By Joan Gralla - Analysis
NEW YORK (Reuters) - Investors in U.S. tax-free municipal debt have snapped up highway bonds because they hope they will rally when more states raise billions of dollars to build new roads, bridges and tunnels by privatizing.
Any new public-private partnerships likely would require existing municipal bonds to be refinanced and they could be replaced with taxable issues.
"There's usually some tremendous price appreciation when that happens," said Paul Brennan, a municipal bond fund manager with Chicago-based Nuveen Investments Inc.
Bondholders who bought the debt at a discount can snare rich profits from refundings as they are repaid the full par amount.
Though Brennan has not seen potential plays, such as turnpike or toll road bonds sold by New Jersey and Pennsylvania, run up in price, those issues have grown scarce.
"I don't see as much of those bonds floating around as I normally would. I think most investors are probably holding onto the ones they've got. They recognize there is some potential opportunity down the road," he said.
At a minimum, hopes that privatization of roads will accelerate will keep outstanding bonds from losing value, experts said.
But just as more than half of all U.S. states are studying or embarking on public-private partnerships, voters and lawmakers in states from Texas to New Jersey have grown wary.
This way of raising funds for transport infrastructure is common in Europe and Latin America, but fiscal monitors have criticized some of the early U.S. deals, saying cities and states failed to get enough for their assets.
Investment banks, eager to sell their advice and earn fat bond underwriting fees, have rushed into this arena.
New Jersey has hired UBS AG (UBS.N: Quote, Profile, Research) (UBSN.VX: Quote, Profile, Research) to study its assets, Pennsylvania tapped Morgan Stanley (MS.N: Quote, Profile, Research) and a few banks, including Goldman, Sachs & Co. (GS.N: Quote, Profile, Research) and JPMorgan (JPM.N: Quote, Profile, Research), have set up funds to invest in infrastructure.
States and cities increasingly desire an alternative to gasoline taxes, perhaps the most common source of funds for new roads and bridges, because volatile energy prices have pushed prices at the retail level to unpopular levels.
Chicago led the way two years ago, capturing $1.83 billion for leasing its Skyway toll bridge to MIG, run by Australian bank Macquarie Bank Ltd (MBL.AX: Quote, Profile, Research) and Cintra (CCIT.MC: Quote, Profile, Research), part of Spanish construction company Ferrovial (FER.MC: Quote, Profile, Research).
But the 99-year deal failed to give the city the extra toll revenue the companies could win, according to Fitch Ratings' Cherian George, who runs the global infrastructure and project finance group. The contract is so long that almost any forecasts about future demand are unreliable, he said.
"If you don't know the real value of a deal, how do you give it away at a price?" he asked.
Due to this uncertainty, George said such deals likely should not stretch for than 30 to 50 years. Pennsylvania now is looking at around a 30-year time frame, he said.
Texas, which has the biggest U.S. privatization plan, might push the model toward shorter deals, and perhaps force companies to compete with public agencies.
State legislators might enact a two-year moratorium on any new projects, except in the north, because they objected to Republican Gov. Rick Perry's choice of Cintra's $5 billion, 50-year proposal to modernize State Highway 121.
The North Texas Tollway Authority estimated it could pay Texas $2.3 billion, three times more than Cintra, to modernize the Dallas-Fort Worth highway. In mid-April, the agency was told to draft a competing plan.
In addition to roads, bridges and tunnels, the list of candidates includes airports, seaports, lotteries, property development rights, stadium naming rights and parking lots.
Mass transit, however, is not a contender as most systems need taxpayer subsidies, and that raises a crucial question.
The privatizing companies can afford to give states and cities big upfront payments partly because they get the benefit of accelerated tax depreciation, George said. But Congress could knock out that tax advantage, just as it did a few years ago with equipment leasing deals, he noted.
For the moment, U.S. voters seem divided, even in neighboring states. New Jersey voters opposed selling or leasing their Turnpike or the Garden State Parkway to cut debt or pay for a property tax cut by a 53 percent to 34 percent margin, according to a January poll by Quinnipiac University.
In contrast, Pennsylvanians supported leasing their Turnpike to a private company, but keeping control over tolls and upkeep, by a margin of 49 percent to 41 percent, Hamden, Connecticut-based Quinnipiac said in March survey. The rest did not answer or did not know how they felt on the issue.
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