Week of 03/29/2021

Not All Transportation Related Muni Bonds Are Equal… MTA Outlook Boosted…“Build Back Better” Front and Center…

Not All Transportation Related Muni Sectors Are Equal… The outlook on transportation related bonds has improved rapidly. Certain transportation sectors have fared better than others. Fueled by a dramatic surge in maritime shipping and port container volume, non-cruise ports are showing the best recovery in the transportation sector. Domestic air travel and connecting hubs have fared better than origination and destination airport hubs exposed to severely depressed international passenger levels. On large interstate toll roads, traffic is evenly balanced between passenger and commercial segments, an early sign of recovery. At the peak of COVID-19, commercial traffic was robust, but passenger vehicle miles traveled across the U.S. fell as much as 50% in certain weeks last April, only to rebound to pre-pandemic levels by June 2020. There is no reason to suspect that the traffic up trend will not continue. Many toll operators are at 75%-85% of 2019 activity levels, with some issuers raising tolls or fees to offset revenue declines. Transit and parking operators face additional headwinds amid massive shifts to remote work. Online shopping poses the greatest risk to parking operators. Transit operators who count a variety of taxes as a greater share of revenue show more resilience compared to those solely dependent on ridership. Activity reports across various transportation sectors show still depressed but generally improving operating trends, with some sectors’ utilization several years away from pre-pandemic levels. Overall state level transportation revenues are in much better shape than expected last Spring, and federal COVID relief has helped cushion COVID-19 related losses. For example, North Carolina’s Dept of Transportation saw a revenue shortfall of $150 million in its last fiscal year, far less than the $500 million shortfall predicted a year ago. Higher vaccinations are setting the stage for fewer credit pressures. Significant aid from three separate rounds of federal funding has bolstered liquidity and brought important financial flexibility. Credit quality of transportation related muni bond issuers could see a boost when President Biden’s $3 trillion landmark infrastructure reform, its sticker price will be critiqued, comes to fruition.

MTA Outlook Boosted…With generous federal aid, ratings pressures on New York’s Metropolitan Transportation Authority (MTA) have faded away. MTA is poised to address projected budget deficits through 2023 and resume its $51.5 billion capital plan. Equipped with an outlook boost from S&P, the nation’s largest public transit agency is set to issue new bonds this year to fund its five-year capital plan. “The outlook revision reflects our expectation that the substantial amount of additional federal grants the MTA has received or anticipates receiving, totaling an estimated $10.5 billion federal aid, will allow the authority to address projected deficits through 2023, mitigating near-term downward rating pressure and afford management more time to better assess the recovery, while implementing necessary adjustments to achieve a sustainable structural balance,” S&P raised its outlook to stable from negative on MTA’s $48.5 billion outstanding bonds. With sizeable federal aid, the MTA is no longer considering major service cuts and layoffs in 2023 and 2024 and can instead restart key infrastructure projects and its capital plan. “The latest infusion of federal aid allows us to unfreeze our historic 2020-2024 capital program,” MTA’s CEO kicked off MTA’s $51.5 billion capital plan into action. Although subway, bus, and commuter rail ridership have been improving, they are all still materially depressed. Widespread immunization will help pave the way for a return to more normal levels eventually. Reflecting improved liquidity, MTA has not drawn down any of its $4 billion federal aid allocated in December 2020. It will end up not needing the $2.9 billion borrowed from the Fed last year to cover budget deficits in 2021 and 2022. As a critical service provider to the New York metro area, MTA receives strong political support. MTA is essential in New York and it enjoys a monopoly, both attributes offer value to MTA bond investors. MTA bonds offer up to 80 basis points more than top rated muni bond benchmarks. MTA CEO stated. “We remain committing to bringing our 117-year-old subway system into the 21st century and this new federal funding package will help us do that.”

“Build Back Better” Front and Center… Republicans and Democrats agree that the country needs an infrastructure overhaul, but there are differences opinions as to which financing provisions could be most cost effective. President Biden will roll out his $3 trillion infrastructure spending plan this week. Revival of Obama-era Build America Bonds, raising the federal cap on tax-exempt private activity bond issuance, an infrastructure bank, and relaxed rules for refinancing costly debt are amongst financing provisions being debated by lawmakers. The country’s overall infrastructure needs over the next 10 years total nearly $6 trillion per the American Society of Civil Engineers. The federal government owns less than 10% of the nation’s infrastructure, while the rest is operated by states, cities and the private sector. A partnership between federal, state and local governments is required for large infrastructure projects which cross state lines. Transportation Secretary Pete Buttigieg said, “It would be a mistake to neglect the possibility of mobilizing private capital.” To bring more private investment into financing infrastructure, private activity bonds are being highlighted by the Biden administration. Tax-exempt private activity bonds allow governments to borrow on behalf of private parties for building infrastructure, subject to an annual issuance cap set by the federal government. Foreigners cannot be left out of the equation for their multi-trillion dollar capital base has an unwavering interest in investing in U.S. infrastructure. From their perspective, taxable municipal bonds’ higher yields are more lucrative than tax-exempt bonds. Taxable Build America Bonds, with a federal interest subsidy for the issuer, are under scrutiny to leverage a broader capital market. Between 2008 and 2010, more than $180 billion of Build America Bonds were issued by state and local governments to revamp infrastructure, far more than the federal government initially expected. However, snags in federal subsidies showed up from time to time. A vehicle mileage tax is also on the table. Buttigieg said, “I’m hearing a lot of appetite to make sure that there are sustainable funding streams.”

Compare 30-Year taxable U.S. Treasury yield 2.35% to 30-Year tax-exempt muni bond yield AAA 1.80%; “AA” 1.89%; 2.22%; “BBB” 3.18%. For investors in the 35% tax-bracket, a 3.18% tax-exempt yield is equivalent to a 4.9% taxable yield. Top rated tax-free bonds yield 77% of comparable taxable U.S. Treasuries.

Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.