The Massachusetts Turnpike Authority could face an estimated $268 million termination payment to UBS Securities LLC on five swaps after Standard & Poor's yesterday downgraded Ambac Assurance Corp., which insures the derivatives, to BBB from A.
At the same time, Massachusetts Transportation Secretary James Aloisi postponed to Monday a MassPike board meeting set for today, citing the administration's need to evaluate a transportation reform bill that the legislature passed last week.
The board may vote to rescind a July 1 toll increase in light of a potential $100 million bailout from the state, pending Gov. Deval Patrick's approval.
Lawmakers earlier this year extended Massachusetts' double-A rating to the five swaps to help avoid a termination payment. That commonwealth guarantee ends Tuesday, leaving the swaps with MassPike's and Ambac's triple-B credit ratings, which would prompt a termination event on the derivatives.
That estimated payment to UBS would be $268 million, according to Cyndi Roy, spokeswoman for the Executive Office of Administration and Finance.
"The Turnpike Authority is in this precarious situation due to risky financial transactions entered into under prior administrations," Roy wrote in an e-mail. "We anticipated the possibility of this termination event under the swap agreements almost one year ago and have worked with the legislature to authorize a course of action that could avoid a multimillion-dollar payment to UBS. We have been negotiating with UBS to reach an agreement that is acceptable to the commonwealth, and we will continue to do so."
UBS spokesman Doug Morris said the bank is in discussions with MassPike regarding the swaps.
Under the five swap agreements that total $800 million, MassPike pays UBS fixed rates of 4.75%, 4.875%, and 5%, and receives in return 68% of Libor from the bank.
In addition, the floating-to-fixed-rate derivatives are attached to $800 million of fixed-rate debt, which the authority has been unable to refinance into variable-rate mode due to market conditions.
Ambac's downgrade is another stress on MassPike's finances. The authority is using reserve funds for operating costs and will need a $100 million bailout from the state to avoid a July 1 toll hike.
The $100 million of state aid would come from boosting the 5% sales tax to 6.25%, an initiative that is now on the governor's desk.
In addition, Patrick is evaluating a transportation reform bill that would eliminate MassPike and create a new authority with bonding power that would take over MassPike's $2.2 billion of debt and oversee most transportation systems in the state.
Fitch Ratings analyst Seth Lehman said a potential near-term termination payment for MassPike is a credit concern, but it is not clear yet if the authority will be forced to pay UBS.
"Masspike is an issuer that has limited financial flexibility, so if there was a termination amount owed, and one that would have to be paid sooner rather than later, that would be a concern," Lehman said.
Fitch rates $1.2 billion of Metropolitan Highway System senior bonds BBB-plus and its $960 million of MHS subordinate debt BBB. The credit is on negative watch.
Moody's Investors Service assigns a Baa2 to the senior-lien bonds and a Baa3 to the subordinate debt with a developing outlook. Standard & Poor's does not rate MassPike.