CHICAGO - St. Louis' Metro has settled on restructuring plans for two pieces of its debt as the transit agency seeks to chip away at a series of operational and capital challenges that prompted a two-notch downgrade earlier this year and drove steep service cuts.
The financings come as the agency's near-term troubles have eased a bit, thanks to additional federal bailout funding. The agency's hopes for a longer-lasting solution to its red ink lie in building public support for a sales tax increase that is expected to appear on the April ballot. Voters rejected a half-cent increase last November, prompting deep service cuts and a 25% reduction in the agency's work force.
The first of the two upcoming restructuring transactions include the remarketing of $100 million of bonds from a $150 million issue in 2005 to pay for cost overruns on the agency's 8.2 mile Cross County light-rail expansion project.
The $150 million was sold in a variable-rate mode as the agency hoped to retire the debt with funds it expected to receive from the project developers as part of a settlement over litigation involving the project. Metro blamed the developers' design flaws for a portion of the overruns. Metro, however, lost the lawsuit last year and a state audit faulted Metro for failing to adequately control the costs of the project or ensure the viability of the developers' proposed design.
In 2006, the agency opted to convert $100 million of the deal to a fixed-rate mode for three years. Its remarketing cycle comes up Oct. 1.
"The $50 million we left in a variable-rate mode is doing quite well, capturing a rate of 25 basis points for the last two weeks, so we decided to shift the $100 million to a variable rate when its remarketing comes up," said John Noce, chief financial officer of the agency, which is formally known as the Bi-State Development Agency of the Missouri-Illinois Metropolitan District.
Banc of America Securities is the remarketing agent. Liquidity was not an issue for the series as the original bonds carry a five-year letter of credit from JPMorgan. However, the LOC expires in the fall of 2010 and the agency has struggled to find affordable liquidity providers for other tranches of debt. "We will have to look at our options for the structure," Noce said.
Next month, the agency will launch a request for proposals process for underwriters interested in working on a restructuring of its remaining $75 million of insured variable rate bonds - most of which are now held by the liquidity provider West LB after failed remarketings - from a 2002 issue. The original issue was sold along with $314 million of fixed-rate bonds to provide the financing for the Cross County extension. Financial Security Assurance insures all of the bonds.
The agency converted $25 million of the variable-rate bonds earlier this year to a fixed rate to cover payments owed by Metro to West LB in April and October under an accelerated repayment schedule. The bonds mature between 2019 and 2023 and captured rates of between 4.5% and 5.2%, Noce said.
The agency expects to issue the bonds by the end of October ahead of the expiration of the West LB standby bond purchase agreement in November. Because the agency is shifting to a fixed rate, it will also face termination fees associated with swaps on the series. Noce estimated those costs at roughly $7 million to $8 million based on a current market analysis.
Columbia Capital Management is serving as Metro's financial adviser.
Metro officials also are continuing discussions with counterparties on their structured leases on equipment and property. The agency faces $40 million in possible termination payments stemming from two structured leases that carried backings from American International Group Inc. and Ambac Assurance Corp. The downgrades of both insurers triggered defaults but so far the counterparties have not demanded any collateral payments. Noce declined to provide additional details as discussions on a resolution are ongoing.
Although the failed sales tax measure last year was a setback, federal funding has helped ease pressures at least temporarily. As a result of the federal aid, Metro earlier this month was able to restore half of the service cuts it made in late March to save $43 million. The state gave the agency $12 million of the $35 million it requested from its share of federal stimulus funds. Metro received another $9 million but that is earmarked for new service projects. Metro also received $41 million directly in transit funding from the federal stimulus package but only 10% can go to operations.
Metro officials are now pinning their hopes on an April referendum, though the final proposal, which must be approved by St. Louis County, has not yet been set and sales tax revenues continue to falter. Metro's $208 million fiscal 2010 operating budget incorporated an expected 6 % drop in sales tax collections. Officials hope the restored service will help sway voters in favor of the referendum. Metro currently receives about $50 million annually from a one-quarter-cent sales tax in St. Louis and St. Louis County. The failed measure sought a one-half-cent increase, with half earmarked for operations and the other half to expand rail service.
Fitch Ratings early this year downgraded Metro to BBB-plus and assigned a negative outlook due to its challenges. Analysts said their decision reflected "the realization of a multiple downside scenario" due to the weight of the challenges facing the agency, including the accelerated amortization of bank bonds, swap termination costs, and possible payments related to sale-leaseback transactions.
Fitch analysts view the credit negatively because of further risks posed by the economy, which could cut deeper in sales tax collections that go to repay the bonds. Possible declines coupled with increased borrowing costs expected after the agency restructures its floating-rate debt could drive debt-service coverage ratios down.
Moody's Investors Service rates Metro's senior-lien debt A2 but in February placed the credit on review for a downgrade. Standard & Poor's rates it A.