WASHINGTON - The Washington Metropolitan Area Transit Authority officials met with the Federal Reserve late Monday in a last-ditch effort to urge them to step in as guarantor on a leaseback deal the agency entered into with a Belgian bank. The move came just ahead of a U.S. District Court hearing today that will decide whether WMATA should remit a $43 million termination payment to the bank on the deal.

The Fed "is considering it," said Candace Smith, spokeswoman for WMATA. "We have not heard back from them."

Fed officials could not be reached for comment yesterday, which was a federal holiday in honor of Veterans Day.

WMATA's plea to the Fed comes after it has repeatedly asked the Treasury Department to step in as guarantor on the leaseback deal that it entered into with KBC Bank NV of Belgium in 2002, which was guaranteed by American International Group Inc.

After AIG lost its triple-A ratings, the deal went into technical default, and KBC demanded a $43 million payment.

The authority filed a response to Judge Rosemary M. Collyer late Monday, and argued that it did not have enough time to replace AIG on the deal amid the credit crunch, and that if forced to make the payment, it would cause the agency "irreparable harm." WMATA officials also told the court that it could suffer downgrades if forced to make additional payments.

If Collyer does not side with the transit authority, KBC Bank will be able to reclaim $17 million from a trust account used to make lease payments in the deal and WMATA will be forced to tap its $613 million fiscal 2009 capital budget for the additional $26 million payment, officials said.

Smith said officials are hopeful that Collyer will rule in their favor, which would give them more time to work with federal officials, and possibly seek legislative help from lawmakers on Capitol Hill.

After KBC demanded the payment, WMATA responded by suing the bank in the U.S. District Court for the District of Columbia on Oct. 29 and asking for an injunction to prevent the bank from obtaining the payment.

At an initial Oct. 30 hearing with Collyer, KBC argued that WMATA owes it the termination payment under a contract. The contract states that if the guarantor - AIG in this case - loses its triple-A rating, the deal will go into technical default.

Apart from this transaction, WMATA officials fear they could face up to $400 million in further payments on 14 leaseback transactions that were done between 1997 to 2003, in which they sold rail infrastructure worth more than $1.6 billion. In most of the deals, AIG was the guarantor.

The decision by the court today is being closely watched by 30 other transit agencies that have leaseback deals guaranteed by AIG.

If the court hands WMATA an adverse ruling, it may be the first transit agency of many to be forced to make up to $4 billion of termination payments to investors, according to market sources.

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