MBTA Makes Use of a Good Name

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The Massachusetts Bay Transportation Authority is set to issue $263 million of sales-tax debt this week or next to help finance capital projects and restructure existing debt for immediate savings.

Officials are planning to sell the bonds on Thursday but may opt to issue the debt next week if market conditions are more favorable, according to Jonathan Davis, chief financial officer at the MBTA.

JPMorgan is book-runner for the deal. Barclays Capital, Citi, and Ramirez & Co. are co-senior managers on the transaction. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC is bond counsel.

There is no outside financial adviser.

The sale includes $63 million of Series 2010C tax-exempt bonds that will refinance outstanding debt and $200 million of taxable Build America Bonds. The Series C bonds offer serial maturities in 2018, 2019, and 2020, according to the preliminary official statement.

The Series D BABs include two term bonds — $49.1 million maturing in 2030 and $150.8 million maturing in 2040, according to the POS.

The MBTA has about $3.8 billion of outstanding sales-tax bonds. Its overall debt is $5.5 billion.

Moody's Investors Service rates the Series 2010C and D bonds Aa1. Standard & Poor's rates the transaction AAA.

The mass-transit agency, which provides public transportation throughout the greater Boston area, is looking to capture a lower cost of borrowing by using BABs instead of tax-exempt bonds. BABs give issuers a 35% federal subsidy on interest costs.

The BAB program could expire at the end of 2010 unless Congress extends the stimulus provision. If lawmakers in Washington choose to keep the BAB program going, it may include a smaller subsidy rate for issuers.

"We would like to take advantage of the subsidy that's available with the BABs," Davis said. "With not knowing if it's going to be extended — I think we need to assume that it will not — and with this particular issue, because of the difference in the interest rate between BABs and tax-exempt bonds, there's a compelling case to be made from an efficiency standpoint that we should do the BABs."

Other issuers will be looking to utilize Build America Bonds and the 35% subsidy before the end of 2010.

Matt Fabian, managing director of Municipal Market Advisors, said the muni bond calendar should be active for the next three weeks. He said the MBTA's "good name" should help it at market. In addition, the credit has a more stable sales-tax revenue stream.

"In the Northeast, [sales-tax credits] have been less volatile than elsewhere," Fabian said.

New-money bond proceeds will help finance vehicles, power improvements, track upgrades, station improvements, and enhanced accessibility to the system. The MBTA's capital program focuses on state-of-good-repair projects and maintenance needs rather than funding further expansion.

The restructuring piece of the deal will give the authority some debt-service relief this year by pushing part of a principal payment due March 1 out by seven to nine years.

"It would probably be around $70 million," Davis said. "So $63 million in par and then we would expect some premium on that, so it's about $70 million that we'll be moving out to 2018, 2019, and 2020."

The bonds are secured by 1% of Massachusetts' 6.25% sales tax, raised from 5% last year. The MBTA must receive a minimum amount regardless of how the sales tax performs.

In fiscal 2011, which began July 1, the authority received $767 million, which is the base amount. The state added $130 million to the 1% collection to reach the $767 million minimum allocation.

The state comptroller could increase that $767 million base amount if both inflation and year-over-year sales-tax collections improve.

Davis said the agency is "reasonably comfortable" that the state has experienced a slight increase in inflation this year and since sales-tax receipts have been coming in higher than the previous year, that base amount might be raised slightly.

"We'd probably get a small increase to the base revenue amount, but we're not certain yet because we still have another couple of months to go through and it needs to be certified by the comptroller," he said.

Davis said if the year were to end now, the increase would be around 1%, or $10 million, "But that's speculative," he said.

That floor has not increased in three years. The state can increase it by up to 3% annually.

"Moody's views the statutory minimum as an important bondholder protection, particularly as the pledged sales tax is underperforming the initial forecasts which were expected to exceed the floor amount," according to a Moody's report.

In addition, the MBTA receives assessment payments from cities and towns that benefit from the agency's public-transportation system.

After debt-service costs are met on the authority's assessment bonds, those revenues can help pay off the MBTA's sales-tax debt.

Likewise, any excess sales-tax revenue left over after sales-tax debt service has been paid can help pay down assessment bonds. That structure allows the authority to "cross-collateralize" its revenue streams.

Challenges for the authority include growing labor and maintenance costs that have helped create a budget deficit.

The agency balanced its fiscal 2011 budget in part with debt restructuring and a $160 million allocation from Massachusetts' general fund, which is on top of the minimum sales-tax revenue allocation.

"Significant additional leveraging of sales tax revenues coupled with protracted declines in sales tax allocation and ridership levels could place downward pressure on the rating," Moody's said in its report.

The MBTA has eight swaps for a notional amount of $660 million and the mark-to-market value is a negative $121 million, as of June 30, according to Moody's.

It has one swaption that totals $49 million with UBS Securities LLC as the counterparty. The bank has yet to exercise its right to require the MBTA to enter into a swap.

In that agreement, the authority would pay a fixed rate to UBS and receive a floating-rate payment based on the SIFMA index.

"I don't want to speak for the counterparty, but my guess is that in this interest-rate environment, it would not be exercised," Davis said. "But they have the continuing option."

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Transportation industry Massachusetts
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