Deal in Focus

MTA $400M Deal Includes Floaters

New York’s Metropolitan Transportation Authority will go to market this week armed with a creative tool: the floating-rate note.

On Wednesday, the MTA, which runs the largest transit system in North America, will issue $400 million of transportation revenue bonds. The sale, through competitive bid, will consist of $150 million in three equal subseries of Series A floating-rate notes and $250 million in Series B fixed-rate notes.

The floating-rate notes will adjust weekly, based on a Securities Industry and Financial Markets Association index.

According to finance director Patrick McCoy, floating-rate notes provide the MTA with additional flexibility.

“The MTA, first and foremost, actively pursues the lowest possible costs for borrowing,” he said, citing various means of issuance that have included traditional fixed-rate and variable-rate bonds, bond anticipation notes and commercial paper.

“The markets have changed,” the finance director said. “The floating-rate note product is a fairly new development that we believe is an important vehicle for the MTA to participate in the short market.”

Closing is scheduled for March 15.

According to McCoy, firms will bid as spread to SIFMA, the authority’s base index.

“Whatever that spread is, that will be what we lock in for the period of that bond,” he said. “We’re looking at one-, two- and three-year tranches of that bond. When that tranche comes up for renewal, we’ll remarket, either through bidding or negotiation, to continue to keep that in the short market.”

The MTA’s finance committee and full board in late January approved the issue as part of a $1 billion financing for new-money needs for approved transit and commuter capital projects. The authority intends to issue the remaining $600 million in a negotiated fixed-rate transaction sometime in April.

Nixon Peabody LLP is bond counsel. Lamont Financial Services Corp. is the financial advisor.

In between, the MTA plans a reoffering in mid-March to replace troubled Dexia Bank on its $440 million of outstanding dedicated-tax fund Series 2002B bonds.

“I can’t think of a better time,” MTA chairman and chief executive Joseph Lhota said of the flurry of bond activity, citing low interest rates.

“Obviously, the rates are important. We’re in a historically low interest-rate environment,” said McCoy. “But it’s not just about the low interest rates. We need to proceed on vital projects.”

According to McCoy, the agency typically issues new-money bonds every quarter. “The MTA has established itself as a periodic issuer,” he said.

Moody’s Investors Service assigned an A2/NR rating to Wednesday’s offering. The NR, or not rated, applies to the short-term rating on the floating-rate note subseries and reflects the repayment of mandatory tenders only with remarketing proceeds.

Fitch Ratings and Standard & Poor’s both assigned A long-term ratings, while affirming the same ratings on $15.2 billion in outstanding transportation revenue bonds. All three rating agencies have stable outlooks on the credit.

“The MTA faces a challenging environment as it manages its operations and a substantial capital plan,” Moody’s said in a report.

Lacking additional capital resources, it said MTA borrowing will increase to fill part of its funding gap of nearly $8 billion in the 2012-2014 portion of its capital program.

Meanwhile, the agency will continue to look for such efficiencies as pay-as-you-go financing, funding from local partnerships, and asset sales.

It’s looking to sell its former subway headquarters on Jay Street in downtown Brooklyn — with New York University keenly interested in the site for a new science building — and plans to issue a request for proposals for the sale of its current headquarters on Madison Avenue in Midtown Manhattan.

“As currently projected, debt service costs will grow but increase only slightly relative to the operating budget.” Moody’s said.

One big risk, according to the rating agency, is the assumption that labor settlements will include three years of net-zero wage growth. The MTA’s contract with Transit Workers Union Local 100 expired on Jan. 15. Lhota, briefing reporters after a board meeting last week, described talks as “candid and moving forward.”

Fitch said the MTA’s strategic importance and strong security pledge were pluses, although it warned about extremely large capital needs, annual rising debt and what it called highly constrained financial operations.

“The MTA’s operating subsidies are vulnerable to economic conditions. There is limited flexibility to offset revenue declines to cover operations of the system despite high debt service coverage ratios,” Fitch said.

Lhota met this winter with Gov. Andrew Cuomo’s transportation officials in Albany, including deputy secretary of transportation Karen Rae, about bond issuance fees, for which the MTA could be on the hook for about $75 million. State law requires the agency to pay a fee of $8.40 for every $1,000 of bonds.

Those discussions “are still progressing,” an MTA spokesman said late last week.

Standard & Poor’s said: “We consider the MTA’s ridership trends resilient, its revenue stream diverse, and the support from the state and city strong. These, in our view, are additional credit strengths.”

But S&P mentioned the size of the capital program, funded largely with debt, as well as continuing pressures to maintain structural balance.

The MTA, meanwhile, is proceeding with a plan to replace Dexia. It has scheduled a sale for the dedicated tax fund bonds for sometime in April, after which the authority will end its exposure to Dexia. The French, Belgian and Luxembourg governments bailed out the Franco-Belgian lender in October after it collapsed during the European debt crisis.

McCoy and the MTA’s deputy finance director, Olga Chernat, last summer noticed a “widening out” of bonds connected with Dexia.

State Street Bank, responding to a solicitation for liquidity as backstop on the variable-rate bonds, responded with the low bid to provide a letter of credit for $150 million of the bonds now backed by Dexia.

The MTA will issue the remaining $290 million in different modes: $128 million in fixed-rate short maturities, and about $162 million using the floating-rate note structure.

Current remarketing agent Morgan Stanley will retain its role in the remarketing plan.

In late January, the MTA’s Triborough Bridge and Tunnel Authority tendered and reissued three subseries of variable-rate demand bonds, totaling $540 million. The transaction substituted standby bond purchase agreements with Dexia with LOCs from a US Bank-led consortium that included the California State Teachers Retirement System and the California Public Employees’ Retirement System.

Regular communication with the credit rating agencies is important, according to McCoy.

“We’re speaking with them on almost a weekly basis, whether it’s a financing plan or any other new development,” the finance director said. “We make a concentrated effort to brief them and because we’re in New York, we also brief them face to face. They’re key members of the investment community.”



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