Independent authorities in Massachusetts would need to obtain gubernatorial approval before entering into derivatives if lawmakers approve an initiative to restrict and regulate swap agreements.
At the same time, Standard & Poor's Friday assigned its A-minus rating to $1.27 billion of senior-lien Massachusetts Turnpike Authority debt, which will help it avoid a $67 million termination payment on a swap attached to the senior bonds.
The derivative proposal is an amendment to a bill that lawmakers will pick up this week, according to Sen. Mark Montigny, D-New Bedford, the legislator behind the amendment.
The push to limit derivatives among bonding authorities is in response to five MassPike swaps for a notional amount of $800 million that at one time had the agency facing a termination event of nearly $400 million. To this day, they have cost MassPike more than $2 million per month in additional interest on the fixed-rate bonds associated with the floating-to-fixed-rate swaps.
Montigny believes bonding authorities should be able to use derivatives, but through a transparent process that would help prevent costly swap agreements such as the MassPike derivatives.
"I want to make sure that if we're going to use them - and I do think there are times where ... there's going to be very legitimate needs for complex financial products - [then] let's make sure that we have our own advisers doing our due diligence," Montigny said. "Let's make sure that it's a proper bidding process. Let's make sure that it's vetted publicly, ultimately through A&F [the Executive Office of Administration and Finance] and those that are responsible to the taxpayer."
If approved, quasi-public entities and independent agencies would need to request through A&F the right to enter into a "derivative financial product." If approved by the governor, authorities may then participate in a swap agreement. Any derivative that requires credit support from the state would also require approval from the treasurer as well as the governor.
In addition to adding a state-level approval process to derivatives undertaken by authorities, the amendment requires the Massachusetts inspector general to investigate all swaps that MassPike entered into between 1999 and 2007 and the parties involved, including the agency's counterparties, UBS Securities LLC, Lehman Brothers, and JPMorgan. The IG will then file a report no later than Sept. 4.
The amendment also requires the state treasurer and all quasi-public agencies and authorities to submit by Sept. 4 all borrowing practices from 1997 through 2009, including all derivative products entered into and details of such agreements.
Boosting MassPike's credit ratings to single-A from triple-B on its $2.2 billion of Metropolitan Highway System debt helped the authority avoid combined termination payments of $257 million to UBS Securities, according to Jay Gonzalez, undersecretary of the A&F.
State officials asked Standard & Poor's to rate MassPike in hopes that a third rating may generate a single-A rating on the senior bonds and stave off a $67 million termination payment on one swap attached to the senior debt. Fitch Ratings last week affirmed its BBB-plus rating on the MHS senior debt. Moody's Investors Service rates the senior bonds Baa2 with a developing outlook.
Late Tuesday, Fitch upgraded $959.6 million of MHS subordinate debt to A from BBB in response to the authority dedicating $100 million of annual state revenues to debt service costs on the subordinate debt. Moody's on Thursday replaced its Baa3 rating on the subordinate lien with an A1 rating in light of the $100 million dedication to subordinate debt service.
Those rating changes helped MassPike avoid a $190 million termination payment on four swaps attached to subordinate debt. Standard & Poor's Friday assigned its AA rating to the subordinate lien.
Along with warding off termination payments, the upgrades will assist MassPike as it heads to the market to refinance the $800 million of fixed-rate debt into variable-rate mode to help better match the bonds with the five floating-to-fixed-rate derivatives.
"It's increasing the underlying rating on the bonds and so the Turnpike as a result is in a much better credit position to access the market," Gonzalez said. "It's still not going to be easy because we still need liquidity, which is still scarce. But I think once we're past the termination and we've started to get some interest from banks in providing liquidity and once the termination event with respect to the last swap is resolved, I think the Turnpike will turn to working on the issuance of the variable-rate bonds."
