Regional News

MassPike Swap Payment a Looming Threat

It may be a new year, but problems with derivatives continue to plague the Massachusetts Turnpike Authority after officials spent all of 2008 tackling its costly swap agreements.

A temporary general obligation pledge from Massachusetts, aimed at shoring up the rating on five UBS Securities LLC swaps, expires tomorrow and it is unclear what the authority and the state plan next.

If the rating on the swaps is downgraded further, termination payments could cost MassPike $400 million.

Without the state's backstop, the rating depends on insurance from Ambac Assurance Corp. If rating agencies downgrade Ambac further, the payment would be required.

Ambac insures the five floating-to-fixed-rate swaps, which are based on the London Interbank Offered Rate.

It is unclear whether the state will extend the GO obligation again or address the derivative problem in Gov. Deval Patrick's anticipated plan to merge portions of MassPike - and its debt and liabilities - into other transportation agencies. Patrick has said he would file that proposal to the legislature this month.

In an effort to generate more revenue for the system, Transportation Secretary Jim Aloisi yesterday announced that the commonwealth will evaluate entering MassPike's 11 service plazas into concession agreements, with the state to release a request for proposals next week. Aloisi took office on Jan. 12.

"There is potential for a large up-front payment by selling to a bidder interested in gaining access to that lucrative revenue stream," Aloisi said in a press release. "A request for proposals to acquire the service plazas shows our seriousness in moving quickly and our willingness to consider all innovative ideas, including public-private partnerships, to find significant revenues within reform."

Officials have yet to announce if the legislature will renew the GO pledge on the UBS swaps or draft an alternative plan specific to the derivatives.

MassPike executive director Alan LeBovidge said he has not heard of any proposals to extend the state's GO obligation and officials declined to offer details on the issue.

"Our discussions with the legislature are ongoing as we work to determine what action may be needed," Cyndi Roy, spokeswoman for the Executive Office of Administration and Finance, said via e-mail.

In August, Patrick signed legislation to extend the state's GO pledge to the UBS swaps.

Standard & Poor's in November downgraded Ambac to A from AA and assigned a negative outlook. That same month Moody's Investors Service dropped the insurer to Baa1 from Aa3. The outlook is developing. Fitch Ratings does not rate the monoline.

According to LeBovidge, if both rating agencies downgrade the insurer by one notch, that would prompt a termination fee of roughly $400 million. MassPike last week received a letter from UBS notifying the authority of a termination event, a claim that MassPike officials dispute.

LeBovidge said: "I've been advised by our legal advisers that ... in order for it to be a termination event, Ambac would have to be downgraded by both Moody's and Standard & Poor's ... and therefore, to me, there's no basis for this letter." .

UBS spokesman Doug Morris declined to comment on its swaps with MassPike. In its letter, dated Jan. 6, the bank stated that the authority has 30 days to remedy the situation to avoid an early termination fee.

"Due to the downgrade of the Moody's financial strength rating of [Ambac] to a level below A2, an insurer rating downgrade has occurred, which, if not cured by you within 30 days from the date hereof, will constitute an additional termination event with you as the affected party allowing UBS to designate an early termination date with respect to the agreement and all transactions covered thereunder," the letter said.

Under the five swap agreements, MassPike pays UBS fixed rates of 4.75%, 4.875%, and 5%, and receives in return 68% of Libor from the bank. One-month Libor is now 0.33%, down from 4.56% three months ago, meaning the state is receiving about 0.2244%.

Along with the looming termination fee, the five floating-to-fixed-rate derivatives are attached to $800 million of fixed-rate debt.

LeBovidge said the authority will refinance the fixed-rate bonds into variable-rate mode to better match the bonds to the swaps once market conditions improve.

MassPike will now pay $2 million per month in additional interest costs due to the mismatched derivatives, after the fifth swap kicked in on Jan. 1.

"The market is not exactly wide open and so we're looking at it on a weekly basis to see what the opportunities are to refinance into variable-rate debt," LeBovidge said. "When it's opportune to do it, we'll do it, but right now it's not."

Of the $800 million refinancing, Citi and JPMorgan will structure $229 million and $207 million, respectively. Morgan Stanley and Merrill Lynch & Co. will price $185 million each.

The transaction will carry Massachusetts' appropriation pledge to help the authority gain better pricing at market, since the state's double-A credit rating is stronger than MassPike's.

Moody's assigns a Baa2 to $1.28 billion of outstanding Metropolitan Highway System senior-lien bonds and a Baa3 to $959 million of subordinate-lien MHS bonds. The outlook is developing. Fitch rates the senior-lien MHS debt and the subordinate bonds BBB-plus and BBB, respectively. The outlook is negative. Standard & Poor's does not rate MassPike.

Last month, the authority paid Lehman Brothers Special Financing Inc. $3.4 million to terminate five fixed-to-floating SIFMA swaptions that had yet to be exercised. Those Lehman derivatives were meant to offset the five UBS swaptions.

LeBovidge, who became MassPike's executive director in late 2007, said it was best for the authority to get the Lehman swaptions off its books as it prepares to refinance the $800 million of bonds.

While he acknowledged that many municipal issuers entered into swap agreements over the past few years, he questioned prior decisions to enter into the complicated derivatives in 2001 and 2002.

"I probably at the time would have said, 'Are you sure you understand all the awards and risks inherent in this proposal, and is this something that an agency like the Turnpike should be involved with?' " LeBovidge said.

The authority has a $12.1 million deficit in its current budget. To help generate more revenues for the system and boost debt-service coverage, officials may vote to increase tolls at an upcoming Jan. 22 board meeting.



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