The Massachusetts Department of Transportation plans to refinance by mid-April up to $2.27 billion of debt that helped fund Boston’s Central Artery Project, known as the Big Dig.
MassDOT’s board yesterday approved refinancing outstanding senior and subordinated Metropolitan Highway System bonds the former Massachusetts Turnpike Authority sold in 1997 and 1999. Citi will serve as book-runner on the subordinated refinancing, said Massachusetts Bay Transportation Authority , chief financial officer Jonathan Davis. Oofficials asked him to help structure the $2.27 billion refinancing deal.
The transaction will include refinancing $800 million of fixed-rate senior and subordinate debt into variable-rate mode in order to pair up five floating-to-fixed-rate derivatives with the variable-rate bonds and create a synthetic fixed rate for MassDOT.
The derivatives are currently mismatched with fixed-rate debt, requiring MassDOT to pay a fixed interest rate on those bonds, a fixed rate on the swaps, and receive a floating-rate payment in the swap agreement. The $800 million of debt includes Series 1997A senior bonds, Series 1997B subordinate debt, and Series 1999A subordinate bonds.
Having those derivatives attached to fixed-rate debt currently costs MassDOT roughly $2.5 million per month in additional debt-service costs, according to a MassDOT summary of the transaction. UBS Securities LLC, as counterparty, began exercising its rights to require the authority to enter into the floating-to-fixed rate swaps in 2008 and by January 2009, all five derivative agreements were in play. The authority had planned to sell variable-rate bonds linked to the swaps but market conditions precluded that.
UBS pays MassDOT 68% of one-month of the London Interbank Offered Rate on each swap and receives fixed-rate payments from the agency ranging from 4.75% to 5%.
“By more closely matching the variable-rate payments on the proposed bonds with the floating-rate payments MassDOT receives from the swap counterparty, MassDOT will greatly reduce the all-in cost of funds on the swap agreements and the related bonds,” according to the deal summary.
Terminating the swaps would cost the agency approximately $224 million, as of Feb. 19, according to MassDOT.
In addition to the $800 million, officials plan to refinance remaining Metropolitan Highway System debt for savings, depending upon market conditions. The agency anticipates the refinancings will generate more state aid for the MHS senior bonds. In mid-July, lawmakers approved allocating $100 million each year in state contract assistance to MHS subordinate debt to help boost its credit rating.
“The proposed transaction will make additional commonwealth contract assistance available to pay MassDOT’s senior-lien debt-service obligations, thereby strengthening the credit of the senior bonds and providing an opportunity to further lower MassDOT’s costs of funds on its overall debt portfolio,” the deal summary said.
To reform its surface transportation systems, Massachusetts lawmakers last summer terminated MassPike and created MassDOT in order to bring several transportation agencies under one roof and reduce operating costs.
Now within MassDOT’s umbrella are the MBTA, the state’s largest mass-transit provider, the former Department of Highways, and MassPike’s two main entities, the Metropolitan Highway System, and the Western Turnpike.
