By the end of October, the 57-year-old Massachusetts Turnpike Authority will cease to exist and a larger, more expansive bonding authority will take over MassPike's operations, assets, and its $2.2 billion of debt.
Bondholders will hardly feel the effects of the changeover, as the transfer of debt to the new Massachusetts Department of Transportation does not require the bonds to be defeased.
Jay Gonzalez, undersecretary of the Executive Office of Administration and Finance, spoke with The Bond Buyer to address specific issues related to the $2.2 billion of outstanding debt, including legislation that lawmakers are working on that would provide bondholders with additional coverage.
Gonzalez stressed that the revenue stream behind the bonds - toll revenue generated from the Metropolitan Highway System, which runs throughout the greater Boston area, and the Western Turnpike, the state's east-west toll road - will continue to pay down principal and interest costs.
"From the bondholder perspective, bondholders are fully protected in this transfer," Gonzalez said. "It's as if MassDOT is a successor to [MassPike] and they're just stepping into the shoes of the Turnpike Authority. The trust indentures for the bonds stay exactly as they are. There's no change to the bonds' covenants protecting those bondholders. Those bonds continue to be secured by the toll revenue."
To give the credit a needed liquidity boost, Massachusetts lawmakers last month agreed to dedicate an additional $100 million per year to MassPike - called a commonwealth general obligation secured contract assistance - with MassDOT to receive those funds once it replaces MassPike on Nov. 1. The $100 million allocation is not subject to annual appropriation and lasts for the life of the bonds, through 2039. That dedication is on top of $25 million that MassPike already receives each year from the state.
While MassPike's board on June 29 voted to dedicate the $100 million to the MHS to avoid a July 1 toll increase, legislators are working on a bill that would steer the $100 million directly to MHS' debt-service funds. If approved, that initiative would strengthen debt-service coverage. The House yesterday enacted the bill, with the Senate set to pass the measure last night.
MassPike estimates MHS debt-service ratios to be 1.29 times and Western Turnpike debt levels to be 1.61 times in fiscal 2010, which began July 1. Officials are still estimating future debt-service levels, depending upon how MassPike will use the $100 million.
"They can pledge [the $100 million] in two different ways, under their trust indenture," Gonzalez said. "One is as supplemental revenue, which basically gets lumped with toll revenue and flows down and pays operating costs and then pays debt-service costs and then the balance is used to pay capital costs. The other way that their trust indenture permits them to use commonwealth general obligation secured contract assistance is to pledge it directly to pay debt service on bonds that would result in a significantly better coverage position for the MHS bonds."
"The [bill would] dedicate that $100 million first to the subordinate debt-service fund, which would cover all of the debt service on the subordinated bonds, and the balance would go to the senior debt service fund, which is where the $25 million they already get goes," Gonzalez said. "And it would offset most of the debt service on the senior bonds over the life of those bonds, but not all of it, so that debt-service fund would still need to be filled with some [additional] toll revenue."
Investors of existing MHS debt are concerned about debt-service coverage in light of the transfer of debt to the new MassDOT from MassPike. While Western Turnpike principal and interest payments are fairly level, MHS debt service does increase over the years through 2039. Bondholders and rating analysts questioned whether the annual $100 million allocation alone will be enough to provide adequate coverage.
"It's an increasing debt service, it's not a flat debt service," said Tom Spalding, senior investment officer at Nuveen Investments. "It increases every year, so does that [allocation] need to be increased going forward? Is it just going to be enough of a pledge to maintain the 1.15 coverage? How is it going to work going forward?"
According to Gonzalez, if the legislature approves the dedication of the $100 million directly to MHS debt, the system would not need an additional toll increase "for a number of years."
"One of the first orders of business of this new entity will need to be to develop a longer-term finance plan," he said. "But what's clear is that we have put the MHS on a stable, sustainable course going forward, and dealt with the equity issue which has been the fundamental flaw of the Turnpike Authority's financing structure by providing the $100 million. And it should take modest toll increases in the future or other sources of revenue to ensure sustainability going forward."
Pledging $100 million to MHS expenses has already strengthened its debt in the secondary market. Spalding believes yields on MHS bonds have dropped by 15 to 20 basis points due to the MassPike board action on June 29.
"They've improved maybe 20 or 25 basis points since they took the pledge," Spalding said. "Part of that is market. Probably on their own they're up about 15 to 20 basis points."
For example, bonds with a 5.125% coupon maturing in 2017 yielded 5.18% on July 14, which is 25 basis points below trading at 5.43% on June 26, according to trade data reported by the Municipal Securities Rulemaking Board.
In addition, lawmakers yesterday were set to address extending the state's GO pledge - until Nov. 1 - to five MassPike swaps totaling $800 million, according to Ashley Allen, spokeswoman for Rep. Joseph Wagner, who co-chairs the Joint Committee on Transportation.
That GO credit pledge, which expired on June 30, would help avert a $282 million termination payment to UBS Securities LLC, the counterparty on the derivatives. MassPike has until June 24 to resolve the issue.
