The Massachusetts Department of Transportation today will issue its first-ever bond transaction, a $274.7 million fixed-rate refinancing to generate savings.
MassDOT anticipates selling another $592.3 million of floating-rate refinancing debt in mid-April, depending upon market conditions, to match variable-rate debt with floating-to-fixed-rate derivatives.
Officials expect to refinance all of MassDOT’s subordinate-lien Metropolitan Highway System revenue bonds. The former Massachusetts Turnpike Authority sold the subordinate and senior MHS debt in 1997 and 1999 to help finance the Central Artery Project, or the “Big Dig,” which runs through Boston.
Last year, lawmakers terminated MassPike and turned its two entities, the MHS and the Western Turnpike, over to a new bonding agency, MassDOT.
Included within MassDOT is the Massachusetts Bay Transportation Authority, which oversees public transportation in the greater Boston area, and the former Department of Highways, among other agencies.
Officials plan to follow the subordinate refinancing with a senior refinancing. MassDOT has the ability to refinance up to $2.27 billion of combined senior and subordinate debt.
The transaction includes refinancing $274.7 million of fixed-rate debt for present-value savings and the deal will allow for excess state funds designated for specific liens to flow over to a sister lien, according to Jonathan Davis, the MBTA’s chief financial officer. Administration officials asked Davis to structure today’s refinancing.
“The way that the refinancing will work, the $100 million in contract assistance will be more than sufficient to cover debt service in the subordinate lien out to maturity so any excess of the $100 million flows over to the senior lien,” Davis said. “However, there’s $25 million of contract assistance that’s being paid into the senior lien. When the senior lien is paid for, which is in 2037, that $25 million comes over to the subordinate lien for the final two payments in 2038 and 2039.”
The refinancings will end a mismatch on five UBS Securities LLC swaps that costs the department about $2.5 million per month in additional debt-service costs, according to a MassDOT summary.
Attached to the outstanding subordinate and senior fixed-rate bonds are five floating-to-fixed-rate swaps for a notional amount of $800 million that resulted when UBS exercised its option to require MassPike to enter into the derivatives.
Refinancing the fixed-rate bonds that currently coincide with the derivatives into variable-rate debt will generate a synthetic fixed rate for the authority. Terminating the swaps would cost $224 million, as of Feb. 19, according to MassDOT.
“These swaptions with UBS yielded an upfront payment, but since the swaptions were exercised, the MHS has paid a swap rate of 4.75%-5% while receiving 68% of the [London Interbank Offered Rate],” according to a Moody’s Investors Service report. “Combined with the fixed bond rate, the current total cost of funds for the bonds are an exceptionally high 9.7%.”
Refinancing the bonds into variable-rate mode will lower the cost of funds to an estimated 5.9% under current market conditions, Moody’s said. The state has been keen to refund the debt into variable-rate but market conditions and a competitive credit-enhancement environment have made that difficult.
Massachusetts lawmakers last year agreed to dedicate $100 million per year towards MHS subordinate debt. The state had already been dedicating $25 million annually towards senior-lien MHS bonds. That $100 million contract assistance from the state and anticipated savings from this week’s deal generated upgrades.
Fitch Ratings March 16 raised MHS’ subordinate debt to AA-minus from A and its senior bonds to A-plus from BBB-plus. The agency yesterday also announced that on April 5 it will recalibrate its rating on the MHS subordinate bonds, and the rating will be revised to AA from AA-minus. All three rating agencies are reevaluating their public finance ratings to assess municipal debt as it would corporate debt.
Moody’s on March 25 changed its rating on the MHS subordinate debt to Aa3 from A1, citing “the favorable restructuring which has reduced the risk of debt service (including net swap payments) exceeding contract assistance from the Massachusetts.”
Standard & Poor’s assigns its AA rating to the subordinate refinancing deal. It first started reviewing the credit last year.
Several different letters of credits and standby bond purchase agreements will provide additional security for the
Series 2010 A1–7 variable-rate bonds. Those agreements will expire in 2012 and 2013.