By Hilary Russ
Nov 4 (Reuters) - New Jersey's economic development arm on Tuesday will sell $457 million of municipal bonds on behalf of the private developer designing and re-building an 85-year-old bridge between New York and New Jersey.
The bonds will help finance a $1.5 billion replacement for the Goethals Bridge, which links New Jersey to Staten Island and is being built under a public-private partnership by the Port Authority of New York and New Jersey. The project will also get a $480 million low-interest federal loan.
The tax-exempt, private-activity bonds are barely clinging to investment grade, with Fitch Ratings saying it expects to rate the bonds BBB-minus once they price on Tuesday.
The sale comes as retail investors have fled muni bond funds since late May as factors such as Puerto Rico's financial troubles, the prospect of higher interest rates and Detroit's bankruptcy filing raise anxiety levels across the muni market.
Institutional investors and mutual funds are the likely buyers of the Goethals Bridge bonds, said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management.
High-yield mutual funds in particular are likely buyers, said Adam Buchanan at Ziegler Capital Markets in Chicago. His firm may be a buyer, depending on the rates, he said.
The New Jersey Economic Development Authority (NJEDA) is acting only as a conduit issuer for the developer, but it charges fees for handling such deals. The NJEDA did not reply to a request for information about how much it would make in fees in this case.
The private developer, NYNJ Link, a unit of Australia's Macquarie Infrastructure and Real Assets, is responsible for making debt service payments.
The bonds are insured by Assured Guarantee, but are not backed the taxing power of New York, New Jersey or the Port Authority, according to the preliminary official statement.
Bank of America Merrill Lynch is the lead underwriter.
While such a low rating is rare for most traditional municipal bond issuers, muni investors are becoming more familiar with project financings, which are usually rated just above junk because of the risk that construction won't be completed on time and because they often cover a single asset, said Fitch analyst Scott Zuchorski.
"Most, if not all of the pure project financings, are going to be in that triple-B level," he said. More established infrastructure projects, like larger toll roads or airports, tend to be rated A or better, he said.