MTA deal leads municipal market into SOFR era, away from Libor

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Linking variable-rate transactions to the new Secured Overnight Financing Rate is a proactive step for New York’s Metropolitan Transportation Authority, according to finance director Patrick McCoy.

The authority, which operates mass transit in the New York City region and is one of the largest municipal issuers with $40 billion in debt, issued the municipal market's first tax-exempt transaction linked to SOFR: its Sept. 20 remarketing of $107.3 million of Series 2001B Triborough Bridge and Tunnel Authority general revenue variable rate bonds in term-rate mode.

The Federal Reserve Bank of New York in April began to publish SOFR in an effort to replace Libor. The London Interbank Offered Rate is to cease publishing after 2021.

“We were very pleased with the results,” McCoy told members of the MTA board’s finance committee on Monday. McCoy cited a rate of 67% of SOFR plus a spread of 43 basis points. SOFR changes daily, while the bond pays monthly.

"In one year, we will remarket the bond," McCoy added.

The following day, the authority, citing strong interest, upsized its new-money issuance for TBTA projects to $125 million from $100 million, also at 67% and with a spread of plus 50 basis points for a two-year note.

Book-running senior manager JPMorgan managed the sale along with special co-senior managers Loop Capital Markets, a minority business enterprise firm, and TD Securities.

Nixon Peabody LLP and D. Seaton and Associates, P.A., were co-bond counsel and Public Resources Advisory Group and Rockfleet Financial Services Inc. were co-financial advisors.

The Alternative Reference Rates Committee, which consists of large banks, selected SOFR based on a market that features roughly $800 million in daily trading.

MTA made the move following successful corporate transactions, according to McCoy.

"SOFR is essentially transaction-based, and it is a collateralized rate that represents overnight borrowing, collateralized by treasury securities," he said. “Libor is essentially rates that are submitted by panel banks, often times there aren’t underlying transactions to justify those ways, and we anticipate Libor going away.”

The financial implosion of 2008 tainted Libor upon discovery that banks rigged reporting rates to profit from derivative trades.

"While the scandal certainly expedited the pending replacement of Libor, the true demise of Libor was rooted in the subjective process it followed in a marketplace that has become more accustomed to unprecedented transparency and accuracy," BondWave managing director Tony Miscimarra said in a Bond Buyer op-ed.

Management consulting firm Oliver Wyman advises institutions to track their exposure to Libor.

"While panel banks could voluntarily continue supporting Libor and Intercontinental Exchange, the Libor administrator, is proposing a new methodology to continue Libor," the firm said in a commentary. "It is clear that the direction of travel is to end Libor as it is published today."