The New Jersey Turnpike Authority owns and operates two key toll roads, the New Jersey Turnpike and the Garden State Parkway. The Turnpike provides an essential link on the I-95 corridor connecting major cities along the Eastern Seaboard while the Parkway is used primarily for intrastate travel between the New York City metro area and shore points in central and southern New Jersey. The Authority’s Turnpike Revenue Bonds, supported by tolls generated from the two roads, are rated A3 (positive outlook)/A+/A from Moody’s, S&P and Fitch, respectively.
Although it is in the midst of a $7 Billion capital improvement program, the Authority has been able to maintain its good credit quality because it was willing to adopt two large toll increases, over 40% in 2008 and over 50% in 2012. Minimal impact on traffic levels and increased levels of toll revenues following the toll increases provide evidence of the essentiality of the toll roads to the region’s transportation system. Toll transactions and revenues have continued to grow, driven by the state’s dense population, increased miles driven with lower fuel costs as well as the competitive position of the toll roads.
The resilience of the credit quality of the Turnpike Revenue Bonds is also evident when compared to other debt issued by the State of New Jersey. New Jersey State GO bonds have been downgraded from High-grade, AA levels in 2011 to the A category in 2014, the second lowest rating for a U.S. state, while Turnpike bond ratings have remained stable during the same period. The Turnpike Bonds provide security provisions that protect bondholders from the imbalance of the state budget and underfunded pension obligations which have led to the state’s numerous downgrades. Although the Authority has recently made annual payments to the state for transportation funding, those payments have been made from cash available after debt service payments as they are subordinate to Authority bonds.
The value of the Authority’s toll road bonds relative to state backed debt can be seen in current credit spreads. We estimate that the credit spread on 10-year Authority bonds is about 75 basis points while the spreads for similar maturities of New Jersey state leases (rated one-notch below the GO bonds) has widened to approximately180 basis points.
Sources: Bloomberg News, Fitch Ratings, Moody’s, Standard & Poor’s