CHICAGO - Under pressure to act soon, the financially strapped St. Louis Metro transit agency is weighing how best to restructure $100 million of insured floating-rate bonds from a 2002 issue, a task complicated by increased liquidity costs and possible swap termination payments.

The various issues facing the agency as it considers how to deal with the increased rates it currently is paying on the bonds because of market turmoil provide a snapshot of the restructuring problems that have triggered headaches for many issuers over the last year.

About $58 million of the deal has failed during previous remarketing cycles and is being held by West LB under a standby bond purchase agreement. The agency is paying an interest rate of about 5% set by a formula based on the prime rate plus a penalty. The remaining $42 million is still trading, but capturing rates at around 6%, said Metro chief financial officer John Noce.

The bonds are insured by Financial Security Assurance Inc., which has lost its top credit marks from Moody's Investors Service.

Another $300 million from the 2002 sales tax appropriation-backed deal that helped finance a light-rail expansion project pay a fixed rate.

Metro - formally known as the Bi-State Development Agency of the Missouri-Illinois Metropolitan District - is under pressure to decide quickly on a course of action, because in April it must repay $7.3 million under an accelerated repayment schedule triggered by West LB's assumption of the $58 million of debt.

The standby bond purchase agreement then expires in November. If the agency opts to renew the liquidity facility, it faces a 200 basis point increase in cost based on preliminary conversations with liquidity providers.

Shifting to a fixed-rate structure might provide one solution, but that would force Metro to cancel its swaps on the transaction. Based on its most recent calculations, that would result in a payment that could range from $20 million to $26 million.

"That's a payment we did not budget for," Noce said. "It's adding a twist to what we are trying to do."

The agency late last year approved a fare increase and a series of significant service cuts to eliminate an operating deficit after voters in November rejected a sales tax increase.

Metro has both a fixed-payor swap and a constant maturity swap on the Series A bonds. Under the swap, Metro pays 3.656 % to counterparty Citi on 30% of the series, and to counterparty UBS on the remaining 70%. It receives 67% of the one-month London Interbank Offered Rate. When Libor inverted in mid-2006, Metro entered into another swap for 61.45% of five-year Libor to pick up additional earnings when the Libor yields returned to normal.

Noce is working with his finance team and financial adviser Columbia Capital Management and bond counsel Gilmore & Bell PC on the most affordable restructuring. Some options include restructuring only the $7.3 million due in April, seeking another liquidity facility, and swapping to a fixed rate but later in the year on the gamble that the swap termination costs will drop.

"We are analyzing everything" with the aim of returning to the agency's board at the end of the month with a plan, Noce said.

On the operating side, Metro has approved a fare increase, is cutting 25% of its workforce, and will implement service cuts at the end of March to save on operational costs. The measures were approved last year after voters rejected the sales tax increase.

Officials said the cuts and a fare increase would be needed to address a $45 million deficit that loomed in the fiscal 2010 budget if the sales tax failed. Sales tax revenues that flow to the district are also down about 5%, Noce warned. Metro receives about $50 million in sales taxes annually from the city of St. Louis and St. Louis County.

The agency also later this year must decide how to restructure $150 million of additional debt sold in 2005 to cover cost overruns on its $550 million expansion project.

Officials had hoped to use proceeds from an expected settlement from a lawsuit against the developers of the project that Metro charged was to blame for the project's design flaws that contributed to the overruns. The agency lost the lawsuit.

A state audit last year found that Metro failed to adequately control the costs of the project or ensure the viability of the developers' proposed design, and issued flawed bid documents.

One fiscal pressure that had posed a significant burden last year appears for at least the time being to be on hold.

Several of Metro's lease transactions involving its equipment and property have been affected by the downgrades of insurers. The agency could face a $28 million payment triggered by the default on a $108 million lease with Bank of America Corp. and Comerica Bank that was insured by American International Group.

A separate $92 million lease with Bank of America that was insured by Ambac Assurance Corp. is also in default and could result in a $12 million payment.

So far, Noce said, the counterparties have not demanded any payments and agency officials are hoping that the federal government will guarantee the deals as proposed.

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