(Bloomberg) -- New York’s Metropolitan Transportation Authority needs to borrow billions to upgrade an 115-year-old subway system that already has $43 billion of debt while principal and interest payments threaten to eat up more of its revenue.
But municipal-bond investors haven’t abandoned the largest public-transportation system in the U.S. Its network of subways, commuter trains and buses is a vital part of what makes New York City function. There’s also fresh cash ahead as the transit agency will get revenue from new congestion pricing fees that motorist will pay to enter certain parts of Manhattan.
“It is the blood that runs through the body of the New York metro area and without that blood you couldn’t exist,” Eric Glass, portfolio manager for fixed income impact strategies at AllianceBernstein, said about the MTA system.
The public transit provider is embarking on a $51.5 billion capital plan -- its largest ever -- that will pay for infrastructure upgrades and expansion projects from 2020 through 2024. As much as $35 billion of that plan could be financed through debt, according to S&P Global Ratings.
The MTA’s biggest undertaking is a $7.1 billion plan to modernize its subway signals. The project will update decades-old signals to increase rider capacity and make the system more reliable.
Straphangers
“This historic and transformational plan will bring the system into the 21st century and provide the level of service our eight million daily riders demand and deserve,” Abbey Collins, MTA’s chief communications officer said in an email. “The proposed capital plan makes unprecedented investments in signal modernization, stations and accessibility all while delivering mega-projects like East Side Access, Penn Access, Second Avenue Subway Phase II – with the MTA’s commitment to get it done faster, better, and cheaper.”
While straphangers and rail commuters want better service, it will come at a price. The MTA estimates that principal and interest could reach $3 billion in 2021 and potentially take up 19% of operating revenues and subsidies, according to the agency’s 2019 budget.
New revenue is expected after state lawmakers earlier this year approved congestion pricing into parts of Manhattan to help ease traffic and raise money for the transit agency. That may translate into $15 billion of bond proceeds for the transit agency as it plans to leverage the new congestion pricing funds.
Still, the agency is at risk of a credit-rating downgrade. Moody’s Investors Service and S&P give MTA’s transportation revenue bonds -- its main borrowing vehicle -- a negative outlook, citing high debt levels, declining ridership, capital needs, labor costs and environmental risks as the system has dealt with flooded stations and tunnels. Moody’s rates the bonds A1, six steps above junk, while S&P ranks the debt one level lower at A.
Attractive Yield
The single-A ratings make the MTA debt attractive to investors as the bonds offer more yield than higher-rated securities. New York investors in particular are seeking tax-exempt debt as there is a limit on how much state and local levies can be deducted from federal taxes.
“There is a lack of lower-rated, higher-yielding paper in New York,” said David Hammer, head of municipal bonds at Pacific Investment Management Co. “Investors that are required to buy bonds in the state of California or New York are requiring less additional premium across the board than they typically would because there’s so much demand and so little supply.”
MTA is also an essential service that New Yorkers depend on, with 2 billion users each year riding its subways, commuter trains and buses. The five-year capital plan is estimated to generate $75 billion of statewide economic activity and create 350,000 jobs, according to MTA documents.
“We’re looking for muni credits that have a lower correlation to the U.S. economy, so are less cyclical and will do okay even if the S&P 500 doesn’t,” Hammer said. “So essential service revenue bonds are a really good example of that. The MTA would very much fit into that bucket.”
Investors will welcome a new credit in the state if the MTA does sell debt from the new congestion pricing revenue, according to AllianceBernstein’s Glass.
“It’s hard to diversify in New York,” Glass said. “There aren’t so many names to choose from in the municipal market and so when you create a new name that is considered a different credit, that’s just great for diversification.”
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