MTA Bond Buyers Are Like New York Commuters Waiting for a Train

(Bloomberg) -- What do municipal-bond investors have in common with New York commuters stuck waiting for a subway train? Both are likely to keep putting money into the embattled Metropolitan Transportation Authority.

Holders of some of the MTA’s $40 billion of bonds also share the same skepticism as riders over the likelihood of a quick turnaround for the troubled agency, despite a preliminary deal released yesterday by New York City Mayor Bill de Blasio and Governor Andrew Cuomo to boost its finances.

And those investors are the ones who are likely to buy what could amount to $15 billion in new debt that would fund a revamp of the system’s crumbling infrastructure.

"This is not the salvation of the MTA, it’s part of it," said Howard Cure, director of municipal bond research at Evercore Wealth Management, which owns some of the system’s debt.

The MTA is one of the most prolific issuers in the $3.8 trillion municipal-bond market. It’s bonds can be found in most portfolios, especially in New York where taxes are high and there’s plenty of wealthy people looking for tax havens. But that much new debt could leave some investors wondering if they’ve had their fill, even if some of the city’s debt is trading at some of the priciest levels since at least 2013 and high demand has pushed the yields on the state’s bonds below those on AAA rated debt.

"Our joke is that they’re like bellybuttons -- everyone has one," said Julio Bonilla, portfolio manager at Schroders, which owns some MTA debt. "If they’re coming to market with these billion-dollar deals, who’s the fundamental buyer?"

MTA Bond Buyers Are Like New York Commuters Waiting for a Train

The plan would raise money from electronic tolling in streets south of 61st Street, a step studies have shown could raise about $1 billion a year that could be leveraged into $15 billion in municipal bond sales. Money from a new Internet sales tax in the city and a tax on the yet-to-be-legalized marijuana would also help infuse cash into the system.

The additional money would come after annual debt service bills have consumed a growing share of the agency’s revenues since 2015, according to Moody’s Investors Service figures.

It "gives some relief to the credit," said Matt Fabian, a partner at Municipal Market Analytics. "At the same time, it’s not going to change the direction. This is probably going to be a slow and redundant process to allocate new revenue from the state and the city to the MTA."

MTA leadership has said it needs $40 billion over the next decade to get the system up to 21st century standards. And the MTA faces declining ridership, threats from ride-sharing applications, and inefficiencies with how it spends money on capital projects, said Evercore’s Cure, who rides the 6 train to work each morning.

Cure still sees the MTA as having flexibility to raise revenue, though de Blasio and Cuomo’s 10-point plan calls for limiting fare hikes to "inflationary increases" of 2 percent per year.

Material Impact

Last year, Moody’s Investors Service changed the outlook on the MTA’s A1 rating to negative, saying that the system faced "relatively inflexible labor costs, high leverage, large capital needs and growing public pressure to improve service and limit fare increases."

The transit system is in a tough position because fare hikes and service cuts can hurt ridership further, the analysts noted in a December 2018 report. And debt is likely only to increase because of its significant capital needs.

Bondholders, just like fed-up riders, said something has to be done. Dennis Derby, a portfolio manager at Wells Fargo Asset Management, said the plan would be beneficial for the MTA if it’s instituted. Turning around the MTA is also important for the area it services, New York City, which is another big municipal-bond issuer, he added.

"If they fail to address it, it could have a material impact on the New York economy and the city and state credits," he said.

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