N.Y. MTA to Keep $1.35 Billion of ARS in Auction Mode Indefinitely

New York's Metropolitan Transportation Authority plans to keep $1.35 billion of auction-rate securities in auction mode indefinitely because it is cheaper than the alternatives, chief financial officer Gary Dellaverson said yesterday at the MTA's monthly finance meeting.

"We don't have a goal of getting out of the auction rate," Dellaverson said. "Where the penalty resets are less than where the substitute debt would be, we've made a judgement to keep those in place for now."

Out of a $2.4 billion of ARS that were outstanding at the beginning of the year, the MTA reported yesterday that it has refunded $600 million and is working on converting another $450 million to variable-rate demand bonds in the next 30 to 45 days.

When the auction-rate market began to collapse in mid-February, the MTA's securities reset as high as 11.9%, but it has refunded or is in the process of refunding all ARS that had a high maximum failure rate - the interest rate at which bonds reset in the event that there are not enough buyers to support an auction. The remaining ARS have a capped interest rate pegged to an index that would currently average 4.43%, according to an MTA report on its variable-rate debt. Although that failure rate is higher than the 4% assumed in the budget, it is lower than the authority's estimated average fixed rate of 4.66%.

Dellaverson said he was trying to be responsive to investors who wanted the MTA to get out of the auction-rate market but that the agency has to consider what was best for its own finances.

"It's important to keep the investors happy, so I don't want to minimize that, but our first obligation obviously is to the customers," he said.

The MTA has also refunded $800 million of variable-rate demand obligations this year.

Since the beginning of the year, the authority has considerably reduced its level of variable-rate debt - which includes ARS and VRDOs - overall relative to fixed-rate debt. The MTA ended 2007 with $22.9 billion of debt outstanding, excluding service contract bonds. Of that, 21% or $4.7 billion was variable rate, while $3.5 billion, or 15%, was synthetic fixed rate, and the remaining 64%, or $14.7 billion, was fixed rate.

The MTA's two issues this year were both fixed-rate deals and, in part, refunded auction-rate securities. Consequently, the MTA's $23.4 billion of debt is now 71% fixed rate while its variable-rate portion is now 14% and synthetic fixed-rate is 15%.

Dellaverson suggested that investment banks' willingness to support its auctions could be a factor in determining which banks are selected as book runners from its syndicate on future deals.

"In assessing our relationships with banks that is something we talk to them about - how much support they supply to us," he said. "We're continuing to assess their performance, we always assess their performance and that's one of the factors that we've been considering."

So far, no banking relationships have changed, but placement on a deal is one area where any such change could show up, according to Dellaverson.

"Our typical way of handling who runs the books is on a rotation basis, but it isn't always strict," he said.

David Brown 4th, the outgoing executive director of the Dormitory Authority of the State of New York, said in February that the agency would consider investment banks' performance during the auction-rate meltdown when allocating future business.

The finance committee yesterday approved a revised bond issuance calendar after changes made because of turmoil in the variable-rate market. Under the revised calendar, which the full board will consider tomorrow, the authority plans to refund $700 million of dedicated tax fund bonds next month and to take out $750 million of commercial paper with transportation revenue bonds in July.

The authority would resume marketing new money in September with $478.4 million of dedicated tax fund bonds, and finish the year with issues of $500 million in November and $400 million in December on its transportation revenue bond credit. The MTA plans to refund $2.83 billion of bonds this year and sale $2.08 billion of new money.

 

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