Bank of America Corp. (BofA) and JPMorgan Chase & Co. were the winning bidders on $900 million of New York Metropolitan Transportation Authority (MTA) debt to finance subway, bus and commuter-rail capital projects as the transit agency seeks federal aid to avoid major service cutbacks.
The sale shows the MTA, the largest mass-transit system in the US, can raise capital in the tax-exempt bond market even as revenue is down 40% and pre-coronavirus ridership may not return until almost 2023. MTA divided the debt sale into three groups, based on maturities, with each batch receiving eight bids, according to Aaron Donovan, a spokesperson for the agency. The all-in true interest cost for the sale was 4.49%, according to Donovan.
Even as MTA is in a self-described fiscal tsunami, many investors see New York City’s transit network as an essential service that will receive some sort of federal, state or local support, said Daniel Solender, head of municipal securities at Lord Abbett & Co., which manages $30 billion in state and local debt, including the MTA.
“New York City’s economy is important to the national economy and without a functioning transportation system, it’s hard for that economy to regain its strength,” Solender said.
Still, today’s yields are similar to those on junk-grade debt even though the MTA carries investment ratings. The deal’s final maturity, debt due in 2050 with a 4% coupon, priced with a 4.35% yield, or 277 basis points above the benchmark index, according to data compiled by Bloomberg. That 4.35% yield for 30-year debt compares with a 4.75% yield for longer-dated junk debt, according to a Bloomberg Barclays index.
Bonds with a 5% coupon due in 2043, the earliest maturity, priced at a yield of 4.44%, or 298 basis points above an index of top-rated tax-exempts, Bloomberg data show. That 4.44% yield compares with a 4.6% yield for non-investment tax-exempts with similar maturity, Bloomberg data show.
The debt, which is backed by fare and toll revenue and state and local subsidies, was sold competitively, with Bank of America winning $600 million while JPMorgan was awarded $300 million.
The MTA has warned that it’s focused on survival and will need to cut subway service by 40% and slash commuter-rail service by 50% unless the federal government provides
$12 billion to cover lost revenue
during coronavirus pandemic.
Rating companies downgraded the MTA as recently as last week, and the transit provider may face additional rating cuts. Moody’s Investors Service rates the MTA’s transportation revenue bonds A3 and S&P Global Ratings grades it one step lower at BBB+.
Both firms give the MTA a negative outlook. Fitch Ratings gives it an A+ with a negative outlook.