The New York Metropolitan Transportation Authority financial staff yesterday defended their use of mandatory tender bonds as a way to get access to short-term rates at a time when the issuer cannot access the variable-rate market.
The MTA marketed $475 million of bonds on its Triborough Bridge and Tunnel Authority credit in two subseries at the end of January and on Feb. 11. The authority had initially planned to sell $350 million but increased the size of the deal in response to strong demand.
Subseries 2009A-1 was sold as variable-rate bonds with a mandatory tender date of Jan. 20, 2010, for a par of $150 million and priced to yield 0.65% with a 2% coupon. The bonds are variable rate because if the MTA opts not to tender them, the rate would reset on the original tender date. The balance of the issue, Subseries 2009A-2, was fixed rate.
But MTA board member Doreen Frasca said that the cost of refinancing the mandatory tender bonds may prove to be more expensive than having issued the bonds as long-term fixed-rate debt on a day when the long-end market had rallied.
"The question is, what happens next year? And by my calculations, if rates next year are 20 basis points higher than they were on Feb. 11, then this would not have been the best strategy," Frasca said.
MTA finance director Patrick McCoy disputed her calculations and said that using the mandatory tender bonds will deliver savings in the current year.
"Despite the problems in the variable-rate market, the volatility we've seen over the past year, that portfolio has continued to be very attractive to us, [but] we cannot issue new money in the variable-rate markets now," McCoy said. "Issuing the mandatory tender bonds gives us an opportunity to capture the short-term market experience without having liquidity."
Time will tell whether the mandatory tender bonds save the MTA money, but it is indisputable that the cost of liquidity is high.
McCoy said that letter of credit providers are asking for "well over 100 basis points" if they are even able to offer LOCs.
"A lot of banks are just saying, 'We can't give you a bid right now,' " McCoy said.
A case in point is that part of the proceeds of the recent TBTA issue will be used to refund $50 million of variable-rate TBTA Subseries 2000CD bonds, of which $175.3 million are outstanding.
The MTA plans to remarket the bonds within the next month to remove Financial Security Assurance Inc. insurance and has been negotiating with Lloyds TSB to replace a standby bond purchase agreement with an LOC.
McCoy would not say what the cost of the letter of credit was to the MTA, but said they were refunding part of that issue to reduce the cost.
"We're paying a lot for a letter of credit," he said.
The MTA is also readying a $255 million deal on its dedicated tax fund credit that is expected to price next week. Citi is book-running senior manager and Siebert Brandford Shank & Co. is co-senior manager.
The MTA is considering the use of taxable bonds that are permitted under the federal stimulus package, though it has no plans right now to do so. Banks in the MTA's underwriting syndicate have given them preliminary ideas on taxable bond deals, McCoy said.
Common among the proposals is that investors don't want optional redemption provisions on the bonds and are interested in longer-term, bullet maturities as opposed to serials, he said.
Today, board members of the cash-strapped authority head to Albany to lobby legislators to support the recommendations of the so-called Ravitch commission, which called for tolling certain bridges and imposing a payroll tax to raise money for capital costs.
The MTA can expect to get about $1 billion of federal stimulus funds for capital projects, a spokeswoman for Gov. David Paterson said.