Governor OKs $100M for Annual MassPike Debt Service

Roughly $2.1 billion of Massachusetts Turnpike Authority debt received a boost yesterday when Gov. Deval Patrick signed a bill that will direct $100 million each year to debt service costs on the bonds, a move that may help raise the agency's triple-B credit rating.

Executive Office for Administration and Finance Secretary Leslie Kirwan and undersecretary Jay Gonzalez spoke with rating agencies on Monday regarding the $100 million initiative, according to A&F spokeswoman Cyndi Roy.

The aim is to increase debt-service coverage on $2.1 billion of Metropolitan Highway System debt, most of which helped finance the Big Dig project, and potentially bring MHS into the single-A category.

If Moody's Investors Service or Fitch Ratings boost the MHS bonds to A level, it would help avoid a $274 million termination payment, as of July 9, that MassPike owes UBS Securities LLC on five swaps totaling $800 million, Roy said via e-mail. UBS sent MassPike a termination event notice last month after Ambac Assurance Corp., the insurer on the swaps, lost its single-A rating. MassPike has until June 24 to resolve the issue.

House lawmakers Tuesday passed a bill that would extend the state's double-A general obligation credit rating to the five swaps until Nov. 1 to help stave off the termination payment. The Senate is set to vote on the measure today.

Last month, MassPike's board pledged to dedicate the $100 million yearly state allocation, which is not subject to legislative appropriation, towards MHS expenses. The bill that Patrick signed yesterday, H. 4160, will ensure that the $100 million goes straight to debt service costs and not other MHS expenses.

"The authority shall seek to effect such pledge in a manner that maximizes the security for the bondholders and increases the likelihood of improving the credit rating for the outstanding [MHS] bonds," according to H. 4160.

On Tuesday, Gonzalez said MassPike would probably direct the $100 million toward MHS' subordinate debt before senior bonds would receive the state aid. The authority already receives $25 million from the state annually.

"The Turnpike Authority's plan would be to 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 the debt-service fund would still need to be filled with some [additional] toll revenue."

Fitch rates $1.2 billion of MHS senior bonds BBB-plus and its $960 million of MHS subordinate debt BBB. The credit is on negative watch. Moody's 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 the credit.

The authority also has $162 million of Western Turnpike bonds.

As part of the state's transportation reform law, MassPike will terminate on Oct. 30 and a new authority called the Massachusetts Department of Transportation will take over the MHS, which runs throughout the greater Boston area, and the Western Turnpike, the state's main east-west roadway. MassDOT will also acquire roadways and bridges within the state's Highway Department and the Tobin Bridge, now under Massachusetts Port Authority's umbrella.

The transportation reform initiative creates two funds, the Commonwealth Transportation Fund and the Transportation Trust Fund. The CTF will comprise gas-tax revenue and motor vehicle fees while MHS and Western Turnpike toll revenue will flow into the TTF. Any excess TTF funds cannot flow into the CTF, according to the transportation reform law.

Gonzalez said A&F officials are working with the state Treasury Department to see how best to leverage revenue within the CTF to help finance transportation infrastructure improvements throughout Massachusetts. While MassDOT will manage the TTF, the administration will have control over the CTF.

Having the commonwealth, with its different borrowing capabilities, as an issuer of potential CTF bonds offers more leveraging choices and less expensive borrowing costs for the state than if MassDOT served as issuer, Gonzalez said.

"With the gas tax revenues, [MassDOT] would only be able to issue gas tax bonds against that limited stream of revenue and they would have to have coverage in there," he said. "So their financing capacity would be constrained and the cost of their financing would be more whereas we have more options. We can do gas-tax bonds to the extent that we think that it will be more cost-effective for us, we can do general obligation bonds, and so from a credit perspective we have more options that give us more capacity and give us the ability to finance cheaper than this new entity would."

Officials are evaluating using a special obligation pledge on the CTF in comparison to the state's GO credit.

"One of the things that we're looking at right now and talking to the treasurer's office about is whether or not there's a way to structure a new special obligation credit that might do just as well or better than the state GO credit," Gonzalez said.

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