New York's Metropolitan Transportation Authority saved about $310 million late last year by terminating leveraged lease agreements early on equipment ahead of a rating-agency downgrade to bond insurer Assured Guaranty Municipal Corp., authority officials said.
"We were looking at this, frankly, for several months," said Jerome Page, the MTA's director of strategic initiatives.
The lease documents required the MTA to replace Assured Guaranty's equity payment agreements and surety policy upon a downgrade of the insurer's ratings by Moody's Investors Service to A2 from Aa3 — two notches — on Jan. 17. Had the leases not been terminated before the downgrade, the MTA would have had to liquidate Assured Guaranty's equity payment agreements and pay $55 million out of pocket to purchase U.S. Treasuries, according to Page.
Moody's announced its review of the bond insurer in March and continued it in late October.
In addition, the MTA said it would also have had to replace the AGM surety policy by depositing U.S. Treasuries with a fair market value of $255 million with a custodian in a collateral account.
The leases involved 480 subway cars with an overall equipment value of around $1 billion. The deals were closed in 2002 and had early buyout rights in 2033 and 2034.
"We were looking at this, frankly, for several months. We were concerned about the position Moody's was taking and we were working with the equity investors and the lenders. AGM was very cooperative and it was a winner for all of the parties," said Page.
“During the fall of 2012, Assured Guaranty worked in partnership with the New York MTA to terminate three leveraged lease transactions. The early termination of the leases, which cost the MTA $2.8 million, enabled the MTA to fully benefit from the original $68 million payment that it received in 2002 for entering into the leases, and the estimated $25 million in interest that it generated on those funds since the deals were closed in 2002,” Assured Guaranty said in a statement.
“The terminations eliminated the possible need for the MTA to post $310 million in collateral because of a rating trigger contained in the transaction documents. If the terminations had not occurred and the MTA had been required to post $310 million in collateral, the MTA could have incurred costs to purchase new collateral and the negative carry between its cost of capital for collateral posting and the yield it would have received on that newly posted collateral.”
Paul Acerra, the MTA's deputy director of finance, cited the need to monitor transactions continually. "We've had to be very diligent," he said. "Regardless of what the numbers are, it's a potential negative. We could have sat back and waited for the downgrade and we would have dealt with it, but we took a different perspective. People should see that we are active and not waiting for events to happen."
The MTA paid $2.8 million to cancel the three terminations.
On Wednesday, the MTA's full board authorized the termination of a qualified technological equipment leveraged lease with Sumitomo, as lessor, of automated fare collection equipment having an asset valuation at closing of roughly $75 million.
The Sumitomo cancellation is separate from the three AGM-related ones, which happened at the end of November. Sumitomo lease involved automated fare collection equipment.
"The benefit to the MTA is net proceeds for the capital program," the agency's chief financial officer, Robert Foran, said Monday before the finance committee signed off on the move.