The Massachusetts Bay Transportation Authority has received clearance from its oversight panel to expand its commercial paper program to $400 million from $250 million and to issue bond anticipation notes.
Approval came at Monday’s joint meeting of the MBTA’s Fiscal Management and Control Board and the transit authority’s parent, the state Department of Transportation.
Both transactions would be competitive, MBTA Treasurer Patrick Landers said.
The MBTA, which operates mass transit in Greater Boston, began its commercial paper program in 2001 and seven years later expanded it to $250 million from $200 million. The program is essentially a bridge between bond issuances.
“It gives us the flexibility to borrow only what we need so that we’re not paying long-term interest rates on unused bond proceeds,” Landers said. “It’s been very effective for the MBTA.”
The current capital improvement program for the “T,” as locals call the system, anticipated $1.75 billion of annual spending and annual issuances of $590 million, twice the scale considered in 2008.
Despite the recent influx of COVID-19 related Washington rescue aid, T officials say federal and state rescue aid for capital projects is declining, thus putting additional pressure on MBTA bonds to fund capital needs.
The T, said Lander, could save up to 140 basis points with this move.
The authority intends to sell roughly $648 million of subordinated sales tax bonds in three tranches on April 8. Goldman Sachs is senior manager. The negotiated issuance will include $39 million of sustainability bonds and $50 million of taxable bonds, according to a preliminary official statement.
S&P Global Ratings and Moody’s Investors Service rate the bonds AA and Aa3, respectively. Both assign stable outlooks.
Moody’s said that despite ridership and revenue drops from the COVID-19 pandemic, it sees no immediate material credit risks for MBTA given the commonwealth’s pledge of sales tax revenue and “substantial” federal support.
The MBTA stands to receive an additional $850 million under the American Rescue Plan.
According to Lander, the MBTA intends to use subordinated sales tax bond anticipation notes to provide interim funding for remote-control train technology and fiber resiliency under the U.S. Department of Transportation’s Railroad Rehabilitation and Interim Financing, or RRIF loans.
The initial BAN issuance would be $370 million with a subsequent $100 million, until the first required draw on the loans. Lander, who called the strategy “riskless arbitrage,” estimated savings of $4.2 million.
“It’s not the first time we’ve employed this technique,” Lander said. “It’s an established technique that works quite well.”
The MBTA, he said, pursued a similar structure in 2017, relying on its first RRIF-loan tranche to finance positive train control while at the same time issuing a $301 million BAN for interim financing of the project. That transaction, he said, saved $13 million.
“This is a very solid way to access an extraordinarily low cost of capital,” said Betsy Taylor, MassDOT board vice chairwoman and a retired Massachusetts Port Authority finance director.
“Not only does it get significant savings, which can then be redirected toward operating costs, but it allows for far more accurate sizing of the new bond issues, avoiding the problem of either having insufficient funds to complete projects, or excess bond proceeds that are needlessly costly.”
Control board chairman Joseph Aiello, while praising the strategy, struck a cautionary tone.
“These are great techniques, and within the techniques they are beneficial and they are relatively risk-free, but they sit within the environment of a lot of borrowing on the plate of this organization,” he said. “The more we borrow, the more stress we put downstream on the overall budget, and what suffers is the operating budget.
“So I would hope that for future boards, we don’t describe these things as risk-free.”
Transit advocates including Boston’s acting mayor, Kim Janey, have called on the MBTA to use its federal money to restore full service to its subways, buses, commuter rail and ferries. Janey became mayor when the U.S. Senate confirmed predecessor Martin Walsh as President Biden’s labor secretary.
