The Massachusetts Department of Transportation this week will price $893.8 million of fixed-rate senior revenue bonds to refinance Metropolitan Highway System debt it took on from the former Massachusetts Turnpike Authority, followed by a $207.6 million variable-rate senior debt sale.
The $1.1 billion tax-exempt sale is the second part of MassDOT’s plan to refinance MHS bonds for present-value savings and switch fixed-rate debt into variable-rate mode to better match the bonds with five floating-to-fixed rate derivatives.
The $1.1 billion refinancing component will address the MHS senior bonds, after Citi priced $853.55 million of debt to refinance MHS subordinate debt in late March and early April.
Overall, refinancing the senior and subordinate MHS bonds will save MassDOT $30 million annually as the five floating-to-fixed swaps are now mismatched with fixed-rate bonds costing an additional $2.5 million in debt service per month, according to Jonathan Davis, chief financial officer of the Massachusetts Bay Transportation Authority, the state’s largest mass transit provider.
The MBTA is part of MassDOT and administration officials asked Davis to structure the refinancings.
Citi will offer retail pricing today for the $893.8 million of fixed-rate Series 2010B bonds and will begin institutional pricing on Tuesday. The $207.6 million variable-rate Series 2010A-1 and A-2 sale will price the following week with Citi as book-runner. Citibank NA and Wells Fargo NA will each supply a letter of credit on the variable-rate bonds.
Edwards Angell Palmer & Dodge LLP is bond counsel and Public Financial Management Inc. is the financial adviser.
The MHS bonds helped finance the Central Artery Project, known as the “Big Dig,” and were sold by the former Massachusetts Turnpike Authority in 1997 and 1999. Last year, lawmakers abolished MassPike and created MassDOT, which oversees most surface transportation systems in the state. MHS was absorbed by MassDOT as part of the reorganization.
Officials have been looking to refinance senior and subordinate MHS debt attached to the five floating-to-fixed rate derivatives once all the swaps became active on Jan. 1, 2009. MassPike entered into the swaptions in 2001 and received an up-front payment of $29.1 million from UBS Securities LLC, the counterparty on the derivatives. The notional amount of the UBS swaps is $800 million.
Terminating the five UBS swaps would have cost $222.3 million as of April 2, the preliminary official statement said.
When lawmakers abolished MassPike last year and created MassDOT, they also pledged $100 million of annual contract assistance for 30 years to help pay down the MHS subordinate debt. The senior bonds already had a $25 million annual contract assistance pledge from the commonwealth. Those allocations are not subject to appropriation and helped the MHS credit achieve upgrades earlier this year from its prior triple-B ratings.
The state was eager to keep the subordinate MHS debt from falling below investment grade as that would trigger hefty collateral payments to UBS. Of the $800 million of UBS swaps, $592.3 million applies to subordinate debt and another $207.6 million pairs up with senior bonds.
“Certainly the contract assistance that was provided to the Metropolitan Highway System from the commonwealth was a key part of our strategy in order to get the ratings that were required to go ahead and do the financing transaction,” Davis said.
Standard & Poor’s and Fitch Ratings rate the senior and subordinate MHS bonds A and AA, respectively. Moody’s Investors Service rates the senior bonds A3 and the subordinate bonds Aa2.
Officials anticipate the refinancing will lower borrowing costs on the higher-rated subordinate bonds and allow for a portion of the $100 million of contract assistance funds to help pay down senior debt-service costs after principal and interest payments have been met on the subordinate bonds.
“We’re still waiting to see how all the components come together, but the presentations that were given to the rating agencies show that our expected cost of funds, on the entire transaction and including the swaps, would be 5.9%,” Davis said. “We still believe that that’s within the ballpark of what we’re expecting.”
In addition, the lower borrowing costs could free up funds for much-needed capital improvements. The system has delayed many capital projects during the past few years as officials worked on revamping MassPike’s operations and finances. Average capital investment per year from fiscal 2004 to fiscal 2008 was $12 million, according to a Fitch report.
Davis said the senior and subordinate refinancings are expected to generate nearly $75 million of savings that will be used for infrastructure upgrades during the next three to five years.
MassDOT is currently working on a five-year capital plan and may release a draft of that plan within the next few days, according to spokesman Colin Durrant. Its board may weigh in on that plan at its June 2 meeting.
A preliminary needs assessments pegs MHS system capital upgrades at $576.6 million from fiscal 2011 through fiscal 2015, according to the POS.
“The program projects are expected to be funded from excess MHS cash flow and other commonwealth sources available to MassDOT, including commonwealth general obligation bonds; gas tax bonds; Garvee bonds; federal funds, and funds available in the new Transportation Trust Fund,” according to a Moody’s report.
The MHS generated $168.3 billion and $169.4 billion of toll revenue in fiscal 2009 and 2010, respectively. A traffic and revenue study by Cambridge Systematics Inc. projects future toll revenue to increase by more than 1% annually to $182.7 billion in fiscal 2015. Long-term forecasts estimate MHS toll revenue will total $193.3 billion in fiscal 2020 to $233.8 billion in fiscal 2050, according to the report.
The toll projections do not include any anticipated toll hikes and MassDOT does not plan on boosting tolls in the near term. Fitch believes MassDOT may need to look towards a toll increase to help fund capital improvements on the MHS system.
“Although MassDOT MHS’s financial plan does not call for toll increases, Fitch believes inflationary toll increases may be needed over the medium term to close the gap in the capital funding plan,” a Fitch report said.
Davis said the subordinate refinancing in last March received much attention, and some maturities were oversubscribed. He’s anticipating the same reception this week on the senior refinancing component.
John Mousseau, portfolio manager at Cumberland Advisors, said tax-exempt investors will be eager to take advantage of a sizable municipal bond deal that has tax-exempt bonds on the longer end of the curve as many issuers now are taking advantage of taxable Build America Bonds, which cannot be used for refinancings, to achieve lower borrowing costs.
“The issuers have optimally priced their debt, but it means that you go through long periods of time, sometimes weeks, without seeing the large tax-exempt deals, and lord, we miss them,” Mousseau said.