took advantage of favorable market conditions, a stream of dedicated revenues, and a recent court ruling to sail through the municipal market, underwriters and analysts say.
The $375 million bond issue, underwritten by a syndicate led by Smith Barney Inc., was the first to tap the state's Dedicated Highway and Bridge Trust Fund, a relatively secure stream of fuel and highway use taxes that investors generally prefer to run-of-the-mill state appropriated debt. Appropriated bonds pay interest only after an annual payment or appropriation of the state legislature. In addition to yesterday's issue, the authority can sell about $2.3 billion more bonds supported by the fund.
Moody's Investors Service rates the securities A, Standard & Poor's Corp. rates them A-minus, and Fitch Investors Service rates them A-plus -- higher than the ratings for nearly all appropriated bonds. Although the authority had hoped to receive a A rating from Standard & Poor's, the overall credit assessment puts the Thruway deal on a par with state general obligation debt.
Dealers originally priced the issue's longest dated bonds, maturing in 2014, to yield 6.20%, 15 basis points to 25 basis points lower than state-appropriated bonds. At the repricing, several hours later, underwriters cut the yield on the 2014 maturity by another five basis points as demand appeared to increase for the securities.
By early afternoon, underwriters were reporting that the issue had received about $1.3 billion in investor orders, more than enough to compensate for the aggressive pricing. "The bonds were well received," said Frederick Clark, the authority's director of finance. "It was a big success."
The offering did not, however, meet with universal approval. Market analysts said many buyers found the issue too expensive, particularly when the underwriters cut yields at the repricing.
Several analysts also complained that the issue's credit structure is not as sturdy as the authority and its underwriters say it is.
One analyst said the future of the issue's dedicated revenues is uncertain given a proposed constitutional change in the state's borrowing practices. The proposed debt reform amendment would create a new form of state revenue bonds that may rely on the same taxes supporting the Thruway bonds.
Another analyst simply complained that the state legislature has the power to remove the dedicated revenue streams at will. He said that the state legislature could in the future replace the stream of dedicated taxes with less secure taxes. Clark said, however, that the issue offers investors sufficient safeguards both to counter future political risks and to maintain current ratings.
Still, most market observers interviewed supported Clark's view of the events, particularly his account of the strong market reception. "I think it's pretty obvious the deal did well," said Michael Shamosh, a municipal market strategist at Cowen & Co.
"Some investors are saying the pricing is too high, but there's no New York paper out there," Shamosh added. "Any New York deal could sell well in this environment."
Michael Brooks, a senior municipal credit analyst at Sanford C. Bernstein & Co., said he was "disappointed" by the offering. Brooks groused that the issue offered only $167 million of uninsured debt, leaving the money management company with little to choose from. The authority obtained bond insurance from AMBAC Indemnity Corp for $207 million of the issue, converting the bonds into triple-A paper.
"We have the room for A-minus paper," Brooks said. "This is a strong credit that we'd like to buy without insurance."
Underwriters, for their part, said the deal's success rested on their ability to take advantage of a number of factors, both those within their control and those outside,
To begin with, the deal was aided by a recent New York State Court of Appeals ruling, affirming the authority of the state to sell debt through its authorities and without voter approval. The ruling rejected the claim by taxpayer activist Robert L. Schulz that the Thruway issue would violate the state constitution's voter approval clause.
Investors' current appetite for New York State debt also added to the deal's appeal. The issue, which will help finance Gov. Mario M. Cuomo's multibillion-dollar transportation financing plan, came at a time when investors have complained about the scarcity of New York State bonds to place in their portfolios.
"We knew there was a real paucity of New York State paper out there, and that would help us to price it aggressively," said Ronald J. Marino, a vice president at Smith Barney and the investment banker in charge of the issue.
But what most caught investors' interest was the credit structure of the issue -- a complex blend of dedicated revenues and other incentives designed to reduce the issue's appropriation risk.
The bonds are supported by the state's Dedicated Highway and Bridge Trust Fund, which is a holding pen for four transportation-related taxes: the petroleum business tax, the motor fuel tax, highway use fees, and motor vehicle registration fees.
Under the legislation that created the fund; the state legislature must appropriate money to cover debt service on the bonds or it cannot reap the benefits of receiving the excess sales tax money dedicated for the payment of bonds sold by the Local Government Assistance Corp.
Authority officials, who spent about six months designing the credit, had felt that the structure of the issue would place it on the credit level of the assistance corporation, which is rated A by Moody's, A-plus by Fitch, and A by Standard & Poor's.
Analysts at Standard & Poor's disagreed. Ernie Perez, director of the rating company's transportation unit, said there is a major difference between the taxes used to support the Thruway bonds and those used to support the assistance corporation. Perez said the assistance corporation is supported by the more stable state sales tax, while the taxes supporting the Thruway bonds are more subject to change.
"That's a major difference," Perez said. "The sales tax fluctuates less with economic conditions."
