Boston Transit Agency Will Terminate Swaps

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Two boards overseeing Greater Boston's mass-transit system voted to terminate five legacy floating-to-fixed rate interest swaps in a move they say could save the Massachusetts Bay Transportation Authority $235 million over 10 years.

The Massachusetts Department of Transportation board and the MBTA Fiscal and Management Control Board both approved the measure late Monday. The state legislature created the MBTA oversight panel last year.

Officials, speaking after a meeting in Boston late Monday, said the swaps could have cost the state-run MBTA more than $100 million in excess interest payments over 10 years. They also expect to save money through lower interest rates.

"It is a very conservative approach," said MassDOT Committee on Finance and Audit Chairwoman Betsy Taylor, who retired from the Massachusetts Port Authority last year after a long run as its finance director.

Savings could free up funds for capital investment. The MBTA's maintenance backlog is estimated at $7 billion.

Also on Monday, the two boards approved a plan to submit to the Federal Transit Administration a scaled-back $2.3 billion extension of the light rail Green Line, provided it can fill a $75 million gap to finance it. The project had stalled after cost estimates for the 4.5-mile northward extension from Cambridge rose to $3 billion from $2 billion.

The MBTA, which locals call "The T," has $5.2 billion of long-term debt, of which $4.6 billion are in fixed-rate bonds. According to the authority, $542 million of its debt is variable rate, hedged through eight legacy floating-to-fixed interest rate swaps that hedge underlying variable-rate debt from the mid-2000s.

These swaps will be terminated at a discount to their market value through cash payments. The MBTA will also refund existing fixed-rate bonds for interest rate savings through a competitive market process.

"Unwinding bad trades is never easy," said MBTA chief administrator Brian Shortsleeve.

In February, Boston think tank Pioneer Institute accused the MBTA of "bleeding millions of dollars on reckless financial derivatives for many years," with poor financial reporting and internal controls, opaqueness and use of risky counterparties compounding the problem – all despite warnings by the state auditor in 2008.

Pioneer senior fellow for finance Iliya Atanasov said that while Monday's move put the MBTA in the right direction, pulling off the strategy will be difficult.

"The chief administrator has put together an ambitious plan to restructure the variable debt of the T and get rid of the costly swaps associated with it. This is a tough decision because it will require some $75 million in upfront expenses to generate savings over the long term," said Atanasov. "Shortsleeve will also have to put in place a team that can manage the variable-rate debt nimbly and fix the interest on it before the bull market in bonds ends.

"With the debt strategy in place, now it all comes down to execution. And that is the toughest part of the job."

To prop up the Green Line extension to Somerville and Medford – to which the state had agreed in the mid-1990s as part of as part of a settlement connected to construction of the Central Artery/Tunnel "Big Dig" megaproject -- the Boston Region Metropolitan Planning Organization committed $150 million, while the cities of Cambridge and Somerville have also committed $75 million apiece. The state and federal governments have each committed nearly $1 billion.

Consultants say the T could save nearly $300 million with simpler designs for the seven new stations and about $120 million with scaled-down walking and cycling paths. State officials last year canceled some Green Line projects.

State transportation Secretary Stephanie Pollack said canceling the project would involve about $800 million in "sunk costs," including wind-down expenses. Given the court settlement, the commonwealth could also be open to litigation should it cancel.

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Transportation industry Massachusetts
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