New Jersey Turnpike joins the resurgence of forward delivery deals

Bonds

The New Jersey Turnpike Authority returned to the market last week with a $684 million deal, with a structure that has also returned to the market: forward delivery bonds. 

Forward delivery bonds may become attractive to issuers, some analysts say, as they try to maximize their savings in a market with uncertain interest rates. 

A forward delivery bond is priced on a determined date but is not issued and settled until a date further in the future.

A $684 million New Jersey Turnpike Authority refunding deal is the latest to use the forward delivery structure.

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The turnpike bond deal, which priced Tuesday, will refund 2015 Series E revenue bonds, which have an optional redemption date in January 2025.

The deal will close Oct. 3, within 90 days of the redemption date of the outstanding bonds, qualifying it as a current refunding.

Because interest rates may increase before January, the Turnpike Authority decided now was the best opportunity to get favorable rates, according to Leonard Jones, head of public finance for Blaylock Van, a co-manager on the deal.

The deal was led by Morgan Stanley, with BNY Mellon Capital Markets and Rice Financial Products Company as the other co-managers. MS&B was the bond counsel. NW Financial Group, LLC was municipal advisor.

It was the third forward delivery bond deal to price this month. 

On May 7, San Diego Unified School District priced $250.985 million of general obligation refunding bonds. Forward delivery bonds account for two of the deal’s tranches: $39.835 million of the bonds will refund election of 2012, Series ZR-5C bonds; and $10.410 million will refund election of 2008, Series SR-4C bonds. 

Hamilton County, Ohio, priced $66.44 million of Metropolitan Sewer District of Greater Cincinnati forward delivery refunding revenue bonds, also as part of a larger deal. 

April saw three different forward delivery deals, one of which also hailed from New Jersey. The New Jersey Economic Development Authority sold $281.370 million of forward delivery school facilities construction refunding bonds, 2024 Series SSS, in a deal managed by Barclays.

Forward delivery bonds hit an all-time high in 2021, ultimately accounting for $15 billion, according to Bloomberg. 2020 saw just $2.724 billion of forward delivery bonds, and prior to 2018, the market usually had less than $1 billion of forward delivery bonds per year. 

The underwriting process for a forward delivery bond is similar to a typical refunding bond, but with a later settlement date.

In a forward-delivery bond, “no funds are delivered until the closing date with a forward delivery, which allows the issuer to lock in rates at pricing, but not receive proceeds until the closing date,” The Bond Buyer wrote in 2021. “That allows an issuer to comply with Internal Revenue Service regulations for current refundings that funds are delivered within 90 days of the call date.”

The benefit of this structure in its 2021 peak was that the 2017 Tax Cuts and Jobs Act had eliminated tax-exempt advanced refundings, which allowed the issuer to refund bonds ahead of the call date, funding an escrow to pay debt service on the original bonds until the call date arrived.

Forward delivery bonds were still permitted, and there was plenty of investor interest in the tax-exempt refunding market. 

The deals this year were motivated by the other advantage of forward delivery bonds: the ability to lock in interest rates in a volatile market, with possible rate hikes from the Federal Reserve on the horizon. 

“Lots of sophisticated issuers are doing that analysis,” Jones said. 

Tom Feeney, media relations manager for the New Jersey Turnpike Authority, said the interest rate savings were a motivator for the authority’s decision. 

“As taxable advance refunding is prohibited by tax laws, forward delivery provides an attractive alternative and ensures 100% participation to maximize savings,” Feeney said in an email. 

The current state of the yield curve has also made forward delivery bonds more attractive, according to Mikhail Foux, managing director and head of municipal research & strategy at Barclays. 

“When the yield curve is steep, it just becomes much more expensive,” Foux said. “So the yield curve became much more flat, so it became cheaper.” 

Leonard Jones of Blaylock Van says issuers will be interested in forward delivery deals as long as the direction of interest rates remains uncertain.

But Foux said forward delivery bonds are unlikely to gain much more popularity, because the deals are relatively expensive to issue. The higher cost will likely cancel out the benefits for many issuers. 

“There’s been a handful of [forward delivery] deals, especially recently, but to me, those deals will still be more like one-offs here or there,” Foux said. 

Feeney said the New Jersey Turnpike Authority saved more than $28 million through the deal, which exceeded the 3% threshold, Feeney said. 

The deal priced with 5% coupons to yield between 3.85% for the 2042 maturity and 4.03% for the 2045. The bonds are rated A1 by Moody’s Ratings, A-plus by Fitch Ratings, and AA-minus by S&P Global Ratings. All assign stable outlooks.

Jones expects the popularity of forward delivery deals to persist as long as the direction of interest rates remains uncertain. 

Issuers have a few other options they could use to manage volatile interest rates, Jones said, such as put bonds and tender offers. Like forward delivery bonds, tenders gained popularity in the wake of the 2017 tax law, although they have waned since last year. 

The NJTA considered those structures, Feeney said, but decided against them; tenders take a long time to execute and don’t receive 100% participation from investors, and bonds involve remarketing risk. 

“The bankers are trying to come up with whatever ideas to help issuers deal with the volatility of the market,” Jones said. “I wouldn’t be surprised if they come up with something else.”

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