The Massachusetts Turnpike Authority will not take immediate action on five swaptions involving a Lehman Brothers Holdings Inc. subsidiary while, at the same time, officials continue to evaluate underwriting proposals on an $800 million refunding deal.
The authority's executive director, Alan LeBovidge, said officials will monitor the situation to determine the fallout of Lehman's bankruptcy filing on the five swaptions with Lehman Brothers Special Financing Inc. as counterparty. Ending the swaptions would cost the authority approximately $30 million, a move that LeBovidge does not favor. Instead, MassPike will wait and see if the bankruptcy filing will at some point force the swaptions to unwind.
"It gets complicated who's on the swaptions and everything else but, the reality is it doesn't really matter for us at this point in time because assuming there's a technical termination by the parent filing bankruptcy - which may be the case - then we have the right, if we want, to terminate the swaption agreement," LeBovidge said. "But that would mean that we would have to come up with $30 million and I have no desire to come up with $30 million right now, so we're just going to let it sit."
The authority is looking into whether it can get out of the swaptions at a reasonable price, an opportunity that officials may consider in the future, if it materializes.
In 2002, MassPike entered into five fixed-to-floating-rate SIFMA swaptions with Lehman on roughly $800 million of fixed-rate debt involving Series 1997A senior bonds, Series 1997B subordinate bonds, and Series 1999A subordinate bonds. In that agreement, the authority pays a floating SIFMA rate to Lehman while receiving a fixed payment of 5% from the bank.
In addition, Lehman agreed to pay a premium of $35.2 million for the swaptions. The bank has yet to exercise its right on the swaptions.
MassPike entered into the Lehman swaptions to help mitigate risk on five swaptions the authority entered into a year before, in 2001. Those floating-to-fixed derivatives involve MassPike paying fixed rates of 4.75%, 4.875%, and 5% on the different swaptions while receiving 68% of one-month of the London Interbank Offered Rate from UBS AG, a subsidiary of UBS Securities LLC.
At that time, UBS agreed to pay of premium of $35.3 million for the swaptions and the bank earlier this year decided to exercise its rights on swaptions. By Jan. 1, all of the swaptions will kick in, forcing the authority to pay roughly $2 million, per month, in additional interest rates.
Having both the UBS and Lehman swaptions in play would have balanced the interest payments. Instead, having just the UBS swaptions kick in requires the authority to pay a fixed rate on the bonds, the fixed rates to UBS while receiving only the floating LIBOR payment from UBS.
To better match the UBS swaptions to the fixed-rate bonds, the authority anticipates refinancing the $800 million of debt into variable-rate mode by the end of the year, although LeBovidge said market conditions will determine the exact pricing. Gov. Deval Patrick last month signed into law a bill allowing the state to extend its appropriation pledge on the $800 million refinancing transaction.
"We'll do it when the timing is the best," LeBovidge said. "Let's see how things shake out here right now. We have to price it out and see what it's going to cost us to do it and I'm not committing to any fixed time."
Officials are now holding oral interviews for underwriting services on the refinancing. LeBovidge said eight firms were invited to come in and talk with the authority in person, but declined to identify which banks were selected for oral interviews. He anticipates the selection committee will have a banker and a plan in place to show the authority's board at its upcoming meeting on Sept. 25.
Of the 18 firms that responded to MassPike's request for qualifications, both Lehman Brothers and Merrill Lynch & Co. filed applications. Other respondents include Banc of America Securities LLC, Ohio-firm Butler Wick & Co., Citi, DEPFA First Albany Securities LLC, Fidelity Investments Capital Markets Services, Connecticut-based Jackson Securities LLC, JPMorgan, Lebenthal & Co., Loop Capital Markets LLC, Morgan Stanley, M.R. Beal & Co., Oppenheimer & Co., Piper Jaffray & Co., Ramirez & Co., RBC Capital Markets, and Raymond James & Associates Inc.
In a separate issue, the commonwealth on Monday announced plans to generate $6.38 million of savings for MassPike. That initiative involves the state's Department of Transportation, called MassHighway, to now execute all safety inspections on MassPike bridges, saving the authority roughly $2.5 million. In addition, the Massachusetts Port Authority will reimburse MassPike for maintenance on the CANA Tunnel, which feeds traffic to and from MassPort's Tobin Bridge. That move will save MassPike another $3.7 million.
While the $6.38 million of savings is only a small portion of the $70 million to $100 million budget shortfall within MassPike's current operating budget, LeBovidge said it's a step in the right direction.
"For a man dying of thirst, any drop of water helps," he said. "That's how I view this. It's not going to solve our problems, but it's better than not having it."
Last week, Fitch Ratings placed the authority's $2.24 billion of Metropolitan Highway System debt on credit watch negative due to rising operating costs. Of the MHS bonds, Fitch rates $1.28 billion of senior-lien debt BBB-plus and $959 million of subordinated debt BBB. Moody's Investors Service rates the MHS senior and subordinated bonds A3 and Baa1, respectively, both with a negative outlook. Standard & Poor's does not rate the credit.
