Fitch Drops St. Louis Metro Two Notches, Warns of More Action

CHICAGO - Fitch Ratings yesterday downgraded the St. Louis Metro's credit by two notches and warned of further action as the transit agency struggles to resolve a series of operational and capital challenges stemming from the market turmoil of last year and a failed sales tax referendum.

Metro's finance team plans to seek approval for the first phase of a debt restructuring plan at a board meeting later this month, but the agency's looming plans were not sufficient to stall Fitch's action. The rating agency downgraded to BBB-plus from A its rating on $418 million of senior-lien mass transit sales tax appropriation bonds and revised its outlook to negative from stable.

Analysts said their decision "reflects the realization of a multiple downside scenario" due to the weight of the challenges facing the agency, including the accelerated amortization of bank bonds, swap termination costs, and possible payments related to sale-leaseback transactions.

Fitch analysts view the credit negatively because of further risks posed by the economy, which could hurt sales tax collections that go to repay the bonds. Possible declines coupled with increased borrowing costs expected after the agency restructures its floating-rate debt could drive debt service coverage ratios down.

"It is not a surprise, but we are disappointed," said John Noce, chief financial officer of the agency, which is formally known as the Bi-State Development Agency of the Missouri-Illinois Metropolitan District.

Metro will seek board approval to remarket next month $17 million to $22 million of variable-rate bonds in a fixed-rate mode. The amount will cover payments owed by Metro to its liquidity provider West LB in April and October under an accelerated repayment schedule.

Due to failed remarketings, the bank has held about $58 million from a $100 million tranche of insured floating-rate debt that was sold in 2002 to finance a light-rail extension. Financial Security Assurance insured the bonds.

Noce said it was notified this week that another $20 million from the series that was synthetically fixed through swaps is now held by West LB. Wachovia Securities LLC and Wells Fargo Brokerage Services LLC are serving as remarketing agents. Columbia Capital Management is financial adviser and Gilmore & Bell PC is bond counsel.

Over the summer, Noce said the remaining bonds from the floating-rate series will be refunded into a fixed rate. The transaction is expected to take place ahead of the November expiration of the West LB standby bond purchase agreement. No team has yet been named for that deal. Because Metro will convert to a fixed rate on all of the $100 million series, it faces swap termination costs of roughly $17 million, though that figure could change depending on market fluctuations.

The transit agency also faces a possible $40 million termination payment stemming from two structured leases that carried backings from American International Group Inc. and Ambac Assurance Corp. The downgrades of both insurers triggered defaults but so far the counterparties have not demanded any collateral payments.

On the operating side, Metro has approved a fare increase and is cutting 25% of its workforce, and will implement service cuts at the end of March to save on costs. The measures were approved last year after voters rejected the sales tax increase. The agency may also sell 12 rail cars.

Fitch raised concerns over the potential impact of service cuts and asset sales of that magnitude saying they increase "political risk to underlying support for the tax. Conversely, the severity of service cuts and consequent media coverage could serve as the political catalyst for new funding sources."

Noce said he is scheduled to talk with Moody's Investors Service and Standard & Poor's - which rate the bonds in the single-A category - next week. He said Metro currently has $40 million in available capital funds that could be diverted to help it resolve its capital issues and $28 million the state has pledged to the city.

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