Massachusetts lawmakers are considering legislation that would allow the commonwealth to extend its financial guarantee on $2.2 billion of Massachusetts Turnpike Authority debt - a move that would allow the authority to use the state's higher credit rating yet at the same time increase its outstanding bond obligation.
The Senate Ways and Means Committee today will hold a public hearing on the measure after House members passed the initiative on Tuesday after including it as an amendment to a $3 billion bond bill to support bridge repair.
The legislation includes the state granting its full faith and credit pledge to $2.2 billion of MassPike debt, a portion of which helped finance the Central Artery Project called the Big Dig. That plan is good news for MassPike as it would give the authority a higher credit rating on its bonds as it prepares to refund about $800 million of debt attached to five floating-to-fixed-rate swaptions with UBS Securities LLC as counterparty that have cost the authority additional interest payments.
Standard & Poor's and Fitch Ratings rate the Bay State AA and Moody's Investors Service assigns its Aa2 rating. Those ratings are higher than MassPike's credit. On its own, the authority carries A3 and Baa1 ratings from Moody's on its senior and subordinated Metropolitan Highway System bonds, respectively. Fitch rates the $1.3 billion of MHS senior debt BBB-plus and the $968.8 million of subordinated bonds BBB. Standard & Poor's does not rate MassPike.
"The credit markets have been so difficult that the refunding hasn't gone through," said Mary Connaughton, a MassPike board member. "And the hope was that with the improved rating provided by the state that it will facilitate the refinancing which in particular would address the UBS swaption that was exercised."
The $800 million consists of three series of fixed-rate bonds insured by Ambac Assurance Corp., Series 1997B for $126.7 million, Series 1997A for $207.6 million, and Series 1999A for $465.6 million. The authority has been working on refunding the $800 million into variable-rate mode to better match the bonds with five floating-to-fixed-rate swaptions that are attached to the debt.
On Jan. 1 and July 1, UBS exercised its option on the $126.7 million series and the $207.6 million series, respectively. That forces the authority to pay a fixed rate on the bonds along with a fixed rate of 4.75%, 4.875%, and 5% to UBS on three separate swaptions while receiving in return 68% of one-month of the London Interbank Offered Rate from the bank.
In addition, UBS plans to allow two remaining swaptions connected to the $465.6 million of debt to kick in on Jan. 1, 2009. In those swaptions, MassPike pays a fixed rate of 4.75% on one swaption and 5% on another swaption while receiving 68% of one month Libor from the bank.
While the commonwealth's full faith and credit pledge would help MassPike address rising interest costs on the swaptions, taking on $2.2 billion of outstanding debt would increase the state's current long-term debt obligation of $29 billion, including $18 billion of general obligation debt, an issue that the credit rating agencies would look at when evaluating Massachusetts' credit.
"We haven't been presented with a specific plan, but generally speaking, the commonwealth is highly leveraged," said Moody's analyst Nicole Johnson. "Their debt ratios are among the highest of the 50 states, so it's a lot of debt to take on top of an already highly leveraged debt position."