The Massachusetts Bay Transportation Authority last week approved a $1.45 billion operating budget for fiscal 2009, which will include rainy-day funds and debt restructuring savings to help fill a $75 million deficit.

To address the budget gap for next year's fiscal plan, which begins July 1, officials agreed to refinance $260 million of debt by the end of this month, generating $50 million of savings, tapping into $20 million of rainy-day funds, and saving $5 million by postponing the authority's annual new money deal until the first half of calendar year 2009.

By the end of the month, the MBTA will refinance $40 to $50 million of debt by pushing out maturities on existing debt which will offer the authority roughly $40 million less on debt service payment in the near term, although that transaction will come at a cost to the authority over the long term, according to Jonathan Davis, the MBTA's chief financial officer. The authority will also refund $130 million of previous debt and generate a savings of roughly $10 million for the authority, or 9% of present value savings.

Davis said the authority anticipates selling before the end of March, in particular to grab that substantial 9% of present value savings.

"It all depends on market conditions. The market out there is pretty volatile and it seems to be holding its own," Davis said. He added that the savings "was actually a higher benefit to us when we first started looking at this about a month, a month and a half ago. It's deteriorated a little, albeit still well above our target and it makes a lot of sense."

The CFO declined to identify which earlier series the authority would refinance in the transaction. Lehman Brothers will price the deal.

Attached to the refinancing sale is a floating-to-fixed rate swap agreement that will provide for the authority to receive 67% of Libor in exchange for a fixed-rate payment, with Lehman Brothers Special Financing Inc. potentially serving as counterpary on that swap.

"It's our anticipation that they will be [counterparty] on the 67% of Libor swap, albeit that we haven't consummated a transaction yet," Davis said.

The Libor market has softened within the past six months. Current rates on one month and three months of Libor stand at 3% and 2.94%, respectively, down from 5.24% and 5.14% in December. While that market has waned, Davis said the authority was looking to add another Libor swap into its deriviative portfolio to help diversify the MBTA's swap exposure.

"We only have one other Libor structure on our books so we don't believe that the basis risk that we're being exposed to would be all that significant," Davis said.

In addition, the MBTA will issue $130 million of variable-rate debt to match a forward-starting swap with Lehman as counterparty paying a percentage of the SIFMA index and the authority paying a fixed rate of 3.834%, according to the MBTA's latest official statement.

While the authority is working on generating savings from the upcoming refinancing sale, MBTA officials are also evaluating its auction-rate debt. Last week the authority redeemed $50 million of its $93 million of auction-rate securities via its commercial paper program and expects to pay down the remaining $43 million in the same way. Eventually, officials may convert the commercial paper into variable-rate demand bonds if the variable-rate market calms down.

"Long-term we're not going to carry it in the commercial paper program, but we would just like to see perhaps the market settle out a little and we have the opportunity to do that because we can use our commercial paper program," Davis said. "And when it makes sense we'll convert those to VRDBs, more than likely, but that's not to mean that we won't look at fixing them at the same time."

The MBTA decided to redeem the $50 million of auction-rate debt, which comprised 28-day Series 2003B-1, which is now within the authority's commercial paper program, and the remaining 28-day Series 2003B-2 for $43 million. Financial Guaranty Insurance Corp. insures the debt and Bear, Stearns & Co. is the broker-dealer on the bonds. Series B-1 reset at 4.82% on Feb. 6, the highest reset rate for the security, and Series B-2 reset at 4.66% on Feb. 20, down from the security's highest reset rate of 5% on Dec. 26.

Connected with the auction-rate securities is a floating-to-fixed-rate swaption agreement with the authority paying Bear Stearns a fixed rate of 5.2% in return for a percentage of SIFMA from the bank. Bear also paid the MBTA $2 million as an exercise premium when the swap kicked in March 1, 2003.

In looking at new-money issuance for the authority, Davis said the authority will probably not sell new-money debt for another year, a move that will allow the MBTA to save $5 million. Typically, the authority sells roughly $300 million annually to help support capital improvements throughout its system.

"We believe right now with the money that's left from the prior issues and also with the commercial paper program that we have, that should be sufficient to get us through to probably sometime after Jan. 1, 2009," Davis said.

The authority has $5.1 billion of outstanding debt. Moody's Investors Service rates the MBTA's sales tax bonds Aa2 and its assessment bonds Aa1. Standard & Poor's rates the sales tax and the assessment bonds AAA.

The MBTA oversees a system of buses, rapid-transit lines, subways, and commuter lines with an average weekday ridership of roughly 1.1 million passenger trips, according to its Web site.

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