WASHINGTON - KBC Bank NV of Belgium and the Washington Metropolitan Area Transit Authority reached an agreement in federal court here on Friday to dissolve a leaseback deal entered in 2002, a move that could set a precedent for more than 25 transit agencies across the country with similar deals.
Judge Rosemary M. Collyer announced the settlement on the third day of negotiations in the U.S. District Court of the District of Columbia, but as part of that agreement, neither KBC Bank nor WMATA would disclose the amount of money the bank collected to end the deal or any details of the negotiations, which lasted more than two days.
"Metro has reached an agreement that has no threat to our capital budget," WMATA general manager John Catoe said at a press conference. "Taxpayers have been saved tens of millions of dollars, and Metro no longer faces ... the downgrading of our credit rating."
He added that because of the action, he was confident and "very optimistic" that WMATA will be able to unwind 14 other leaseback deals that are in technical default with other banks.
Craig Kline, a partner with Troutman Sanders LLP, the firm representing the bank, called the deal a "win for everybody."
"We're very pleased with the settlement in which no court action was needed," Kline said.
Collyer, after first hearing arguments from both parties on Wednesday during an injunction hearing against the bank, suggested that KBC consider taking a more than $17 million trust payment instead of pushing for a $43 million termination payment, which the bank demanded from WMATA after American International Group Inc., the guarantor on the leaseback deal, lost its triple-A ratings, which put the deal into technical default.
Officials would not say whether the $17 million in the trust account that was set aside for lease payments to the bank was part of the agreement, but WMATA officials said the deal is closed, which would mean the trust no longer exists.
Carol Kissal, chief financial officer of WMATA, had said earlier that one other bank, SunTrust, had recently unwound a leaseback deal with the agency in which the bank collected the money from the trust that was set aside for lease payments and demanded no further termination payments.
But Kissal said the agency has been receiving waivers from banks on the 14 other deals, and that one waiver expires today. She said they will continue negotiations with the bank to avoid a termination payment. WMATA officials said they are still urging Treasury Department or Federal Reserve to back the guarantees of the deals.
Catoe said transit agencies "still need the support of the federal government and that he will work with "whoever will talk with us." Catoe and transit officials will meet with lawmakers tomorrow to urge Congress to "legislate a provision in the economic stimulus bill to require the Treasury Department to back AIG and other insurers' credit ratings," officials said.
A sticking point for Collyer during the arguments on Wednesday was what she called a "windfall" for the bank if it collected the full $43 million termination payment.
When the bank and WMATA formulated the leaseback contract in 2002, she noted, the termination payment agreed upon factored in tax benefits the bank expected to receive over the life of the deal. But because the IRS ruled in the deals as tax shelters in 2004, those benefits no longer existed and the bank would end up recouping the lost benefits through the payment, Collyer said.
"It's a windfall for the bank; it's money they never thought they'd see again," she said.
Harvey A. Levin, a partner at Thompson Coburn LLP, the firm representing WMATA, pushed that idea on Wednesday during a round of oral arguments before both sides entered into the back-room negotiations.
He said the bank was pursuing the termination payment purely because of Internal Revenue Service action earlier this fall, in which the service 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 had realized under the transactions.
Levin said that the bank was using the AIG downgrade simply 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.
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.
About 25 transit agencies in 18 states could face $2 billion to $4 billion of payments if the banks demand payment from the agencies.