The Massachusetts Turnpike Authority may need to raise tolls again as it faces additional interest payments of $300,000 per month due to a mismatched swaption agreement.
MassPike officials plan to sell $126.7 million of variable-rate debt to refinance current fixed-rate bonds, a move that will better match the fixed-rate debt to a floating-to-fixed swaption tied to the Series 1997 B bonds. What is holding the authority back from selling the debt immediately is that it is looking to strengthen its revenue stream before heading to market.
MassPike paid Ambac Assurance Corp. $6 million to insure the debt when the authority entered into a swaption agreement with UBS Securities LLC in 2001. But last month Fitch Ratings downgraded Ambac to AA from AAA and placed the credit on rating watch negative.
The insurance company still has triple-A ratings from Moody's Investors Service and Standard & Poor's, although Moody's placed Ambac on review for possible downgrade and Standard & Poor's gives the credit a negative outlook. The rating actions were in response to $3.3 billion of net losses Ambac reported for the fourth quarter of 2007, fallout from the subprime mortgage crisis.
On its own, MassPike 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 intention was to have triple-A rated bonds, and given the situation with Ambac, there is great uncertainty," Mary Connaughton, a MassPike board member, said in an interview. "The question is now, what would we have to do financially internally to increase the bond rating?"
That may include raising tolls to help secure the $126.7 million sale, as Connaughton said there is only so much savings the authority can gain from cutting costs within the system. The authority already faces a $35 million shortfall over the next two years.
In addition, Gov. Deval Patrick's administration is working with UBS, the state's adviser for transportation finance, on how the state could merge MassPike with the Massachusetts Highway System and restructure existing debt to help generate savings.
Officials have yet to announce when they plan to release their "transportation reform package."
The commonwealth's secretary of transportation and MassPike board chairman Bernard Cohen addressed the issue of how the authority can take on additional costs at MassPike's board meeting on Tuesday.
"I think we were clear that unless we can figure out a way to unburden the Turnpike from some of its debt and some of its expense burden, we're going to be facing the possibility of another toll action. But we're trying hard to avoid that," Cohen said.
The additional $300,000 of interest payments stems from UBS swaptions. In 2001, the authority entered into five floating-to-fixed-rate Libor swaptions with UBS on three series of fixed-rate debt, for a notional amount of $800 million. To balance the transaction, the authority also entered into five fixed-to-floating-rate SIFMA swaptions with Lehman Brothers in 2002.
In September, UBS notified MassPike that it would exercise its option on two of the swaptions, affecting $126.7 million of debt. The UBS swaps kicked in on Jan. 1, while Lehman has yet to exercise its right on the SIFMA swaptions.
MassPike received $35.3 million and $35.2 million in premium payments from UBS and Lehman for the swaptions.
The authority last raised roadway tolls by 25 cents to $1.25 and tunnel charges by 50 cents to $3.50 on Jan. 1.
