St. Louis Metro Looks to Shore Up Liquidity

CHICAGO - While the St. Louis transit agency Metro lacks the headache of dealing with any outstanding auction-rate securities in its own debt portfolio, it's concerned about that market's collapse because of its role as an investor that's now looking, like most others, to shore up its own liquidity.

Metro currently holds about $28 million of the $3.5 billion of auction-rate securities that are part of the Missouri Higher Education Loan Authority's overall $5 billion tax-exempt and taxable bond portfolio. Metro has placed sell orders on its outstanding balance but the auctions have failed due to a lack of buyers. The $28 million invested in MOHELA represents about 18% of Metro's overall investment portfolio, according to Metro's treasury manager Mark Carroll.

Last month, the interest rates at auction ranged from 3% on the low end to 17% on the high end. The maximum rates set after a failed option is based on a complex formula involving Treasury note rates and the prior year's auction rates.

Most of MOHELA's ARS continue to carry top ratings because they are backed by loans guaranteed through various federal student loan programs although MOHELA does have about $340 million of bonds that carry Ambac Assurance Corp. The insurer lost its AAA from Fitch Ratings.

Metro officials said the underlying credit remains sound and they have at various points collected some additional interest, but like others that have exited the auction-rate market, they are concerned with liquidity.

"This is not a credit issue for us, it's about liquidity. We are sitting here like many other investors," Metro's chief financial officer John Noce said. "We have had a lot of success and earned rates above comparable investment vehicles."

The agency several years ago revised its investment policies permitting the purchase of Illinois and Missouri student loan debt.

The student loan bonds were viewed as a top notch credit investment that paid a higher yield than short-term certificates or other highly-rated and liquid investments. Because of the frequent auction cycles, the agency believed the investment could quickly be converted to cash when needed to fund projects. That was until earlier this year when rates shot up and auctions began to fail as a result of the credit crunch that prompted investors to pull their holdings.

With the banks and broker-dealers that serve as auction agents also struggling with liquidity issues, they did not step up as they had in the past, to place orders. Metro's inability to sell its ARS holdings does not pose a near-term threat, but Noce said he wants to ensure that over the mid-to long-term the agency has funds easily accessible when needed.

As an issuer, Metro has been watching the market closely for its impact on about $150 million of outstanding variable-rate bonds. A $100 million issue from 2002 is remarketed weekly by UBS that carries a standby bond purchase agreement from West LB and a $50 million 2005 issue is remarketed by Bank of America that carries a direct pay letter of credit from JPMorgan Chase & Co.

The agency has not seen a major jump in rates or a failed remarketing. In a worse case scenario in which the liquidity providers were to own the bonds, rates would rise to as much as 6% and add about $4.5 million in interest over the course of one year. Columbia Capital Management LLC is financial adviser to Metro.

Metro has a swap on its 2002 $100 million variable-rate bonds in which Metro pays 3.656 % to counterparties Citi and UBS and receives 67% of the one-month London Interbank Offered Rate. When Libor inverted in mid-2006, Metro entered into another swap for 61.45% of five-year Libor to pick up additional earnings when the Libor yields returned to normal.

As of March 18, Metro's interest costs had risen to 3.98% when the swap payments did not fully cover the interest on its bonds. The level, however, remains below the 5.06% the agency would have paid if it sold only fixed-rate bonds and Noce said he intends for the time being to leave the swaps in place.

Metro wants to delay any restructuring of its debt until next year.St. Louis County is considering placing a sales tax hike on the November ballot to help shore up Metro's struggling operational budget and raise new revenues for transit projects. The agency wants eventually to restructure portions of its debt to address various issues including the expiration of the West LB liquidity next year and the expiration of the JPMorgan LOC in 2010. Metro has $100 million from its 2005 issue also coming due in 2009 as the agency had hoped to receive a legal settlement to help pay it off.

The agency's debt includes $400 million from a 2002 issue for its light-rail expansion project. Another $150 million was issued in 2005 to cover cost overruns on the project. The agency lost its lawsuit against developers of the project last year.

Meanwhile, MOHELA is exploring its options, including the possible restructuring of its debt and the possible sale of certain loans that secure bonds. "However, there can be no assurance that there will be any restructuring or sales of loans or, if there is, when any such actions will occur," according to a notice posted by MOHELA on its Web site March 18.

 

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