Massachusetts’ largest public transportation agency Tuesday will leverage future parking revenues through a newly formed nonprofit entity to pay down outstanding debt and provide near-term budget relief.

The financing will help close the Massachusetts Bay Transportation Authority’s fiscal 2012 budget deficit of $127 million, at the cost of pushing debt maturities into future years.

Citi is senior manager of the $304.2 million Metropolitan Boston Transit Parking Corp. revenue bond deal.

The MBTA will use the proceeds from the tax-exempt transaction to help pay down a combined $330 million of outstanding sales-tax bonds and assessment bonds over the next six fiscal years.

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC is bond counsel. There is no outside financial adviser.

The corporation is a new credit and the Series 2011 system-wide senior-lien parking revenue bond deal is the entity’s first-ever ­borrowing.

Standard & Poor’s rates the Series 2011 bonds A-plus with a stable outlook. Moody’s Investors Service rates them A1 with a stable outlook. Fitch Ratings does not rate the corporation nor the MBTA.

The authority provides an average 1.2 million mass transit passenger trips per business day throughout eastern Massachusetts.

It chose to borrow through a new nonprofit corporation rather than sell the parking revenue bonds on its own to help broaden the mass transit agency’s debt portfolio, according to chief financial officer Jon Davis.

The corporation is part of the MBTA and does not have any staff. Its board of directors consists of three ex-officio management employees of the ­authority.

The MBTA has $5.5 billion of ­outstanding debt, including sales tax bonds, assessment bonds paid down with ­assessment fees that cities and towns pay to the agency, and legacy debt it ­inherited from the state. Those bonds have AAA and Aa1 ratings from ­Standard & Poor’s and Moody’s, respectively.

“We could have done it without setting up this special-purpose entity; however, we think it adds diversification to our debt portfolio,” Davis said in a telephone interview. “And we would expect that a new issuer in Massachusetts would have a lot of interest from the people who are interested in buying the bonds.”

Davis and his team held an investor conference call to educate potential buyers about the new credit and the parking revenue bonds.

He also said the agency would make itself available to speak one-on-one with any interested investors.

“We’re working with Citi to do that and we’re going to generate as much interest in this as possible,” the CFO said. “And we do think this will have a lot of interest.”

Citi will not hold a retail order period, as principal payments will first begin in 11 years, a bit too far out for retail investors, Davis said.

The Series 2011 parking revenue bonds offer serial maturities that increase gradually from 2022 through 2031, according to the preliminary official statement.

The transaction also includes an $82.6 million term bond maturing in 2036 and a $106.7 million term bond maturing in 2041.

The MBTA will use bond proceeds from Tuesday’s sale and debt-service reserve funds related to existing debt to pay down $55 million of outstanding sales tax bonds and assessment bonds each year from fiscal 2012 through fiscal 2017, for a total defeasance of $330 million.

The strategy will help reduce the authority’s debt service costs annually by a net $36 million after taking into consideration negative arbitrage and interest costs on the new bonds, according to Davis. That will cut debt service costs by a net $216 million from fiscal 2012 through fiscal 2017.

Principal and interest payments take up a large portion of the mass transit provider’s operating budget. The $1.6 billion fiscal 2012 budget includes $362 million for debt service payments.

“This does come at a cost,” Davis said. “It’s the cost of not only the negative arbitrage, but also the cost of extending the maturity of the refinancing. However, we needed to do this in order to bring cash into the years where we believe we need it to help relieve some of the budget deficit.”

Other initiatives to close the budget deficit include spending reductions, a current refunding of debt for present-value savings, and a $45 million asset sale.

The Massachusetts Taxpayers Foundation calculates that the MBTA will pay an additional $400 million in interest costs over the life of the bonds to extend outstanding debt into future years, though that amount is based off a larger $350 million bond sale, according to Andy Bagley, MassTaxpayers’ director of research and public affairs.

“This is one of the few quivers they have left to figure out how to get cash up front to close their operating budget, but it’s just throwing more debt into the future, which they’ve got a lot of,” Bagley said.

MassTaxpayers is a nonpartisan public policy organization that researches tax and economic issues in the state.

The MBTA plans to structure the Series 2011 bonds so that it has the option to redeem the parking revenue debt before the final 2041 maturity.

“Traditionally, it’s usually a 10-year par call,” Davis said. “We may actually look to having something less than that — albeit that hasn’t been determined — but we’ll definitely have the ability to be able to call the debt sooner than the 30-year maturity on the issuance. And that would save a significant amount of additional interest costs, if we have the revenues available to redeem them earlier.”

The Series 2011 revenue bonds will be repaid with parking fees the corporation will begin receiving in July from the MBTA’s 44,000 parking spaces at seven garages and 89 surface lots.

The MBTA retains ownership and rate control of the parking assets. It is also responsible for maintenance costs and construction of any new parking facilities.

Daily parking rates range from $4 to $7. The agency last raised parking rates in November 2008. Davis said there are currently no plans to increase those fees. Once debt service costs are met on the Series 2011 bonds, any excess parking revenue will flow to the MBTA.

Moody’s believes the transportation authority may increase parking rates in the future in order to help meet its operating expenses.

“Given the MBTA’s fiscal challenges and reliance on excess parking revenues for operations, we expect the authority to adjust rates and charges as needed to meet bond covenants and maintain debt service coverage,” Moody’s analyst Nicole Johnson wrote in a report on the corporation.

The MBTA anticipates parking system revenue will total $37.56 million in fiscal 2011, which ends June 30, and expects fiscal 2012 revenue to total $39.91 million, according to the preliminary official statement.

Annual parking revenue has increased steadily since 2002 — when the system generated $18.38 million of parking revenue — due to rate increases and the construction of additional parking facilities.

About 30,000 mass transit riders park at the authority’s parking facilities on a typical workday, the POS said.

The MBTA is the oldest and fifth-largest mass transit system in the U.S. Its service area includes 175 towns in eastern Massachusetts, including the greater Boston area, with commuter rail, bus, subway, and trolley service.

Officials anticipate ridership will grow by 3% in fiscal 2012.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.