New Jersey's $1.5B transportation bond deal should be well-received, analysts say

The New Jersey Transportation Trust Fund Authority hit the timing right on its upcoming $1.5 billion of tax-exempt transportation program bonds, analysts said.

Strong market fundamentals for municipal bonds coupled with light issuance next week may result in tightening spreads on the TTFA bonds despite its low credit ratings, according to J.R. Rieger, owner of Rieger Report LLC.

“There should be a healthy spread differential but with cash continuing to flow into bond funds, the need for bonds may keep the spread on these bonds tighter than expected,” he said.

The deal should be well received given the demand for New Jersey paper and since the bonds are structured so that dedicated revenues cannot be appropriated for other purposes, said municipal bond analyst Joseph Krist.

"If the bonds offer spread is along the lines of the [state's recent] GO deal, the demand should be there,” said Krist, publisher of Muni Credit News. “The risk of non-appropriation is quite low.”

The TTFA is scheduled to sell the $1.5 billion of tax-exempt transportation program bonds through Goldman Sachs on Dec. 3 to finance various capital projects in its first trip to the market since December 2019. The authority has $10 billion of transportation system bonds outstanding, according to an offering statement.

Chiesa Shahinian & Giantomasi PC is bond counsel.

Greg Saulnier, a municipal analyst at Refinitiv MMD, said there should be a strong appetite for the TTFA bonds despite New Jersey issuing $3.7 billion of tax-exempt COVID-19 emergency GO bonds just last week, given how many investors are seeking high yield opportunities. TTFA bonds typically trade about 50 basis points wider than New Jersey GOs, he said. Last week's deal initially priced at 133 bps above the MMD triple-A scale before trading heavily in the secondary market later in the week and tightening by as much as 45 bps.

The $3.7 billion sale shouldn't “have any impact on demand for the New Jersey transportation deal,” Saulnier said. “The New Jersey GO deal had over $30 billion in orders so there is plenty of cash around.”

The TTFA borrowing arrives two months after New Jersey’s gas tax was raised to 50.7 cents a gallon from 41.1 cents a gallon on Oct. 1 under a 2016 law signed by former Gov. Chris Christie requiring a steady stream of revenue to support the state’s Transportation Trust Fund. Voters approved a constitutional amendment in 2016 mandating that gas tax revenues be dedicated solely to the TTF.

The upcoming deal is rated Baa1 by Moody’s Investors Service, BBB-plus by Fitch Ratings, BBB by S&P Global Ratings and A-minus by Kroll Bond Rating Agency, one notch below New Jersey GOs, which have the second lowest rated credit of any U.S. state, ahead of only Illinois.

The last TTFA bond deal in December 2019 priced with yields ranging from 1.45% for bonds maturing in 2020 and 3.46% for 2039 maturities. That transaction comprised $1.69 billion of federally taxable transportation bonds and $619.28 million of tax-exempt transportation system bonds.

The press office for New Jersey State Treasurer Elizabeth Maher Muoio did not immediately respond for comment on the sale.

S&P credit analyst David Hitchcock said while New Jersey is burdened with structural deficit challenges amid lost revenue caused by the COVID-19 pandemic, the state is well positioned to cover debt service for TTFA bonds in the 2021 fiscal year through the state’s statutorily dedicated highway fuels and sales tax revenues. The state’s ability to enact automatic gas tax increases if consumption levels fall, he said, provides "adequate" funds for debt service coverage.

Roughly 79% of New Jersey's net tax-supported debt is subject to appropriation, according to Moody's analyst Baye Larsen. She noted the constitutional dedication of revenues and the essentiality of transportation infrastructure projects "provide strong incentive" for the state to appropriate for debt service for the TTFA bonds.