WASHINGTON - Washington Metropolitan Area Transit Authority officials on Friday made an urgent plea to the Treasury Department to prevent it from having to make a $43 million termination payment on a leaseback deal, just as the Belgian bank demanding the payment was expected to urge a federal court here not to block the payment.
"We need action by Treasury if we are to avert a crisis," WMATA board chairman Chris Zimmerman said at a press conference here. "We run the risk of not being able to do repairs, we could fall into a state of disrepair. This could really not have come at a worse time."
If the Treasury does not intervene, KBC Bank NV of Belgium will be able to reclaim $17 million from a trust account used to make lease payments in the deal, and WMATA will be forced to tap its $613 million fiscal 2009 capital budget for the additional $26 million payment, authority officials said.
Zimmerman sent a letter to Treasury Secretary Henry Paulson Friday, urging the department to step in to fill American International Group Inc.'s shoes as guarantor on the leaseback deal, which WMATA entered into in 2002 with KBC Bank. The letter followed an earlier one the authority sent Treasury Oct. 28.
The bank demanded the $43 million termination payment after AIG lost its triple-A rating and the deal went into technical default. WMATA responded by suing KBC in the U.S. District Court for the District of Columbia on Oct. 29 and asking for an injunction to prevent the bank from obtaining the payment. The bank was expected to file a response on Friday to Judge Rosemary M. Collyer, who has scheduled a hearing for Wednesday to decide the matter.
At an initial Oct. 30 hearing with Collyer, KBC argued that WMATA owes it the termination payment under a contract. The contract states that if the guarantor - AIG in this case - loses its triple-A rating, the deal will go into technical default. Mark E. Nagle, a partner with Troutman Sanders LLP, who is representing the bank, also argued at the hearing that WMATA could not prove it faced irreparable harm if it was required to make the payment, and that if AIG were to fail, KBC Bank also would face losses.
Collyer said she wanted more information about whether the authority has done its due diligence to replace AIG with another guarantor. WMATA officials argued that because of the credit crunch, and because other transit agencies had similar deals and were seeking to replace AIG as well, no other guarantor could be found. The officials are expected to respond to KBC Bank's claims in a filing to be submited to the court tomorrow.
Apart from this transaction, WMATA officials fear they could face up to $400 million in further payments on 14 leaseback transactions that were done between 1997 to 2003, in which they sold rail infrastructure worth more than $1.6 billion. In most of the deals, AIG was the guarantor.
The court action is being watched by 30 other transit agencies that have leaseback deals guaranteed by AIG.
Because of the possible defaults, transit agencies could be forced to make up to $4 billion of termination payments to investors, according to market sources.
