CHICAGO - The Regional Transportation Authority of Illinois yesterday approved a synthetic fixed-to-floating rate swap on $150 million in general obligation bonds in an effort to diversify its debt portfolio with the aim of saving on interest costs.
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The authority's board approved the deal with counterparty J.P. Morgan Chase & Co., which was selected from a handful of firms that submitted proposals in a competitive selection process completed earlier this year, according to RTA's chief financial officer Joseph Costello.
The swap is structured so that the RTA pays to J.P. Morgan a floating interest rate The Bond Market Association index and receives a fixed rate of 4.3% over the 19-year term of the contract. The transaction's timing is dependent on when interest rates move slightly higher.
The swap will mark the second time the agency will use a derivative product as a means of incurring variable-rate debt to capitalize on the lower interest costs on the short end of the yield curve. The first deal was done last year for $112 million with counterparty UBS PaineWebber Inc. and the upcoming one is largely modeled after it with the same interest rate goals.
Both swaps are structured so that every six months the firm and the agency settle up. The RTA recently received its first payment from UBS PaineWebber on the first swap for $1.3 million.
The fixed-to-floating rate swap is the only means available for the RTA to attach a variable rate to a portion of its long-term debt since it is limited by state statutes to competitive sales. Without the ability to use a negotiated sale, the agency would have go through the burdensome process of re-selecting a firm prior to every remarketing period.
"This is a way for us to hold down our interest rate payments," Costello said.
Once the second swap is completed, the agency will still have room to convert other debt down the line. That's because the board yesterday adopted an ordinance that sets a policy for the agency's financial instruments' risk management, which permits floating-rate exposure of up to 20% of its debt portfolio. That's a level well within the limits viewed by rating agencies as acceptable for a mid-double-A range credit like the RTA.
Costello said the agency has no plans to lobby Gov. George Ryan or state lawmakers for permission to do negotiated transactions. Costello said the board's fear is that lawmakers could perceive it as a move to award the agency's business to certain firms. "We need to keep focused on the need to keep investing in the system," he said.
The RTA uses its share of a sales tax to repay its general obligation bonds. The state also reimburses the agency for a portion of its debt service. The RTA is the parent agency for the Metra commuter rail system, the Chicago Transit Authority, and Pace suburban bus service.
