The Port Authority of New York and New Jersey plans to use its own cash flow to provide liquidity support for a new type of variable-rate long-term debt.
The structure enables the authority to tap the short-term variable-rate market, but reduces the high cost of liquidity facilities needed to support such debt.
The authority hopes as early as tomorrow to issues $100 million of the new securities, dubbed versatile structure obligations, underwritten by Goldman, Sachs & Co.
Initially, the obligations will pay a floating rate of interest reset at a daily remarketing by Goldman Sachs. Investors will have the right to put the bonds back to the authority each day.
But the authority can alter the daily reset period on the securities to be a weekly, monthly, quarterly, semiannual, or a longer-term reset, or it can convert the securities to a fixed rate.
For example, if short-term rates rise substantially, the authority could switch the bonds to a fixed-rate preset when the bonds are priced tomorrow.
"We felt this structure would give us maximum flexibility in terms of accessing different parts of the yield curve over time," said Bruce D. Bohlen, the authority's assistant treasurer.
In addition to the added flexibility that the "multi-modal" structure offers the authority, the deal will also feature an unusual solution to the market's ongoing shortage of affordable liquidity facilities: the use of the authority's own consolidated bond fund reserve to provide liquidity support.
As of Dec. 31, 1992, the authority had $288 million in the consolidated reserve fund.
Usually, such bonds would be backed with a liquidity facility to ensure that the issuer would always have enough cash on hand to pay off all investors exercising the put. But as competition in the liquidity facility arena has dropped, the price of such enhancement has risen.
Several hospitals pioneered the issuance of put bonds without bank-supplied liquidity facilities, with some issuing bonds with no external bank support.
In the case of the Port Authority, the Sumitomo Bank Ltd., the Bank of Tokyo Ltd., and the Sanwa Bank Ltd. will provide a limited standby purchase agreement for the first 364 days.
Under international bank capital standards, banks do not have to set capital aside for commitments of less than one year in duration.
The agreement is less comprehensive than a standard liquidity facility, but also less expensive. The banks would purchase securities put back to the authority if Goldman Sachs is unable to resell the tendered securities.
If the securities are purchased by the banks after an auction failure, the rate would convert to a predetermined rate and the authority would be obligated to buy back the securities within five days.
Some credit analysts said the agreement is so limited that it is of little value in supporting the securities.
The agreement "was not a factor in the rating assigned to the tender feature because the authority would only be able to access liquidity under extremely limited circumstances," analysts from Moody's Investors Service wrote in a report on the securities released last week.
However, the authority's assistant treasurer finds that assessment a bit harsh.
"They felt there were some outs that the banks had, but we don't think we'll even see a situation where the banks' liquidity would be called into play," Bohlen said.
The securities are subordinate to the authority's consolidated bond issues. As of Aug. 1, 1993, the authority had $4.38 billion of consolidated bonds outstanding.
Interest on the versatile structure obligations cannot be paid until interest is paid on the consolidated bonds and payments are made to the authority's general reserve fund.
The new securities are on parity with the authority's commercial paper program and variable-rate master notes. The authority may not issue more than $300 million as commercial paper and $250 million as master notes.
Standard & Poor's Corp. rates the obligations A-minus long term and A1-plus short term. Moody's rates the obligations A long-term and VMIG-1 short term.
The authority will issue up to $450 million more obligations over the next four years. However, subsequent issues may not start out as daily reset bonds, Bohlen said.
Tomorrow's issue will not mature until 2028, but mandatory redemptions will slowly reduce the amount of securities outstanding beginning in 2008. By 2028, at most, only $8.6 million will remain. The securities will also be callable by the authority on interest rate reset dates and conversion dates.
Portfolio managers said the new securities would be welcome despite the high volume of short-term securities issued in the past month.
"A lot of managers are looking for a barbell strategy right now," one manager said. "And that, means there is a lot of demand at the long end and at the short end. Much of the supply is in the middle, unfortunately."
Other managers said the deal would be appealing if it carried higher long-term ratings.
"There is a lack of supply for New Jersey debt," one manager of a New Jersey fund observed. "But our internal credit policies preclude buying single-A paper. We have bought put bonds supported by the issuer's cash flow in the past, but generally rated double-A or better."
The securities will be exempt from state taxes in New Jersey and New York, adding to their appeal, one portfolio manager said.
Also, the deal marks a change in strategy by the Port Authority, an official on the deal said. In the past, the authority has issued a lower proportion of its debt at floating rates than other major issuers.
"This is a move to change their capital structure closer to other issuers and increase reliance on floating rate debt," the official said.