The New Jersey Turnpike Authority can proceed at full speed with its $7-billion capital program, thanks to being the nation’s first transportation agency to sell more than $1 billion in taxable bonds that come with a 35% reimbursement from the federal government under the American Recovery and Reinvestment Act. The Build America bonds (BABs) will contribute $1.375 billion to the authority’s 10-year capital program, along with $375 million sold in traditional tax-exempt bonds.
BABs allowed the authority to diversify its investor base and raise critically needed funds. “Without this financing we would not be able to proceed in any way with our capital program,” says Diane Gutierrez-Scaccetti, the authority’s executive director. “We would have had to stop construction. It was equally as critical to have an interest rate we believed was within our means.” Because of the new program, “We were able to do both things,” she adds.
The authority can now proceed with major construction projects for both the turnpike and Garden State Parkway, including $1.7 billion for bridges, $2.7 billion in road widening and $1 billion in interchange improvements, says chief engineer Richard J. Raczynski. It has already awarded a $10.5-million earthmoving contract and plans an average of one to two more contracts a month for the next two years, says John M. Keller, turnpike supervising engineer. Eight more contracts will be awarded this year, 15 in 2010 and two in 2011.
The program will add 170 new lane-miles in a 35-mile stretch of turnpike between Interchanges 6 and 9, with continued separate lanes for trucks and autos. The parkway will be widened from two to three lanes in each direction for 17 miles. Bids have consistently been under engineers’ estimates, and design has accelerated for portions of the widening, scheduled for completion by 2011.
Many factors aligned at the right time to contribute to the turnpike authority’s success. The Internal Revenue Service established guidelines for BABs on April 3. “We didn’t know if it would be in time, but it was,” says Dennis J. Enright, principal with NW Financial Group LLC, Jersey City, the turnpike’s financial adviser. “It’s a brand-new program, and we were the first to sell over $1 billion.”
EXECUTIVE DIRECTOR
NEW JERSEY TURNPIKE AUTHORITY
Enright also points out that, “right now the tax-exempt bond rates are higher than the U.S. treasuries.” Build America bonds brought an actual interest rate of 7.41%, and the government will reimburse 35%. Standard & Poor’s, a division of the McGraw-Hill Cos., upgraded the agency’s rating from A to A+ last month. When the taxable debt’s federal reimbursement is taken into account, the yields come in at about 4.8%, says Enright.
Tight credit markets prompted the turnpike officials last month to embark on a multicity road show to “promote the toll revenue bonds to institutional buyers that have not previously been buyers of toll bonds, but may now be looking at the transportation sector,” says Jack Finn, national director of toll services for HNTB Corp., Kansas City, the turnpike’s general engineering consultant.
The results exceeded expectations. Investors oversubscribed: “We ended up with orders for $5 billion worth,” Finn adds. The bonds are due in 2040.
Gutierrez-Scaccetti called the experience a mutually educational experience. The turnpike officials learned more about investors, and “we gave them the sense that we have to run the turnpike like a business,” she says. “A lot of folks don’t realize we don’t get state tax dollars.”
The turnpike authority board originally authorized a minimum of $650 million and a maximum of $1 billion in bond sales, with more bonds to be sold next year once market conditions improve. Because of the road show’s success, the board in mid-April increased that maximum to $1.75 billion, Finn says.
The road show, arranged by lead underwriter Morgan Stanley, has “broadened our base of investors” to include pension funds, insurance companies and money managers, notes Enright. It helped that the authority late last year implemented toll increases of about 40%, to about 7.4¢ per mile on the turnpike and to about 2.9¢ per mile on the parkway. Another approximately 50% increase is slated for 2012 on both roads. The agency will generate about $1 billion a year in related revenue with these increases.
The tolls are still not particularly high, contends Stephen Dilts, chairman of the turnpike authority and New Jersey Dept. of Transportation commissioner. In fact, “The parkway remains the cheapest in the country,” he claims. Investors can feel confident of a consistent revenue stream, even though toll increases are less than what Gov. Jon Corzine (D) had originally proposed. Moreover, the annual total number of vehicles using the turnpike has not dropped drastically despite fluctuations in fuel prices and the economy. The number remains close to 250 million.
Waiting for funding from remaining revenue is the new rail tunnel planned to connect New Jersey and Manhattan beneath the Hudson River, notes Finn. “Out of the excess revenue each year, [turnpike officials] project they can pull off another $175 million a year for six or seven years. Bondholders will get paid back first, then we contribute to the tunnel.”
Because the turnpike authority’s bond sale was oversubscribed, Finn believes its success may encourage many other toll agencies to get back in the market. “This may also result in more agencies ‘going on the road’ to promote their bonds,” he says.
Barney Allison, partner with Nossaman LLP, Los Angeles, a law firm that specializes in infrastructure investments, warns of limitations, including the scheduled expiration of the Build American bond program at the end of 2010. “I’d say for a toll-road credit, you have to have a mature system, a lot of diversification in it and the ability to show—as New Jersey has—that you’ve got business-oriented board members willing to consider rate adjustments despite the economic downturn. That’s what investors will be attracted to. It’s not every toll-road project that can do that.”
