Judge Rosemary M. Collyer began the negotiations with attorneys from both sides late yesterday after hearing arguments at an injunction hearing, but the court was not expected to reconvene until this morning to formally announce if an agreement has been reached.
WMATA brought the case to the U.S. District Court for the District of Columbia after KBC Bank demanded a $43 million termination payment from the agency after American International Group Inc. lost its triple-A rating. The downgrade forced the WMATA deal, which AIG guaranteed, into technical default.
The transit agency responded by suing KBC on Oct. 29 and asking for an injunction to prevent the bank from obtaining the payment.
If a compromise is agreed to instead of the injunction, it could serve as a precedent for 30 other transit agencies also facing large termination payments to banks on similar leaseback deals.
Carol Kissal, chief financial officer of WMATA, said one bank had unwound a leaseback deal, causing no termination payments by the transit agency, but said that 15 others were in technical default.
Kissal added that unwinding the deals would be the "best solution" aside from a Treasury Department guarantee on the deal.
If the judge instead ruled in favor of the bank, KBC could reclaim $17 million from the trust account used to make lease payments in the deal, as well as force WMATA to tap its $613 million fiscal 2009 capital budget for the remaining $26 million, authority officials said.
Authority officials said the agency already has about $200 million of deferred capital projects and that damage resulting from any termination payments made from its capital budget would be detrimental. They also warned that it could suffer downgrades if forced to make additional payments.
Transit agency officials said they could face more than $360 million in further payments on 15 leaseback transactions that were done between 1997 to 2003, in which they sold rail infrastructure worth more than $1.6 billion.
Tim Lee, a director at KBC Bank, told the judge that because of the contract language, the bank was entitled to the payment.
Harvey A. Levin, a partner at Thompson Coburn LLP, the firm representing WMATA, told the court that the bank was pursuing the termination payment purely because of Internal Revenue Service action earlier this fall, in which the IRS offered to settle with corporate taxpayers who had participated in such leaseback transactions. The settlement required companies to return 80% of the tax savings they realized under the transactions.
Levin argued that the bank was using the AIG downgrade as an excuse to collect the termination payment, and WMATA has made all of its previous lease payments on time.
Under these tax-advantaged leaseback transactions, governmental entities, including transit agencies, counties, and cities, sold or leased an asset such as transportation equipment to a private entity in exchange for cash - usually about 3% to 6% of the asset's value.
The government or agency typically got an up-front payment, and the private entity was able to write off the depreciation costs of the equipment 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.
Agencies in major metropolitan areas entered into deals between 1998 and 2003 that amounted to a total of $16.102 billion in pledged assets, based on Federal Transit Administration and congressional data analyzed last month by the nonpartisan Tax Foundation.
Financial disclosures and annual reports from several agencies involved in leaseback transactions show that most agencies had expected to make hundreds of millions of dollars of payments to settle their lease contracts on schedule, before credit rating downgrades triggered the defaults.
New York's Metropolitan Transportation Authority, which has terminated one leaseback already, expects to terminate a second and revise a third. It is analyzing "one or two" more in which Ambac Assurance Corp. is a player, said Gary Dellaverson, the MTA's chief financial officer.
The first termination cost about $15 million, Dellaverson said.
"At the end of the day, short of catastrophe, these things will still be a substantial net benefit to the capital plan. Remember, they all threw extra funds toward the capital program. That's why they exist," he said.
Dellaverson added that he thinks the agency's leaseback terminations are "not terribly related" to the IRS settlements.
The Los Angeles County Metropolitan Transportation Authority currently has eight deals involving AIG that total about $900 million, said Terry Matsumoto, chief financial services officer, who testified at the hearing here on behalf of WMATA.
The agency also has "a number of deals that [Financial Security Assurance Inc.] is involved in," he said, but none of its leases involve Ambac.
The agency has sent proposals to investors for settling the leases, Matsumoto said.
The Metropolitan Atlanta Rapid Transit Authority has about $1.43 billion of leases guaranteed by AIG, and another $140.5 million guaranteed by Radian Asset Assurance Inc.
MARTA's financial and legal teams are exploring the possibility of replacing AIG and unwinding its guarantee, said spokesperson Andrea Coleman, who did not know when the agency's board might consider options.
The transit agency's liability on the AIG deals could be as much as $400 million, according to the Atlanta Journal-Constitution.
Treasury Secretary Henry Paulson signaled yesterday that transit agencies are unlikely to get intervention from Treasury, and may instead need to turn to Congress.
Paulson said the $700 billion troubled assets relief program is intended to help financial institutions, not state and local governments.
"The backing that we are seeking is on Treasury securities to begin with," said Rob Healy, vice president of government affairs for the American Public Transportation Association, referring to Treasury securities that transit agencies typically rely on to make their lease payments.
"Our request is essentially a no-cost means of ensuring stability in the state and local bond markets," Healy said.
He added that Congress could use a stimulus bill as the vehicle for transit leaseback assistance, but that such a measure may not be approved by Congress in time to help the agencies. A resolution would have to come "in the next couple of weeks," Healy said.
Ted Phillips and Shelly Sigo contributed to this story.