XL Capital Woes Lead Citi to Give MTA Liquidity-Compliance Deadline

New York’s Metropolitan Transportation Authority received an event notice Friday from Citi giving it 90 days to comply with its liquidity agreement after Fitch Ratings downgraded bonds insured by XL Capital Assurance Inc., MTA chief financial officer Gary Dellaverson said yesterday.Dellaverson made the announcement at a finance committee meeting as the MTA was grappling with construction cost escalations that could put the brakes on a new downtown transit station. Citi has a standby purchase agreement on $350 million of variable-rate bonds issued in 2005 on the MTA’s dedicated tax fund credit that requires the authority take action if the insurer’s rating drops below AA-minus. Last week Fitch downgraded triple-A insurer XL Capital to A. The event caused Citi’s fees to go up, Dellaverson said. The MTA’s first step is to talk with Citi and for the MTA to explore its options, including possibly securing a different insurer, unwinding the deal, or substituting the liquidity facility. The bonds are also in a variable- to fixed-interest rate swap in which Citi is the counterparty, but Dellaverson said the swap agreement was not a subject of the notice. The MTA has insurance on $5.5 billion of variable-rate and auction rate debt. Of that, about $4 billion is insured by an insurer that has either been downgraded or is on watch for downgrade or has a negative outlook. Last November, the interest rate on some of the MTA’s auction rate debt insured by Ambac Assurance Corp. spiked by as much as 85 basis points, but has since come back down considerably. The authority’s auction rate debt insured by insurers that have either been downgraded, put on watch for a downgrade, or with a negative outlook reset about 20 basis points higher than its other insured auction rate debt, Dellaverson said. Low interest rates have shielded the MTA from the some of the negative affects of the higher resets. “Because there’s been a general decline in rates we haven’t seen a hit,” he said. The bond insurance turmoil could drive up costs for issues if it results in there being fewer triple-A rated insurers overall.“Conceivably, as there’s less competition in the market ... we could see higher premiums,” Dellaverson said. The MTA finance committee yesterday also released its projected 2008 bond issuance calendar. The authority expects to sell $2.1 billion of new money bonds in the current calendar year. The amount is a leap from last year’s issuance of $1.27 billion of new money bonds, according to Thomson Financial. The first sale planned is $500 million of transportation revenue bonds in March which would be followed by the sale of $105 million of Triborough Bridge and Tunnel Authority bonds in May. The MTA plans a sale of $500 million of transportation revenue bonds in July and would round out the year selling $483 million of dedicated tax fund bonds in September and $490 million of transportation revenue bonds in November. Despite the debt sale plans, construction cost escalation has forced the authority to re-examine its mega projects. The authority received only a single proposal to finish construction on a new transit hub at Fulton Street in Lower Manhattan and the bid was $462 million above the engineer’s estimate, said MTA president of capital construction Mysore Nagaraja. The project was budgeted in 2002 at $750 million and was to have an above-ground station. It would be primarily funded by the federal government, but now the MTA anticipates the project, on which it has already spent $446 million, will cost a total of $930 million to do the underground and foundation work. The station itself would cost an additional $250 million. Nagaraja expects to save some money by breaking up the contract for the remaining work into smaller pieces. The MTA will study options for containing costs at Fulton Station and other large projects over the next 30 days.