The Port Authority of New York and New Jersey is expected to pay $60.3 million to BNP Paribas Capital Services Inc. on Monday after settling on a credit swap the bank previously announced it would terminate.
The amount is $6.7 million less than the $67 million the authority originally anticipated paying and concludes its financial responsibility to BNP Paribas.
"The agency has acknowledged this costly mistake is a legacy of past mismanagement under the watch of previous administrations. The current leadership has been forced to unwind these risky deals at a high financial cost, and will ensure these speculative financial maneuvers never occur again," the agency said in a statement.
The terminated swap is one of three that the authority has had on its books since 2007. All three have been losing money since the day they were entered into.
As of December 2011, the fair value of the outstanding swaps was at a negative $242 million, a decrease of $94 million from the previous year.
According to its financial statements, the port may enter into interest-rate swaps "for the purpose of managing and controlling interest-rate risk" in connection with its obligations at the time of the transactions.
While the three transactions were originally tied to specific obligations — two anticipated a July and August 2008 issuance and the third corresponded to versatile structure obligations — they are no longer connected to any bonds.
The July and August 2008 bonds were never issued due to unfavorable market conditions and the other obligations were refunded in 2008.
In 2009 the authority amended the three unhedged swap agreements to defer payments on the swap transactions until the last quarter of 2010. As part of the amendment, BNP Paribas and the Royal Bank of Canada were granted the option to early terminate, cancel or cash-settle their swaps beginning this year.
RBC so far has not chosen to terminate its existing swap. Dexia, the third bank, does not have the option.
The monthly payments on the RBC and Dexia swaps are around $1.6 million combined, a spokesperson said.
According to its financial statements for the year ended December 2011, the authority pays a fixed rate of about 4.4% to 4.5% and receives a variable rate of 70% of the one- to three-month London Interbank Offered Rate.
The Port Authority used Public Financial Management Inc. as advisor for the settlement, replacing Swap Financial Group LLC. The firm will be paid a maximum of $8,000 for the transaction.