The Massachusetts Turnpike Authority next month will sell $126.7 million of variable-rate bonds to restructure outstanding fixed-rate debt and match the new debt to a 2001 swaption agreement.
Citi will serve as underwriter for the transaction. Public Financial Management Inc. is financial adviser and bond counsel is Edwards, Angell, Palmer & Dodge LLP. Ambac Insurance Corp. will insure the bonds.
The sale will defease the 2029 and 2037 term bonds from the authority’s 1997 Series B bonds and restructure the debt from a natural fixed rate to variable rate in order to match the bonds with a 2001 UBS Securities LLC swaption that is tied to the debt.
In 2001, the authority entered into five floating-to-fixed-rate swaptions with UBS on three series of debt, for a notional amount of $800 million. UBS is exercising its swaption on two. The authority will pay a fixed interest rate of 4.875% on one series and 5% on another while the firm pays 68% of one month of Libor, according to the authority’s 2006 audited financial statement. In addition, in 2001 UBS agreed to pay MassPike $35.3 million over eight years beginning in 2001.
The bonds associated with the UBS swaption include 1997 Series A senior and Series B subordinated debt, for $207.6 million and $126.7 million, respectively, and 1999 Series A subordinated bonds for $465.6 million.
In addition to the UBS swaptions, the three bond series are connected to another set of swaptions. In 2002, the authority entered into five fixed-to-floating SIFMA swaptions with Lehman Brothers, with the authority paying a floating SIFMA rate while Lehman pays a fixed rate of 5%. To enter the swaptions, the firm agreed to pay MassPike $35.2 million.
The UBS and Lehman swaptions gave the authority combined up-front payments of $70.5 million. As Lehman has yet to exercise its swaption on the $127.6 million of bonds, UBS’s decision in early September to exercise two of its swaptions meant the authority had to plan the upcoming restructuring. Officials are considering ending all of the Lehman swaptions.
Terminating those agreements could cost the authority roughly $34 million. Ending the swaptions associated with the $127.6 million of debt may cost MassPike roughly $4.8 million.
