Passenger Trains > NY's MTA bonds take a hit

Barron's has an article today about the likely problems coming in municipal bonds across the US, and how NYC's problems are likely a harbinger of what will happen elsewhere. The troubled Metropolitan Transportation Authority is used as an example. Most transportation assets are financed by bonds, and the interest / principal is financed through fares and tolls. Or refinanced, much like a home mortgage.

MTA's bonds are issued for periods of 10 to 25 years, and pay interest derived from bridge and tunnel tolls, rail and subway fares, an income tax surcharge, and a slice of real estate transfer taxes, etc.  All of which are going down. So there's less money to pay interest and pay off principal. Just rolling over the principal into new bonds risks a downgrade if you have too much bond debt outstanding.

MTA bonds now yield about 5%, compared to 2% before the Covid-19 crisis hit. The 90% drop in some rail line passengers, a drop off the cliff in bridge and tunnel tolls, etc has taken a huge bite out of incoming revenue. The price of the bonds has dropped, as buyers are concerned about whether the future interest will be paid on time, and the bonds redeemed on schedule.  The MTA has about $45 billion in outstanding debt, more than some states.  The agency is rated single A plus by Fitch's, down one notch from double A minus. Generally, the lower the rating, the more you have to pay in interest on newly issued debt.

 

This will apply to many bonds based on revenue

Always had issues with revenue bonds but not really ones backed by pretty secure cash flow streams such as tolls and transit bonds. I had more issues with housing revs and education rev bonds as the income streams were more suspect. While this situation is novel revenue streams changing or even vanishing is not. Back when the defense highway system was being built there were toll bridge authorities scattered across the country with bond issues depending on toll revs then the interstate gets built no reason to pay the toll authority fails Generally the local municipality steps in and the toll goes away but this is different in the sheer size but add so many more agencies like any state turnpike and bridge and tunnel. Might be good buying opportunity a tax equivalent yield well north of 7% smart investors will make out well.

Posted from iPhone