The Massachusetts Turnpike Authority yesterday announced that State Street Bank pulled its offer to provide a letter of credit on its planned $127 million variable-rate deal, a move that forces MassPike officials to search for an alternative strategy in dealing with a problematic swaption.
The authority may turn to other banks to supply a letter of credit enhancement on the floating-rate bonds, but it is also reviewing all options, including not selling the $127 million of debt. MassPike officials said State Street withdrew its LOC on the deal due to current market volatility and credit constraints from the fallout of the subprime housing market.
State Street did not respond to telephone requests for comment regarding the LOC.
"The Turnpike Authority is working with its financial advisers to determine the best course of action right now, which would include doing everything from looking for additional banks that might be interested in the business, and considering what would happen if we did nothing at this point," said Mary Connaughton, a MassPike board member. "We have to consider the wide gamut of options, but nothing is cast in stone as to what the next step is going to be at this point. Obviously it's a bad time to be going out to the markets to sell bonds."
Since the fall, the authority has been considering selling $127 million of variable-rate debt to refinance $126.7 million of Series 1997B fixed-rate bonds in order to better match the debt against a floating-to-fixed swaption attached to the bonds. In that agreement, MassPike pays a fixed rate of 4.875% on $83.1 million of the debt and 5% on the remaining $43.6 million of debt and receives 68% of one-month London Interbank Offered Rate from UBS Securities LLC.
In September, UBS informed MassPike it would exercise its right on the swaption, which began Jan. 1. Since then, the authority has paid roughly $336,000 per month in additional interest payments. Those costs could decrease if MassPike refinanced the fixed-rate bonds into a variable-rate mode to better match the swaption.
State Street's decision to withdraw its LOC from the $127 million deal follows UBS' announcement earlier this month to exercise its right on a second floating-to-fixed-rate swaption. That swaption is attached to MassPike's $207.6 million of Series 1997A fixed-rate bonds and would kick in on July 1, with the authority paying a fixed rate of 4.75% and receiving 68% of one-month Libor from UBS.
Connaughton said additional interest rate payments on the second UBS swaption could cost the authority an additional $525,000 per month.
The authority does have a third fixed-rate series of debt connected to a UBS floating-to-fixed swaption, Series 1999A for $465.6 million, yet the bank's first exercise date on that option would be Jan. 1, 2009. UBS has yet to announce whether it will exercise its right on those bonds. That agreement includes MassPike paying a fixed rate of 4.75% on $371.3 million of debt and 5% on the remaining $94.2 million of debt while UBS pays 68% of one month of Libor.
Along with the floating UBS swaptions, the 1997 and 1999 bonds mentioned above have fixed-to-floating swaptions attached to the debt, with Lehman Brothers as counterparty. Yet Lehman has yet to exercise any of the swaptions, forcing the authority to pay two fixed-rate interest payments - the fixed rate on the bonds and the fixed rate set in the swaption - in return for one Libor payment from UBS.
Over the past few years, MassPike received $70.5 million in premium payments from UBS and Lehman for the swaptions.
