WASHINGTON - The Treasury Department must take the place of American International Group Inc. as guarantor of transit agency sale-leaseback deals to avoid "financial disaster" for state and local governments, a group of lawmakers warned Treasury and Federal Reserve officials yesterday.
"The consequences of inaction and an adverse decision could trigger banks to demand technical defaults on some 31 other public transportation authorities serving virtually every major metropolitan area in the United States, which would severely hamper the ability for transit properties to access credit markets," House Majority Leader Steny Hoyer and six other lawmakers from Maryland, Virginia, and the District of Columbia said in a letter sent to Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke.
The letter warned that the Washington Metropolitan Area Transit Authority faces an immediate $43 million termination payment to KBC Group of Belgium and up to $400 million in payments on 16 sale-leaseback transactions that were done between 1997 to 2003 to finance rail infrastructure worth more than $1.6 billion.
AIG provided a guarantee on the agency's lease payments to the bank counterparties. When it lost its triple-A rating, the deal technically defaulted, leaving WMATA at the mercy of its investors. While most of the bank-investors have given the agency time to remedy this situation, the authority has claimed it cannot find any other guarantors to replace AIG.
The lawmakers told the federal officials that 31 other public transit agencies are in the same boat and could be forced to shell out billions of dollars to investors from these deals. The defaults "threaten the financial future of most of the nation's largest transit agencies, as well as the financial futures of the state and local governments that fund them," they said in the letter.
The public transit sector's total exposure from these deals ranges from $1.5 billion to $4 billion, they said, adding, without help from the Treasury, some of these agencies could face dramatic ratings downgrades that could lead to the default of existing debt.
And because the leaseback transactions are not limited to transit assets, but also include sewage plants, water treatment facilities, government buildings, and other assets, the resolution of the WMATA situation "will be critical for a potential surge of a latent flood of technical defaults which could be forthcoming," the letter said. "Whatever precedent is set by WMATA, it is likely to follow for every other manor agency in a comparable situation."
Under these tax-advantaged leaseback transactions, which were done from about 1996 to 2003 and are often called sell-in/lease-out or lease-in/lease-out deals, governmental entities including transit agencies sold or leased an asset, such as transportation equipment, to a private entity in exchange for an up-front payment, usually about 3% to 6% of the asset's value.
The private entity was able to write off the depreciation costs of the equipment on its federal taxes while leasing the equipment back to the municipal entity. When the lease ended, the asset would revert back to municipal ownership for a nominal fee.
