Regional News

N.Y. MTA To Refund Some ARS

New York's Metropolitan Transportation Authority plans to use $430 million of the proceeds of $1 billion of bonds that closed last week to refund part of its $2.4 billion of auction-rate securities currently outstanding, the agency announced at its monthly finance committee meeting yesterday.

The MTA sent out a 30-day notice of its intent to refund the bonds Friday, which was posted on Digital Assurance Certification LLC's Web site yesterday.

Last week's issue was originally scheduled to price in March and total $750 million, but the MTA decided to move up the sale and increase the amount.

"There's a lot of uncertainty in the auction-rate short term bond market and it's pretty certain there's going to be a lot of heavy issuance coming soon. So we went to the market early by a month," acting MTA finance director Vinay Dayal said.

Slightly less than half, $2.4 billion, of the authority's approximately $5 billion of variable rate debt is in auction-rate mode.

The ARS that are to be refunded were issued in November 2007 and have a maximum reset rate of 12% in case of auction failure, according to their official statement. None of the auctions for any of the subseries has failed but in the past two weeks those securities reset at various rates up to 8.01%. By comparison, the bonds had reset at rates between 3.5% and 3.75% in the first week of January.

The auction-rate securities will continue to reset at auction until they are redeemed at the end of March. One subseries, 2007A-5 reset yesterday at 4.85%, down from 8.01% last week. The bonds are insured by Ambac Assurance Corp.

Last week's issue was sold in two series on the authority's transportation revenue credit with yields ranging from 2.0% to 4.85% and various maturities out to 2038. They were sold as serial, term and mandatory tender bonds and were not insured. Dayal said the authority has not yet identified which series would be used for the refunding.

At the meeting, board member and New York City budget director Mark Page said the market was being "irrational" as uninsured MTA debt priced below insured debt. "You have an underlying obligation that is otherwise selling at 4.5% or 5.0%," Page said. "Eventually people are going to wake up and see what's in front of their faces and I think they are, to a degree, and that this should at least eventually be less acutely out of whack than it has been over the last week or two."

MTA chief financial officer Gary Dellaverson responded: "I don't think the high wealth investors or the hedge funds that are in there and taking advantage of this think this market is acting irrationally, I think they think it's going great."

Dellaverson said that the weighted average reset rate of its entire auction-rate debt was about 5.5%. The MTA's budget assumed a 4% per anum rate.

"The good news is we don't know yet what the bad news is going to be in the next week, two weeks, three weeks in this very unsettled market," Dellaverson said.

The MTA will consider its options for dealing with its auction-rate debt on case-by-case basis, Dayal said.

Most of the MTA's auction-rate securities are pegged to a percentage of the London Interbank Offered Rate, Dayal said. However, the series being refunded and one other series have a maximum reset rate. Transportation revenue bonds Series 2005D issued as subseries 2005D-1, 2005D-2, 2005D-3 and 2005D-4 at a total par of $250 million have a maximum reset rate of 15%. None of those 2005D auctions failed but subseries D-1 spiked to 11.9% two weeks ago from 3.8% before falling to 6% last week.

The MTA's failed auctions have priced at lower rates than some of the successful ones. In the last two weeks, auctions of twelve of the authority's 21 subseries in auction-rate mode have failed, but those failed bonds reset at rates ranging from 3.88% to 6.24%.

The past two weeks of higher interest rates have cost the MTA an additional $992,000 of debt service above budget.


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