If the bank won't back you, maybe the state will.
Massachusetts officials are considering guaranteeing a portion of Massachusetts Turnpike Authority debt as the agency has yet to pin down a letter of credit for an upcoming $126.7 million variable-rate deal.
Since the fall, MassPike has reviewed different options in backing the $126.7 million, including obtaining a LOC or raising tolls to support the floating-rate transaction, or possibly not selling the bonds at all. Yet the authority's options are shrinking as State Street Bank last month withdrew its LOC on the variable-rate deal and the LOC market becomes more and more competitive as more borrowers are looking to obtain LOCs. In addition, not selling the bonds will continue to cost the authority roughly $300,000 per month in added interest costs as the variable-rate sale would refinance fixed-rate Series 1997B bonds to better match the securities with two floating-to-fixed rate swaptions attached to the fixed-rate debt.
Having the commonwealth step in and secure a portion or all of the $126.7 million could give MassPike the strength its looking for. Standard & Poor's and Fitch Ratings rate the Bay State AA and Moody's Investors Service assigns its Aa2 rating. Those ratings are higher than MassPike's credit. On its own, the authority 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.
Bernard Cohen, the secretary of transportation and MassPike board chairman, yesterday said state officials are evaluating whether to guaranty the bonds, but have yet to make a final decision.
"Nothing's been finalized on it, but it's encouraging that the commonwealth is considering this," Mary Connaughton, a MassPike board member, said in a phone interview.
UBS Securities LLC is the counterparty on the Libor swaptions, which kicked in on Jan. 1. In that agreement, the authority pays a fixed rate of 4.875% on one series and 5% on a second series while UBS pays 68% of one month of Libor. In addition, MassPike must pay the fixed interest rate on the Series 1997B bonds.
The added interest costs will only intensify this summer as UBS last month informed the authority it will exercise its right on another floating-to-fixed swaption set to begin on July 1. That swaption is attached to Series 1997A fixed-rate bonds for $207.6 million and will cost MassPike an additional $525,000 per month, according to Connaughton. The agreement involves the authority paying a fixed rate of 4.75% and receiving 68% of one-month Libor from UBS.
MassPike's fourth and fifth floating-to-fixed-rate UBS Libor swaptions involves Series 1999A fixed-rate for $465.6 million, with the authority paying 4.75% on $371.3 million of debt and 5% on the remaining $94.2 million of debt while UBS pays 68% of one month of Libor. The bank's first exercise date on that option would be Jan. 1, 2009.
Along with the five UBS Libor swaptions, the 1997 and 1999 bonds mentioned above have five fixed-to-floating SIFMA swaptions attached to the debt, with Lehman Brothers as counterparty. Yet Lehman has yet to exercise any of the swaptions, forcing the authority to pay two fixed-rate interest payments - the fixed rate on the bonds and the fixed rate set in the swaption - in return for one Libor payment from UBS.
Over the past few years, MassPike received $70.5 million in premium payments from UBS and Lehman for the swaptions.
