The New York Metropolitan Transportation Authority’s finance committee approved a pool of banks Monday that could replace liquidity facilities on $4.6 billion of variable-rate bonds due to expire over the next four years.
A resolution approving nine banks and a procedure for soliciting pricing will go before the full board for a vote on Wednesday.
The MTA’s variable-rate debt portfolio has letters of credit or standby bond purchase agreements that will expire on $350 million of bonds in 2010 and $1.4 billion in 2011.
MTA finance director Patrick McCoy said decisions about how to handle the expiring facilities will be made in future.
“We’ll take those one at a time,” he said. “Block and tackle as we go, that’s all we can do.”
The resolution listed alternatives to replacing facilities, including refunding as fixed-rate debt or as indexed variable-rate debt that does not require liquidity support.
The nine banks approved were: Barclays Bank PLC, Bank of America Merrill Lynch, Citibank NA, JPMorgan Chase Bank NA, KBC Bank NV, Morgan Stanley Bank NA, Sumitomo Mitsui Banking Corp., U.S. Bank, and Wells Fargo NA.
McCoy said that they did not solicit prices for the liquidity support. “Pricing will come as we need them,” he said.
The authority will solicit bids from at least three banks on the list to provide LOCs or SBPAs as needed, according to the resolution. MTA staff will also be authorized to add commercial banks to the list, provided they meet minimum ratings criteria.
On Sept. 29, the MTA will replace an expiring LOC from Bayerische Landesbank with a standby bond purchase agreement with JPMorgan Chase. The bonds were issued on the Triborough Bridge and Tunnel Authority credit in 2001. The change led Moody’s Investors Service to downgrade its long-term rating on the bonds to Aa2 from Aaa.
“In our rating approach for letter-of-credit providers, the long-term rating is based strictly off of the bank’s rating, but with the standby, the long-term rating is the underlying issuer’s rating,” said Moody’s analyst Maria Matesanz. “It’s written as a downgrade, but it’s really a change in the provider.”
McCoy declined to say how much the authority is paying JPMorgan for the SBPA, but said they generally are less expensive than LOCs because they have liquidity but not the full credit support of the financial institution.
“It worked out well — because of Triborough’s high ratings, you can go out with an unenhanced standby,” McCoy said. “I don’t think we could do that on a transportation revenue bond where it’s a single-A rated credit.”
Earlier this month the MTA closed on its new $900 million commercial paper program, initially placing $100 million of short-term debt. The paper is enhanced with LOCs from four banks. Those facilities cost between 75 to 110 basis points and expire in two to three years.
Speaking generally about the choices issuers of variable-rate debt face when deciding if renewing with an LOC or SBPA, Matt Fabian, managing director of Municipal Market Advisors, said it comes down to cost.
“LOCs will be more expensive, but some of that can be made back in the lower yield a fully guaranteed bond would carry, not to mention the hedge it provides against the issuer getting downgraded itself — an increasingly relevant scenario these days,” Fabian said in an e-mail. “There is also some pressure to lock in two to three LOCs now, even if it means a slightly higher premium rate, to avoid competition later on in the year and replacement anxiety next year.”
The MTA finance committee also approved a $350 million TBTA bond deal to be competitively priced in the last week of October.