The Massachusetts Bay Transportation Authority plans tomorrow to sell its first Build America Bond deal, set for $213.8 million, after offering $39.3 million of traditional tax-exempt debt to retail investors today.
Sales tax revenue will back the debt. It will be the final bond deal for the mass transit agency before it merges on Nov. 1 into a new bonding authority, the Massachusetts Department of Transportation, or MassDOT. The new entity will oversee most surface transportation systems throughout Massachusetts, including the state’s two main toll roads.
The MBTA will utilize the taxable BAB program for its annual new-money transaction, which it typically issues at this time of year. Officials are looking to take advantage of borrowing savings as the BAB program offers borrowers a 35% federal subsidy on the interest on the taxable bonds. Chief financial officer Jonathan Davis said that waiting to sell debt when the authority typically heads to market, as opposed to jumping into the BAB program when it first emerged in mid-April, may be a plus this week.
“We’ve been aware of this structure since it was included in the stimulus legislation,” Davis said. “We’ve talked to our underwriters during that time period and we just did not see anything that was compelling enough to have us go out early to the marketplace. And I think to some extent not being first in the marketplace will have some benefits.”
Goldman, Sachs & Co. and Barclays Capital are serving as joint co-book-runners on the Series 2009C BABs and the Series 2009D tax-exempt bonds. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC is bond counsel. There is no outside financial adviser.
Moody’s Investors Service and Standard & Poor’s rate the senior sales-tax bond transaction Aa2 and AAA, respectively, both with a stable outlook.
The Series 2009C BABs include three term bonds, with $41.1 million maturing in 2024, $48.1 million maturing in 2029, and $124.5 million maturing in 2039, according to the preliminary official statement. The tax-exempt Series 2009D bonds mature from 2014 through 2019, with maturities that increase gradually each year.
The MBTA receives one percentage point of the commonwealth’s 6.25% sales tax and the state must allocate a base amount of $767 million in fiscal 2010, regardless of how the tax performs. Though the state hiked its sales tax to 6.25% from 5% on Aug. 1, the administration of Gov. Deval Patrick anticipates directing $120.3 million from the fiscal 2010 general fund to meet the $767 million base allocation to the authority, according to the POS.
While sales tax collections in Massachusetts are below expectations, the MBTA also receives dedicated assessment revenue, which are fees that cities and towns served by the transit agency pay to the state that are then passed on to the authority. In addition, it has the ability to use excess assessment revenue, after debt service costs are met on the assessment bonds, to help pay debt service on the sales tax bonds. It also can tap into surplus sales-tax revenue — again, after it pays principal and interests costs on its sales tax bonds — to meet debt service payments on its assessment bonds.
The authority tends to use its lower-rated sales tax credit when borrowing, unless the market is not as favorable to issuers.
Moody’s rates the assessment bonds Aa1, one notch above its Aa2 rating on the sales tax bonds. Standard & Poor’s assigns the assessment credit the same AAA rating that it gives to the sales tax bonds.
“Typically we’ve been going out with the sales tax,” Davis said. “Once and awhile we do assessments, but we try to save the assessment bond credit for difficult times in the marketplace, similar to a year ago when there was a meltdown in the capital markets and we did use assessment bonds at that point in time. However, we felt that the sales tax credit is pretty well known out there and it was our judgement that it should be the credit that we go out with in this new-money issue.”
The MBTA’s next board meeting is set for Nov. 12, with a new five-member MassDOT panel serving as the authority’s new board. Patrick has yet to announce his selections for the MassDOT board.
Peter Demirali, vice president and portfolio manager at Cumberland Advisors, said the MBTA’s transition phase as it merges into MassDOT should not deter institutional or retail investors from the highly rated credit.
“Overall it wouldn’t have much of an effect in terms of the attractiveness of their bonds,” he said. “It’s not as if it’s a different company — a public company that trades on the stock exchange — where new management might have a different view or a different philosophy about a certain business. This is public transportation and the same issues are going to be there, so I don’t think overall it will have much of an affect.”
In addition, the MBTA’s recognizable name and the fact that so many Massachusetts residents rely on the system for transportation should help the bonds find a home, Demirali said.
“It’s a high-quality credit and a name that most investors would want to own,” he said. “Essential-service revenue bonds are really trading like a champ in this environment and as a firm we favor those essential-service revenue bonds over general obligations, just given the climate in the real estate market and declining home values, etc. — that makes it harder to raise revenues through higher property taxes.”
Ridership has been down so far in 2009. Ridership in the first and second quarter of this year decreased by 3.5% and 5.3%, respectively, compared to the same time periods in 2008, according to Davis. In July, the system experienced 6% fewer users.
In August, the authority selected an outside analyst to evaluating its operations to see where it can cut costs as opposed to implementing bus and train fare increases that were originally set for this winter and have now been postponed. David D’Alessandro, a former chief executive officer at John Hancock, is conducting the review, which is due Nov. 1.
New fare revenue could help. Debt service costs and lease payments take up about 30% of the MBTA’s revenues and it has $5.2 billion of outstanding debt. It will pay $445.2 million and $482.5 million in debt service and lease payments in fiscal 2010 and fiscal 2011, respectively.
Debt service costs on the outstanding senior sales-tax bonds are $181.4 million for this fiscal year, with that amount increasing to $336.6 million by fiscal 2017, dipping below $300 million in fiscal 2020 and fiscal 2021, and reaching $337.9 million in fiscal 2022, according to the POS.
“Growth in expenditures related to new labor contracts and growing maintenance costs are placing additional pressure on operations and have resulted in an operating deficit, which the authority is financing with draws on cash reserves, restructuring of debt, expenditure reductions and fare increases,” Moody’s said.
While the MBTA has fiscal challenges, sales tax and assessment revenues flow straight to debt service costs before going towards other operating expenses, insulating the outstanding debt from other operating needs.
“We base the rating on the bond structure supporting the bonds and debt-service coverage safeguards and not on the financial position, nor the operation, of the authority,” Standard & Poor’s said.
Moody’s calculates annual debt service coverage at 2.05 times, on average, over the next 10 years and increasing thereafter.
The MBTA serves an average of 1.2 million passenger trips per day on its commuter rails, bus lines, trollies, and the Boston subway. It is the oldest mass transit system in the country.