Officials at the New York State Thruway Authority say they expect investors to respond positively tomorrow, when the agency is slated to sell about $200 million of bonds recently targeted by a disgruntled taxpayer as unconstitutional.
Financial advisers representing the authority say investor interest in the deal should be sound, even with the pending lawsuit.
The issue marks the third offering by the Thruway Authority to finance local highway and bridge work through service contract bonds. The bonding program began in 1991. The agency can issue bonds through 1997.
Financial advisers say the deal, underwritten by a syndicate headed by bookrunner PainWebber Inc. and co-senior manager Morgan Stanley & Co., is expected to sell at yields ranging between 5.60% and 5.70% on the issue's 20-year maturity, a level comparable to similar state issues.
Moody's Investors Service on Friday confirmed its Baal rating on the bonds. The Standard & Poor's Corp. rating was unavailable Friday. In the past, the rating agency has given thruway bonds a BBB rating.
As part of the state's transportation financing program, the deal is being challenged in court by taxpayer activist Robert L. Schulz. The case is before the state's Appellate Division, and will likely be argued before the state's highest court, the Court of Appeals.
The Glens Falls, N.Y., resident is suing the state, the authority, and various public officials including Gov. Mario M. Cuomo, challenging the legality of state bond issues that are not approved by voters in the state.
Schulz, who has challenged the state bonding practices in more than a dozen lawsuits, says these securities are illegal because they violate the voter approval clause in the state constitution required for the sale of state debt.
But the state, which has about $17 billion of these bonds outstanding compared to about $5 billion of voter-approved general obligation bonds, has so far convinced the courts that these securities are perfectly legal.
The state's position relies on legal precedent created in the late 1970s, which established the state's ability to sell appropriated debt without voter approval to finance the bailout of New York City.
Since then, the state has sold approriated debt through bonding agencies such as the Thruway Authority and the Urban Development Corp., using the legal argument that these securities are not debt of the state.
According to the upcoming transaction's preliminary official statement, the Thruway Authority will issue about $116 million of serial bonds maturing in 1994 through 2007. This tentative structure also calls for the sale of $83.2 million of term bonds due on April 1,2013.
The securities are part of the Consolidated Highway Improvement Program, and the Municipal Streets and Highway Program. The state has used these financing plans, also known as the Chips and Marchiselli programs, to reimburse local governments for the cost of building and repairing local roads and bridges. The plans were established in the early 1980s.
In March, the programs received a jolt of financing under Cuomo's multibillion-dollar transportation bonding program. Under the program, the Thruway Authority will sell $1 billion of bonds to finance local road work.
The plan also calls for a separate bonding initiative, where the authority will issue $3 billion of securities to repair state roads and bridges by leveraging a mix of the. state's petroleum-related taxes.
The bonds are serviced through annual appropriations by the state Legislature. As a result, these bonds do not require voter approval, the state maintains.
"These bonds have been held legal and constitutional by the courts of the state for the past 20 years," said Ralph J. Vecchio, the Thruway Authority's general counsel.
On Friday, Moody's confirmed its rating on the issue, underscoring the authority's optimism that it will prevail against Schulz.
Moody's, which had been initially hesitant to rate the securities, said in a press release, "Although the constitutionality of these bonds is currently being challenged, independent bond counsel has opined that the plaintiff's claims are without merit and the authority and the state will prevail."
"Based on the underwriter's assessment of market conditions, the buyers are ready to go," said Steven J. Kantor. a principal at O'Brien Partners, the authority's financial adviser. "We don't believe there will be any interest penalty" because of the lawsuit.
Despite the authority's optimism, legal officials representing the agency will appear in court this morning to respond to a show cause order issued on Friday by Appellate Division Judge Anthony V. Cardona.
Cardona issued the order after Schulz on Friday asked the court to prohibit tomorrow's scheduled bond deal. Schulz said state taxpayers would face "irreparable harm" if the bonds were sold before the appellate division ruled on the case.
The Thruway Authority and its underwriters may face some skepticism from municipal bond buyers when the deal is priced.
To be sure, the authority has convinced many municipal investors as well as bond market raters that it will prevail against Schulz. Despite numerous attempts, Schulz has failed to derail a single appropriated bond deal on the grounds that the securities are unconstitutional.
Moody's in its press release quoted the authority's bond counsel, Mudge Rose Guthrie Alexander & Ferdon, which said in the deal's preliminary official statement that, "Under the present law ... the plaintiffs' claims relating to the payment obligations of the state under service contracts and the validity of the series 1993 bonds ... are without merit."
"As far as the litigation goes, Mudge Rose has signed off on the deal," said one portfolio manager, who asked not to be quoted by name. "It's highly unlikely" that the state will lose.
Moody's also cited a July 27 ruling by the state Supreme Court, which ruled for the Cuomo administration on the Chips and Marchiselli bonds because Schulz failed to file suit in a timely fashion.
But several buyers interviewed Friday said they would demand a higher yield for the bonds because of the lawsuit. One, who asked not to be quoted by name, said he would not purchase the issue because of the additional risk represented by the case.
"Buyers are fiduciaries, and they want to be paid for any additional risk they take," said Michael Shamosh, a municipal market strategist for Cowen & Co. "It's bad enough these bonds have appropriation risk."