MTA’s service woes don’t translate to credit concerns

This piece first published June 16, 2017, Debtwire Municipals
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Metropolitan Transportation Authority (MTA) should survive through growing demands for capital improvements due to the essential nature of the service it provides, said Mike Linko, credit analyst at Western Asset Management.

MTA, the public transportation agency responsible for New York City’s subways and buses, commuter rail lines within New York and Connecticut and other operations, has been plagued recently with renewed calls for capital improvement amid commuter frustrations.

Last month, the MTA board approved a USD 2.9bn increase to its five-year capital plan, to USD 32.5bn from USD 29.6bn – a 10% bump that includes an additional USD 1.6bn in new debt to fund capital spending between 2015-2019.

It’s the largest capital plan in MTA history.

However, a report this week from the Citizens Budget Commission found the capital plan is not enough to improve levels of service.

“They need outside revenue to maintain the system in a state of good repair – it’s declining,” said Richard Ravitch, former MTA chairman. “I don’t think this should affect MTA’s credit – it could in the long run if government doesn’t address the serious underfunding of the infrastructure, but we’re not yet at that point.”

The authority’s revenue has not seen an impact with complaints surrounding service, Ravitch said.

That essentiality—the subways in New York City report 5.6 million daily riders—in addition to good management, should leave MTA’s financial position intact, Linko said.

“We think their financial position is strong, and bolstered by the flat-out essentiality of the services they offer, and pricing power,” Linko said. “While we’re always concerned about the capital plan—it’s gigantic and continues to grow—they seem pretty good at getting money together, and we’re not overly concerned about the noise you’re hearing this summer.”

MTA has a growing debt profile—a report from the state comptroller noted the authority’s debt outstanding will grow 43% by the end of this decade—to USD 41.4bn in 2020 from USD 29bn in 2010, as reported. That means the group’s debt service costs will increase by nearly 33% between 2015 and 2020 to USD 3.1bn.

Although that’s not “ideal” for most institutions, MTA still has price elasticity, Linko said.

“At some point, it’s prohibitive, but it hasn’t shown signs of that yet,” Linko said. “As long as they manage their expenses, it’s something they can continue – though you’d think they’d hit that wall, it’s not imminent, from my perspective.”

MTA reports USD 35.7bn in debt outstanding, as of 31 December 2016.

“Obviously, there’s a lot of time and energy expended by all kinds of folks on the challenges that the MTA is facing,” said Tim Maniccia, founder at Policy Innovation, Inc. “Everyone’s trying to fix the problems and also give themselves some political cover for what is undoubtedly a very difficult situation that won’t go away overnight. I haven’t seen anyone say these challenges make MTA a meaningfully risky credit.”

MTA’s transportation revenue bonds are rated A1/stable by Moody’s Investors Service and AA-/stable by S&P Global Ratings and Fitch Ratings.

A USD 116.93m tranche of 5% Series 2014D-1 MTA transportation revenue bonds due 2039 last traded in odd lots at 116.256 to yield 2.884% on 16 June, according to Electronic Municipal Market Access.

by Maria Amante

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