Massachusetts Gov. Deval Patrick last week called for dismantling the Massachusetts Turnpike Authority and merging it into another state transportation agency. Meanwhile, one MassPike board member is calling for immediate toll hikes to help boost debt service coverage on $2.4 billion of debt.
MassPike board member Mary Connaughton said that she has called for an emergency board meeting in the hopes of bringing a proposed toll increase to a vote, although the meeting has yet to be scheduled.
"We need to meet right away to talk about increasing tolls," Connaughton said. "First of all, to get the authority's finances back in order, and second of all, to assure the credit rating agencies that we are serious about our finances and our obligations to bondholders."
Moody's Investors Service last week downgraded to Baa2 from A3 $1.28 billion of Metropolitan Highway System senior-lien bonds and also lowered its rating on $959 million of subordinate-lien bonds to Baa3 from Baa1. Moody's also changed the rating outlook on the bonds to developing from negative.
Fitch Ratings rates the senior revenue bonds BBB-plus and the subordinated debt BBB and placed the bonds on negative watch on Sept. 9. Standard & Poor's does not rate the credit.
Moody's cited low debt service coverage due to increasing debt service costs, limited liquidity, and "continued delayed decision-making on toll increases and the potential for traffic and revenue declines in a slowing economy," for the downgrade.
"Without aggressive revenue raising measures, use of reserves, or debt restructuring, debt service coverage will be barely sum-sufficient in 2009, well below covenanted requirements," according to a Moody's report. "Debt service coverage of maximum annual debt service by 2007 net revenues is estimated at 0.58 times in 2020, including the additional interest costs related to swaptions [that]lowers the projected coverage to 0.51 times."
Part of MassPike's woes stem from five floating-to-fixed-rate swaptions with UBS Securities LLC that will cost the authority $2 million per month in additional interest costs beginning Jan. 1 as the swaptions are attached to $800 million of fixed-rate bonds.
Current market conditions make it difficult for MassPike to refinance that debt into variable-rate mode and therefore better match the bonds with the floating swaptions, even with the commonwealth's appropriation pledge now attached to the $800 million of debt.
In total, MassPike has swaps and swaptions totaling $1.8 billion in notional value that would cost the authority approximately $250.3 million to terminate, according to Moody's.
While Connaughton would like to see the Turnpike Authority merge with another state transportation agency to help lower operating costs and potentially assist the authority with its outstanding debt, that process may take some time and will be difficult to implement. Patrick said officials must draft a plan, the details of which they have yet to make public, and then present that proposal to the legislature, which will not reconvene until January.
"I don't know if there's any plan in place," Connaughton said. "I don't know what the details are, I don't know what they're going to do with [MassPike's] debt and the obligations to UBS. I find it hard to believe that the state is going to be anxious to pick up those kinds of liabilities."
The commonwealth has $29 billion of outstanding debt and is rated AA by both Fitch and Standard & Poor's and carries a Aa2 rating from Moody's.
An earlier plan involved MassPike merging with the Department of Highways, but Cyndi Roy, spokeswoman for the Office of Administration and Finance, said it is too early to say if the state will move forward with that strategy.
"It's a little too soon to determine that," Roy said. "The governor did direct [Transportation Secretary Bernard Cohen] ... to begin working on something legislatively that would fold [MassPike] in with some other transportation agency."
As for what would happen to MassPike's outstanding debt and if the Commonwealth were to take responsibility of those bonds, Roy said officials have not determined that.
"Honestly I don't know. I don't think we're there yet," she said.