--J.P. Morgan offers unusual backing of New Jersey note sale in
wake of Hurricane Sandy
--State's short-term debt sale expected to price Thursday
--New Jersey's revenue projections prior to Sandy were
aggressive
(Update adds comments and details starting in the fourth
paragraph.)
By Kelly Nolan and Mike Cherney
New Jersey intends to sell $2.6 billion in short-term debt later
this week with an unusual guarantee from the bank running the
offer: J.P. Morgan is offering to buy any notes the firm is unable
to sell at or below a certain interest rate, a move that should
help the state as it continues to struggle with Hurricane Sandy's
devastation.
Specifically, J.P. Morgan will buy any notes in New Jersey's
deal if it isn't able to sell them at an interest rate of 0.35% or
less, according to bond-offering documents, a move that puts an
upward limit on borrowing costs for the state.
"It is by no means normal," said Craig Mauermann, who manages
the roughly $825 million BMO Tax-Free Money Market Fund and the
approximately $800 million BMO Ultra Short Tax-Free Fund. "J.P.
Morgan is really stepping up to the plate...they are basically
taking any sort of market risk off the table" for New Jersey.
A spokesman for New Jersey Treasurer Andrew Sidamon-Eristoff
said "these were by far the best terms" the state received when it
was looking for an underwriter for its debt.
New Jersey originally planned to sell its notes through a
competitive process two weeks ago, but postponed the offering in
anticipation of Hurricane Sandy. The state opted to do a negotiated
sale instead because it offers more flexibility in terms of when
the debt can be sold, the spokesman said.
In competitive offerings, banks bid on blocks of debt through an
electronic auction at a certain time and date; banks then sometimes
reoffer bonds to investors. In a negotiated offering, such as the
one New Jersey is slated to do this week, banks act as
underwriters, marketing the debt directly to investors, but they
assume the risk of buying the bonds if enough investors are not
interested. Timing of the deal is also more flexible.
Disaster-modeling company Eqecat estimated that Sandy caused
between $3 billion and $6 billion in insured losses in New Jersey,
and as much as $20 billion in insured losses overall. At the upper
end of Eqecat's range, Sandy would be the second-worst storm in
U.S. history for the insurance industry, behind only Hurricane
Katrina and its $41 billion pricetag.
Proceeds from New Jersey's $2.6 billion note sale this week will
repay a $2.1 billion line of credit from Bank of America as well as
fund the state's cash-flow needs.
Moody's gave the New Jersey notes a rating of MIG 2, its
second-highest short-term debt rating, while Fitch and Standard
& Poor's gave the notes ratings of F1 and SP-1, their highest
short-term debt ratings, respectively.
Paul Palmeri, J.P. Morgan's head of public finance, said that
the bank has more than 30,000 employees in the region, so it
"wanted to help New Jersey in any way we could in the aftermath of
the hurricane. We expect strong demand from investors who we think
will want to step up as well."
Spokespersons from Goldman Sachs, Citigroup, Bank of America and
Morgan Stanley, all of whom underwrite muni-debt deals, could not
provide immediate comment as to whether they have offered similar
guarantees on other muni-bond offerings.
Andrea Bacon, a partner at Chapman & Cutler and chairman of
the law firm's public finance disclosure committee, said she has
never seen an underwriter make such a guarantee in bond-offering
documents before.
"I don't think there is a securities-law requirement that they
would disclose this deal up front," she said. "There is a
requirement they disclose what their compensation is, but it
doesn't sound like that's what this is."
Dan Solender, director of municipal-bond management at
investment firm Lord Abbett in Jersey City, agreed that the J.P.
Morgan backing is unusual.
"Technically, when you underwrite a deal [as a bank], you are
taking on the risk of buying the bonds if the deal cannot get
done," said Mr. Solender. "But guaranteeing the price is
unusual."
Mr. Solender added he didn't expect the New Jersey notes to have
any trouble selling, despite unknown Sandy damage costs to the
state.
Given that the New Jersey notes will mature in June 2013, buyers
of the debt will likely be short-term muni mutual funds as well as
money-market funds, which are starved for short-term debt and are
looking to pick up securities with any incremental yield, he
said.
"With rates so low, 0.35% is still something," Mr. Solender
said.
To be sure, even before Sandy hit, New Jersey faced some
financial challenges. According to Fitch Ratings, fiscal 2013
revenues through September this year ran 4% below budget
projections. Moody's Investors Service said the state's available
resources outside its general fund are lower than they have been in
advance of any New Jersey note sale in the past five years, and the
state's projected year-end cash balance has also "declined
substantially" from the level expected a year ago.
"This leaves the state a narrow margin for error in the event
that projected revenues fall short, or if expenditures escalate,"
Moody's said.
Market participants expect that New Jersey will get most, if not
all, of its costs related to the storm reimbursed by the federal
government. But, there is a concern there may be a short-term
impact while the state waits for reimbursements to come in.
With the state's revenue projections already too aggressive,
"now you throw in Sandy's impact, we have a lot of concern," said
Todd Sisson, senior analyst of tax-exempt fixed income at Wells
Capital Management. "Clearly they are going to miss their budget
projections," and there's worry the state may have to do another
short-term borrowing in the wake of Sandy, he said.
That said, there has been little muni-market reaction in New
Jersey's longer-term debt to Hurricane Sandy so far. The state's
10-year general-obligation bonds, which are backed by its taxing
authority, were yielding 0.33 percentage point more than the
Thomson Reuters Municipal Market Data triple-A benchmark, as of
Friday. That is the same level as when the hurricane hit.
Meanwhile, the S&P Municipal Bond New Jersey Index has
returned 0.74% so far this month, about the same as the broader
S&P National AMT-Free Municipal Bond Index, which has returned
0.72% this month.
New Jersey, as well as other states, sell notes repaid with
future tax revenues to bridge seasonal imbalances between when
money comes into state coffers and when expenses must be paid.
According to Moody's, New Jersey has sold these notes, called
"tax-revenue anticipation notes" in each of the last 21 fiscal
years. Last year, the state's TRAN was roughly $2.2 billion in
size, according to Ipreo LLC.
--Christian Berthelsen and Erik Holm contributed to this
article.
Write to Kelly Nolan at kelly.nolan@dowjones.com and Mike
Cherney at mike.cherney@dowjones.com.
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